Is the concept of valuation limited to real estate valuation only? In fact, although real estate, including residential, commercial, and other types, is an important sector in valuation, there are many branches of valuation approved in Saudi Arabia, including the valuation of business entities, which deal with these enterprises and their various components, whether tangible or intangible assets such as trademarks, innovation, and reputation. In this article, we will discuss the valuation of business entities and their most important challenges. 

What are business entities?

Business entities can be defined as all business entities, regardless of size, ranging from small individual enterprises to large companies, encompassing the rights and obligations associated with them. The value of these enterprises encompasses both tangible assets, such as buildings and equipment, and intangible assets, including patents, trademarks, reputation, and intellectual property. 

What is economic enterprise valuation?

Economic enterprise valuation is a professional process that aims to estimate the value of these enterprises of various types, according to a specific type of value, such as market or fair value, and for a specific purpose, such as investment, merger, taxation, financing, acquisition, or any other purpose.

The importance of economic enterprise valuation lies in revealing the true value of the enterprise, whether in tangible or intangible assets, and it is also used as a strategic tool in investment and financing decisions.

What are the main challenges in business valuation? 

Given the importance of economic entity valuation in understanding the value of any commercial entity, to make sound decisions regarding investment, financing, and even expansion or merger plans, the valuation process faces many challenges that must be recognised to arrive at reliable results. These challenges are issued by the Saudi Authority for Accredited Valuers. Among the most important of these challenges are: 

Lack of data:

 A certified real estate appraiser in Riyadh may face a significant challenge in obtaining accurate and reliable financial data, especially in small or unlisted companies, as they do not adhere to accounting standards or lack a clear business plan that would lead to an accurate assessment of financial performance. This challenge can be overcome by using techniques such as qualitative analysis and non-financial data to compensate for this deficiency.

Market and economic changes: 

Valuations are affected by market fluctuations and economic factors such as interest rate volatility and global crises. Economic facility valuations also face this challenge, which can lead to inaccurate valuations if the valuer does not consider and take them into account. One of the most important solutions proposed to address this issue is to conduct periodic valuations to keep pace with these changes and understand their impact on the company. 

Difficulty in identifying non-financial factors:

This is one of the challenges faced by valuers, as non-financial factors such as reputation, innovation, leadership quality, organisational culture, and employee-customer relationships can have a significant impact on the value of a company, but are difficult to measure using traditional valuation models. The solution proposed here is to develop valuation models based on a combination of financial and non-financial criteria, such as brand valuation or technological innovation.

Choosing the right valuation method:

 There are many real estate valuation methods, such as the income approach, market approach, and cost approach. A certified real estate appraiser in Riyadh must choose an appropriate method, as choosing the wrong method can lead to an inaccurate valuation. Therefore, a method appropriate for the purpose of the valuation and the asset being valued must be used.

Changes in growth and future expectations:

 Predicting the growth rate of economic establishments is a major challenge, especially with the lack of clarity in the establishment’s plans, constant market fluctuations, competition, and the need to deal with these challenges. More flexible preliminary valuations based on qualitative indicators such as innovation, level of technology use, and the extent to which the enterprise can adapt to changes, in addition to adopting a multiple-scenario approach that allows for different estimates of future performance, taking into account the possibilities of change in the economic environment, such as rising inflation or price volatility.

Difficulty in valuing intangible assets: 

The valuation of  business entities is not limited to tangible assets such as commercial real estate, but also includes intangible assets such as trademarks, patents, or business relationships. These assets can be difficult to evaluate, especially in the absence of an objective measure to accurately gauge their value.

To address this challenge, advanced valuation methods can be used, such as customised models for evaluating trademarks, calculating replacement cost, or estimating the future value of intangible assets. As well as consulting with experts and specialists, this is an important step in understanding the nature of these assets and how they contribute to future benefits and returns.

Challenges related to governance and transparency:

Some companies lack clarity in their reporting and do not apply strong governance standards, making it difficult and challenging to judge their management. To overcome this, the internal governance structure must be carefully analysed, the company’s track record of transparency and accountability reviewed, and external ratings and assessments used to measure the reliability of the information provided.

Valuation of high-growth economic entities: 

Start-ups or fast-growing companies focus more on future expansion than on current profits, which makes their valuation more complex as it relies on high-risk future assumptions. Apply a discounted cash flow model that takes into account the periods during which the company is in the growth phase, along with flexible discount rates that consider the risks associated with rapid growth.

Geopolitical and legal impacts:

Political tensions or legislative changes play a fundamental role in determining the stability of the business environment, and may directly affect companies’ ability to generate profits or remain in the market.  This can be addressed by continuously monitoring geopolitical and legal developments, incorporating the analysis of these risks into valuation models, and regularly updating them in line with developments.

In conclusion

The valuation of business entities remains an important branch of valuation, no less important than real estate valuation in its residential, commercial, and other branches, as it contributes to clarifying the true picture of the value of various entities, whether tangible or intangible assets. 

This is where the expertise of Aain Real Estate Valuation Company comes into play, offering comprehensive services that include residential and commercial valuation, feasibility studies, market consulting, valuation of projects under construction, and valuation for budgeting purposes, through a team of certified real estate appraisers in Riyadh. The company thus guarantees its clients accurate and reliable valuation reports that help them make clearer and more confident investment and financial decisions, based on the real estate valuation standards approved in the Kingdom.