Valuing a Malaysian Private Company

There is no such thing as the value of a private company. A valuation produces a figure for a stated purpose, at a stated date, on a stated basis, for a stated interest — change any one of those and the figure legitimately changes. Most valuation disputes in Malaysian owner-managed companies begin with two parties comparing numbers that were never prepared on the same footing.

What follows sets out the decisions that determine the figure, the adjustments that carry the most weight in practice, and the consequences that follow the transaction rather than the valuation itself.

The purpose determines the basis

Establish first why the valuation is being prepared, because the answer drives everything after it. A figure prepared for one purpose is frequently inappropriate for another:

• A negotiated sale between willing parties, where the figure informs a price that is ultimately settled by negotiation.
• A shareholder exit under a shareholders' agreement, which may prescribe its own mechanism and its own definition of value.
• A dispute, where the basis may be directed by the agreement, by the parties' instructions, or by the forum.
• Financial reporting, where the applicable accounting standard defines the measurement basis and the valuation must follow it rather than a commercial view.
• A tax or stamp duty position, where the relevant legislation and the authority's own basis of assessment govern.
• Financing, where a lender's view of realisable value in a downside may differ sharply from a going-concern figure.

Two consequences follow. Where a shareholders' agreement specifies a mechanism, that mechanism generally governs regardless of what a market-based valuation would produce; read the agreement before commissioning work. And where the purpose is a tax or duty assessment, the authority applies its own basis — a negotiated price is evidence, not a conclusion.

What is being valued is a separate question

A common source of confusion is the difference between valuing the business and valuing a shareholding in it.

A minority holding is not simply a proportionate share of the whole. It carries no control over dividend policy, remuneration, strategy, borrowing or the timing of an exit, and the basis adopted may reflect that. A holding large enough to block a special resolution sits differently again from one that is not. Equally, a controlling interest may attract different treatment. Establishing whether the subject is the entire business, a controlling stake, a blocking stake or a small minority is a threshold question, not a refinement applied at the end.

Whether the valuation is of equity or of the enterprise — and how borrowings, cash, shareholder loans, surplus property and other non-trading assets are treated — should be stated explicitly and consistently. Comparing an enterprise figure with an equity figure is a frequent and material error, and in owner-managed companies the bridge between the two is rarely trivial: director balances, unpaid dividends, hire-purchase obligations and personally guaranteed facilities all sit in it.

Method follows the facts

Earnings-based, asset-based, market-comparison and cash-flow approaches each suit different circumstances. An asset-heavy property-holding company, a profitable trading business with stable earnings, a services business whose value walks out at six o'clock, and a loss-making business with a valuable customer base are not sensibly valued the same way.

• An earnings basis suits a business with a settled trading history and reasonably predictable results. It depends entirely on the quality of the maintainable earnings figure.
• An asset basis suits an investment or property-holding company, or a business worth more broken up than continued. It requires current values rather than carrying amounts, and it should address the tax and duty that would arise on realisation.
• A discounted cash-flow approach suits a business whose future differs materially from its past — a new contract base, a capital programme, a changed cost structure. Its weakness is that small changes in the rate and the terminal assumption move the answer a great deal.
• Market comparison is often the least reliable for Malaysian private companies, because genuinely comparable transactions are scarce and the terms of those that exist are seldom public. Listed-company multiples are drawn from a different market with different liquidity.

More than one approach is usually worth running. Where two methods diverge sharply, the divergence is information: it normally points to an assumption that has not yet been tested.

Where the judgement concentrates

In most private-company valuations, the great majority of the movement comes from a small number of inputs: the maintainable earnings figure, the multiple or discount rate, the growth assumption beyond the forecast period, and the treatment of surplus assets and debt. Each should be stated separately, with the reasoning visible and a sensitivity showing what happens if it is wrong. A conclusion that cannot be traced back to those inputs cannot be argued with — which is a weakness, not a strength.

Normalising maintainable earnings is where most of the work sits

In an owner-managed Malaysian company, reported profit reflects choices made for tax, family and cash-flow reasons. Those choices may be entirely proper, but they do not describe the earnings a purchaser or an incoming shareholder would inherit. The adjustments that recur:

• Directors' remuneration set above or below a market rate for the role, in either direction, together with related contributions.
• Related-party transactions not on arm's length terms — rent paid to a director-owned property company is the common Malaysian example, and the post-transaction rent may differ substantially.
• Personal expenditure borne by the company: vehicles, travel, subscriptions, and family members whose remuneration exceeds the value of the work performed.
• Non-recurring items presented as ordinary, and genuinely recurring items presented as exceptional.
• Accounting policy and estimate changes that affect comparability across the period examined, including provisioning and revenue-recognition timing around year ends.
• Assets used by the business but owned elsewhere, or owned by the business but not used by it.

Each adjustment should be evidenced rather than asserted. An adjustment supported by a benchmarked salary, a tenancy agreement or a board minute survives scrutiny; one supported by an explanation does not. Where the adjustments are large relative to reported profit — which in owner-managed companies they frequently are — the valuation is, in substance, a valuation of the adjustments.

The tax consequences follow the transaction, not the valuation

A valuation does not create a tax charge. The disposal does, and the treatment depends on who disposes of what.

According to HASiL's guidelines on capital gains tax for unlisted shares, the chargeable person is a company, limited liability partnership, trust body or co-operative society, including a Labuan entity subject to tax under the Income Tax Act 1967. An individual shareholder disposing of the same shares is not a chargeable person under that charge, although a different charge may apply depending on what the company owns. The guidelines state that where the capital asset was acquired before 1 January 2024 the disposer may be taxed at 10% of the chargeable income from the disposal or at 2% of the gross disposal price; where it was acquired on or after that date, the rate is 10% of chargeable income. Gains are declared on the CGT return form electronically within 60 days from the date of disposal, and the date of disposal is the date of the written agreement where there is one.

Separately, the instrument transferring the shares is assessed to stamp duty under the First Schedule to the Stamp Act 1949 on the price or the value on the date of transfer, whichever is the greater. A transfer at a nominal or discounted price therefore does not produce a nominal duty, and the valuation prepared for a negotiated sale is not necessarily the figure the assessment will use.

Both regimes are revised from time to time and their application turns on the facts. Confirm the current position against the guidelines published by HASiL and obtain tax advice before the structure is fixed.

Limitations belong in the report, not in a footnote

A valuation conclusion is only usable if its assumptions are visible. State the purpose and the intended users, the valuation date, the interest valued, the information relied upon and its source, the assumptions made, what was not verified, the sensitivities, and what would change the conclusion.

Scope limitations should be stated plainly rather than absorbed. If the management accounts were unaudited, if a property was not independently valued, if a major contract was not sighted, if a related-party arrangement could not be evidenced — each of those belongs in the report, because each affects how much weight the figure can carry.

A single number presented without that context invites misuse, typically by being carried into a different purpose or treated as a guaranteed transaction price. It is neither.

Before commissioning a valuation

1. State the purpose, the intended users and the valuation date.
2. Check whether a shareholders' agreement, constitution or statutory provision prescribes the basis or the mechanism.
3. Define precisely what interest is being valued, and whether on an equity or enterprise basis.
4. Assemble reliable financial information for a period long enough to show a trend, not a single year.
5. Identify related-party, non-recurring and personal items with supporting evidence before the work starts.
6. Establish which assets and liabilities sit outside the trading business and how they will be treated.
7. Obtain separate tax and legal input where the outcome affects either.

When a formal valuation may not be needed

A formal valuation is not always the right spend. Where a shareholders' agreement prescribes a formula, the exercise may be an arithmetic one applied to agreed figures. Where two parties in a small transaction are content to negotiate, an indicative range and a clear understanding of the adjustments may be enough to reach terms. Where the purpose is internal planning, sensitivity analysis on the drivers may be more useful than a point estimate.

The position changes where the figure will be relied on by a third party, where it must withstand challenge by an authority or a court, where shareholders' interests diverge, or where the amounts are material relative to the parties' resources. The question is not whether a valuation is available but what standard of support the figure will have to bear.

Where the valuation supports a transaction, the wider preparation is addressed under corporate finance and transactions.

General-information limitation

This article is general information, not valuation, investment, tax or legal advice, and it does not determine the value of any business or shareholding. A valuation conclusion depends on its purpose, date, basis, the interest valued and the information available, and it is not a guaranteed transaction price. Tax, duty and company-law requirements are periodically revised. Confirm the current position against the issuing authority's own published material and obtain advice based on your circumstances where the amounts are material.

To discuss your circumstances, contact Saifudin & Co.