Valuation of your SME Business for Sale ? Yes - But understand the market factors too.

The valuation of an SME business is important but it does not guarantee success. You also need a smart M&A and marketing strategy.



Characteristics of SMEs in Singapore and Southeast Asia


In Singapore, we define SMEs as businesses with turnover of less than USD50m. SME businesses all over the world including in Singapore form the backbone of the global economy and they also generate most of the jobs opportunities. In most countries, SME busineses are thought to contribute to between 70% to 80% of GDP and employment.


The characteristics of SME businesses in Singapore and Southeast Asia tend to be:

  1. Family-owned and family-run perhaps for a decade or more.

  2. In traditional sectors such as logistics, manufacturing, F&B and services.

  3. Rely mainly on bank borrowings to finance operations.

  4. More conservative because of the scarcity of capital.

  5. Focus on profitability and cashflows rather than revenue growth at all costs.


Most SME Businesses face a succession problem in Singapore and Southeast Asia


The SME business valuation is important. When SME owners reach retirement age, many realise that they do not have successors to hand the business over to. This is not surprising and instead quite expected because control is key for the founders. The founders would then look to perhaps sell the business with certain expectations in mind.



Selling the SME Business and the Expectations Gap in Singapore and Southeast Asia


The SME business valuation is important. Every year, we work with 20 to 30 SME who want to sell their businesses. Based on our experience, many SME owners have certain expectations about selling their business.

  1. Valuation of the SME business - Most SME business-owners expect a certain valuation and this could be influenced by their gut-feel, stockmarket valuations or what they read about other similar companies being sold.

  2. Ease and speed of finding buyers - We often hear about SME owners wanting to sell their companies in six to nine months and it is quite easy to find a ready buyer.

  3. The lack of professional management is not a problem - Many founders think that most potential buyers are able to bring in their own people or other professional managers to take over from the founders.


Issue 1: Valuation of the SME Business for Sale in Singapore and Southeast Asia


The SME business valuation is important. The valuation of an SME business for sale needs to be put into context. Often, when professional business valuers are appointed to value a small business for sale, it is very likely that the valuation will be much higher than what any potential buyer would pay for. This could be because of unrealistic growth assumptions, the valuer wanting to give a certain result that the SME owners expect and a lack of understanding of the M&A market for small businesses.


We recently met a prospect who told us that their professional valuer valued their business at about 11x Price-to-Earnings ratio. I told them that this price is not realistic and there would be very few buyers for that price unless the founders were willing to give profit guarantees. The founders could not understand why since they had obtained a professional valuation.


Our answer to them was for SMEs, most strategic and financial buyers operate within a range of 4x to 7x valuation multiple and this is the market. A valuation of an SME for sale needs to consider the market factors instead of just relying on a forecast. It just doesnt work this way.


Solution to the Valuation of the SME Business Issue


It is quite pointless for a professional valuer to give an unrealistic valuation and leave the founders wondering how come no buyers could accept such a number. Perhaps founders could then ask the professional valuer to look for buyers since the valuer was able to justify this valuation.


When we value companies for sale, we take into account market conditions and industry expectations. We then thoughtfully value the business with the aim of arriving at a valuation range which buyers can accept. If you are selling your condo, would you price it at $3,000 psf when similar units were sold for between $1,800 to $2,400 psf ? Our recommendation is always to consider the market factors when valuing an SME business for sale.


Issue 2: Ease and Speed of Finding Investors in Singapore and Southeast Asia


The SME business valuation is important. It is not easy to sell an SME. Based on our experience, most SME businesses do not get sold for many reasons. The valuation gap is one of them but is not the main factor. When we look for potential buyers for SME businesses, we do very detailed screening and filtering of the potential investors universe. We know from experience what our networks are looking for. The potential universe of buyers could be:


  1. Private equity: They are usually financial investors and valuations tend to be between 5x to 7x earnings.

  2. Venture capital: Usually focused on scalable and hyper-growth. Do not usually invest in traditional SME busineses.

  3. Strategic investors: Valuations may be higher because of synergies and they tend to hold on for longer-term.

  4. Individuals: Of late, wealthy individuals have invested in Singapore companies as part of their objective to obtain PR in Singapore.


The astute reader realises that private equity players do not pay high valuation premiums. Strategic investors may pay higher valuations but the M&A process usually takes a much longer time since strategic investors have their core business to run and M&A is not considered core.


Selling to private equity companies could take between six to eight months and finding the right strategic buyer could take more than year.


Venture capital is not an immediate fit and it is difficult to find the right wealth individuals.


Solution to Finding the Right Investors Issue


When we accept an engagement to find the right investors for the SMEs, we take three to four weeks to screen the entire universe of suitable buyers and having trusted networks are critical. Also, confidentiality is key.


With a good M&A advisor, take the time to improve the Company whilst looking for a suitable investor. Such improvements can be incredibly effective in improving the chances of finding the right investor.


Be patient and do not rush the process. This may smell of desperation and distract you from running your business.


Issue 3: The Lack of Professional Management in many SMEs


The SME business valuation is important. The lack of professional management to run the business is by far the single biggest reason why the majority of SME businesses do not get sold. Put yourselves in the shoes of the investors, would you buy a company knowing that nobody else can take over the founders ?


Solution to the Lack of Professional Management


Succession planning is key to the going-concern of any SME businesses if you want to sell your SME. Do not expect investors to bring in professional managers to run your business. Instead if you want to increase the chances of selling your business, put in place professional managers and empower them before starting the sales process.


Concluding Thoughts


The SME business valuation is important. As professional advisors in valuation and the selling of SME businesses, we share practical advice on how to maximise the SME business valuation when SME owners sell their companies. Most SME businesses do not get sold and this is a fact.


We strongly encourage SME owners to be realistic in valuation, build a succession plan, and be patient when looking for investors. Do not start the sales process when you are about to retire. Instead start the process perhaps in your late forties or early fifties.