10 Questions to Ask Yourself When Buying a Business in Singapore or Malaysia.

I regularly encounter ETA (Entrepreneurship Through Acquisition) folks, who are looking to buy a business in Singapore for the first time. Very often, this group of individuals tend to be enthusiastic in starting their business acquisition journey. Yet more than 90% of them would end up not making any acquisition in 2 years and calling it a day.

Hence I have decided to share a list of questions for ETA folks or anyone considering the acquisition of a small business.

Question 1: How do you plan to finance the deal?

Insight: If you are expecting a 60+ years old SME owner to provide you 80% seller financing for the sale of his business to you, then you are probably in for a rude shock. Why would anyone in the right mind underwrite so much risk for a stranger?

If you are an individual planning to get a few million dollars financing from the bank, then you need to be aware that such facilities are presently not available in Singapore yet.

If you are planning to fundraise from your investors, it’s helpful for you to know that 90% of the people I met fail in fundraising from their investors.

Question 2: Do you have the time and bandwidth to source for deals and evaluate it?

Insight: Contrary to what most people assume, it takes a significant amount of time to source for deals (whether it is proprietary or brokered), evaluate it, meet the owners, market research, come up with an investment thesis and conduct due diligence. If you are unable to set aside at least 10 hours every week for this pursuit, it might be a good idea to put this on hold for the time being.

Question 3: Are you looking for a passive investment?

Insight: If you are looking into a passive investment, then a small business is probably the wrong asset to look at. A small business often comes with plenty of risk and volatility. Many things will probably and likely go wrong even with active management in place. Unless you can bring in a stakeholder who can be an active executive running the business on your behalf, otherwise I highly don’t recommend it.

Question 4: Are you looking to acquire the business at 2X EBITDA or less?

Insight: 95% of the time, a business that is selling for 2X EBITDA or less, are either having hidden problems or it’s a turnaround case. If you are buying such businesses, you need to be prepared that you have a failure rate of > 70%. Such businesses are more suitable for experienced entrepreneurs or people with deep domain knowledge.

Question 5: After acquiring the business, do you have additional financial resources for working capital or business expansion?

Insight: It’s important for you to set aside funds for deal acquisition process (due diligence expenses), working capital needs and business expansion plan. You do not want to run out of cash when you become a business owner.

Question 6: Buying a profitable business today does not mean that the business is fool-proof or fail-proof. Are you aware that the profitable business you acquired, can still be run to the ground?

Insight: It takes commercial acumen, financial knowledge, leadership, grit, operator skills and know-how to successfully navigate the uphill challenges of running a small business. It’s not meant for people who is faint hearted or looking for an easy way out. Although buying a business in Singapore does save one time in building a business from scratch themselves. You are effectively exchanging your money for reduced risk and saved time.

Question 7: Are you aware you need to pay the former business owner a salary while they are assisting you with the handover period?

Insight: After the acquisition of a small business, in most cases, the former business owner will be retained from anywhere between 6 months – 36 months. During this period, they are expected to be paid a salary. You will need to forecast this expense into your cashflow projection.

Question 8: Are you aware that different type of businesses at different scale will require different skillset to run it effectively?

Insight: B2B businesses with less than $5 mil revenue often require the business owner to be hands-on in doing sales. Whereas a B2C business put a heavier weightage on marketing. Running a business in a niche field often requires a very differentiated set of skills and personality traits, compared to running a business in a common domain. The type of business and industry you picked, can potentially make or break you.

Question 9: Can you stomach failure?

Insight: Regardless of how capable you are or the quality of business you have acquired, there is always the risk that things will not work out. Are you willing to accept the risk of failure?

Question 10: Dealing with SME owners in Singapore or Malaysia can be a major challenge. Are you prepared for it?

Insight: Most SME owners have no experience in M&A and they tend to be in their mid 50s to 70s. Perspective and values can be very different due to generation gap. Their knowledge of M&A often comes from coffee chat with their peers, which can represent a skewered viewpoint and biasness. Likewise, their expectation of the business valuation can occasionally be out of whack. Do you have the soft skills and patience for such engagement?

Read next article: Understanding Common Terminology in M&A Transactions

Fey Day is a M&A firm in Singapore that provides business brokerage service for SMEs in Singapore and Malaysia. We are predominantly a sell-side representative that focus on M&A and fundraising.