Business Valuation for Small Business in Singapore: Unlocking Your Business Value

So, you're thinking about selling your business. It's a big decision, and one of the first questions that comes to mind is: "How much is my business worth?"

Understanding your business's value is absolutely crucial. It's not just about pulling a number out of thin air based on your mood of the day. (Which is a common practice among many SME owners in Singapore and Malaysia!)

A proper valuation helps you set a realistic selling price, negotiate confidently with potential buyers, and ultimately, achieve the best possible outcome from your decades of blood, sweat and tears. (Not forgetting truckloads of financial risk!)

At Fey Day, we understand that the world of business valuation can seem complex, especially for small business owners in Singapore. That's why we've put together this simple guide to shed some light on the key aspects you need to know.

Why Bother with Business Valuation?

You might be thinking, "Can't I just guess a price?" While you could, it's highly risky. Imagine you are selling your residential property for $5 million, whereas your neighbours are selling it for approximately $3 million. What is the chance that a buyer would take up your offer? Technically speaking, it’s possible but this is as good as winning a Toto at the top prize! Here's why a professional or even a basic understanding of business valuation is essential:

Setting a Realistic Price: Overpricing your business can scare away potential buyers, leading to a prolonged sales process and potentially no sale at all. It’s common to encounter business owners who are unable to sell their business for at least 1 year due to unrealistic business valuation. You need to consider that Singapore is a small market with a very small pool of buyers. Meanwhile underpricing means leaving money on the table – money you've rightfully earned over the past decades.

Negotiation Power: Knowing your business's true value equips you with solid ground to stand on during negotiations. You'll be able to justify your asking price and avoid being lowballed. This is important as selling your business can be confusing and it’s an emotional process.

Attracting the Right Buyers: A well-valued business attracts serious and qualified buyers who recognize its worth.

Strategic Planning: Even if you're not selling immediately, understanding your business value can help you identify areas for improvement and growth, ultimately increasing its future worth.

Peace of Mind: Knowing you've gone through a fair and objective valuation process provides peace of mind that you're making informed decisions based on logical guideline.

What Factors Influence Your Business Value in Singapore?

Several elements come into play when determining the value of a small business in Singapore. Here are some of the most important ones:

Financial Performance: This is often the cornerstone of business valuation. Buyers will scrutinize your revenue, profitability (both gross and net profit), cash flow, and financial stability. Consistent growth and healthy profit margins are highly attractive to investors who looking for business to buy in Singapore and Malaysia.

*Please note that financial acquirers in Singapore tend to be conservative, compared to acquirers in other parts of Southeast Asia market.

Industry and Market Conditions: The industry your business operates in plays a significant role. Is it a growing sector? Are there strong market trends? e.g. green energy, electric vehicle, or anything that has the word AI in it, etc.

The overall economic climate in Singapore and any specific industry regulations will also be considered. A good case in point is that the current economic climate in Singapore is somewhat muted. Whereas the in Malaysia, the business climate are significantly more optimistic. This may impact valuation too.

Assets: This includes tangible assets like equipment, inventory, and property (if owned). Intangible assets such as brand reputation, customer relationships, intellectual property (like trademarks or patents), and proprietary processes also contribute significantly to value.

Customer Base: A diverse and loyal customer base is a valuable asset. Reliance on a few key clients can be seen as a risk. (Customer concentration risk) The strength and stickiness of your customer relationships are important. It’s beneficial to have customers information stored in a proper customer relation management (CRM) system e.g. Zoho, Salesforce, HubSpot and Apptivo are popular choices.

Management Team and Employees: A strong and capable management team that can operate independently of the owner is a major plus. Skilled and loyal employees also add value by ensuring smooth operations. While there isn’t a quantitative way to come up with a valuation for a capable management team, the presence of it can make or break an acquisition decision.

Business Model and Operations: A well-defined and scalable business model is attractive to buyers. Efficient operations, clear processes, and a strong organizational structure enhance value. A business model with a clear element of recurring revenue is very attractive to most business acquirers. E.g. Saas (Software as a service), Marketplace, Multi-year contract that guarantees revenue, etc.

Growth Potential: Buyers are often looking for businesses with the potential for future growth. Demonstrating opportunities for expansion can significantly increase your valuation. E.g. A business with market presence in Southeast Asia is definitely more attractive than a business with presence in Singapore only, all things being equal. Due to the size of the total addressable market and growth potential.

Risk Factors: Any potential risks associated with the business, such as legal issues, intense competition, or reliance on a single supplier, can negatively impact its value.

Pro-tip: Most investors are risk-averse for a good reason! Such decisions tend to be irreversible, and the deal quantum can easily range upwards of 7 figures…

Location: For brick-and-mortar businesses in Singapore, location can be a significant factor, especially in high-traffic areas.

Highlight: Does your landlord have a practice of charging you a high rental rate, and has a tendency to increase rent every 3 years? If so, this might affect potential investors’ interest in buying over your business in Singapore.

Uniqueness and Competitive Advantage: Does your business have a unique selling proposition? What sets you apart from your competitors? A strong competitive advantage makes your business more desirable. For small medium enterprise (SMEs), it’s common to have no unique moat. This is fine if the company is well-run and profitable.

Read next article: 6 Reasons Why People Buy Business in Singapore

Common Business Valuation Methods Explained Simply

While professional valuators use sophisticated techniques, understanding the basic principles behind common methods can be helpful:

Market-Based Valuation: This method compares your business to similar businesses that have recently been sold in the same industry and location. The business valuation is based on multipliers of your company seller’s discretionary earnings (SDE).

Seller's Discretionary Earnings (SDE) is typically used for smaller businesses and represents the total financial benefit an owner-operator receives from the business. It includes earnings before interest, taxes, depreciation, amortization (EBITDA) and owner’s salary.

An example is a fast-moving consumer goods (FMCG) business in Singapore that produce and sells toothbrush & toothpaste. This business owns the brand, patent its own recipe, distribute the products in Singapore and Malaysia. It has an annual revenue of $5 million with an EBITDA of $1.5 million. The owner pays herself $300k per year. In this case, the seller’s discretionary earning is $1.8 million.

Given that FMCG brands of similar quality and size in Singapore is commonly trading at 2X – 4X of SDE, we can roughly value this business at $3.6 mil - $7.2 mil.

Market-based valuation method is typically used for most mainstream businesses. E.g. FMCG, F&B, Manufacturing, Engineering services, corporate service providers, etc. This is by far the most common business valuation method used by professionals when they buy business in Singapore.

*Please note that businesses in different countries tend to have different average business valuation range. For example, in Singapore 2X - 5X is the norm, whereas in Malaysia 3X - 6X is the norm. In Thailand, 7X - 10X is fairly common.

Asset-Based Valuation: This method focuses on the net value of your business's assets (total assets minus total liabilities). It's more applicable for asset intensive businesses in the real estate or property holding companies. It can also use when a company is being liquidated or in financial distress.

Highlight: There are only a handful of buyers in Singapore who are keen in buying distressed business.

Discounted Cash Flow (DCF) Valuation: This more complex method projects your business's future free cash flows for 4 - 5 years, and discounts them back to their present value. It considers the time value of money and is often used for businesses with predictable and stable cash flows.

Often, a professional valuation will consider a combination of these methods to arrive at a more accurate and comprehensive assessment of your business's worth. Most professional investors would have a business valuation checklist.

While the valuation methods are standardized, the commercial exposure, entrepreneurial experience, in-depth knowledge of the industry and level of optimism of the investor will impact the way how the valuation methods are being applied.

What's Your Next Step?

Understanding the basics of business valuation is a great start. However, getting a professional valuation is highly recommended when you're serious about selling your business.

At Fey Day, our experienced business broker in Singapore can guide you through the valuation process. We have the expertise and market knowledge to provide you with an accurate and realistic assessment of your business's value. We'll take the time to understand your unique business, analyze your financials, and consider all the relevant factors to help you achieve your selling goals.

Selling your business in Singapore or Malaysia is a significant undertaking. Don't leave its value to chance. Contact our business broker in Singapore today for a confidential discussion and let us help you unlock the true worth of your hard work. We're here to make the process as smooth and successful as possible for you.

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