Newsletter #97: Common Myths To Debunk For M&A in SMEs

Mac
5 hours ago
3 min read

Singapore National Day Parade — Sang Nila Utama Statue at Boat Quay

Accordingly to legend, the Kingdom of Singapura (Present-day Singapore) was founded in the 1299 by Sang Nila Utama. Sang Nila Utama was a 13th-century prince from the Srivijaya Empire (Malay kingdom centered in Palembang, Sumatra) and he encountered a lion in the shore of Singapore island. You can find his statue in Boat Quay area. Interesting, isn't it?

In case you are wondering, what does legend or myth got to do with M&A for SME? In today's newsletter, the purpose is to debunk common myth centred around M&A for SMEs. Obviously, you have to take my words with a pinch of salt since I am debunking common myth. These 3 insight can be very useful for SME owners.

Myth #1 - The Business Valuation determines how much you can sell your business for

I regularly encounter SME owners who thought that their non-listed business can be sold for the value that was being appraised by a chartered business valuer. Often time, they can spend at least 3 - 5 years waiting for a unicorn buyer to offer them their dream price, before their business stagnate until it becomes either unsellable or a fractional of what it is originally worth. Check out the table below, where it showcase the top 10 listed property developers in Singapore and their share price. (Based on 4th Sept 2026)

While there are many ways investors would value property development firms, it's common for them to use book value as a benchmark. You can see that all the property developers in the table above, are being traded at a significant discount to their actual book value.

Obviously the market (buyers and sellers) are pricing the businesses based on the potential, current earnings, portfolio, risk, yield and etc. The main lesson that stood out from this, is the significant discount to the book value for all the property development firms above. Do note that these are sizeable businesses that are profitable and well-established with strong brand equity. If a business like the above are already facing a 'discount' from investors, wouldn't it be normal for small SMEs to face a higher 'discount' factor as well?

Myth #2 - Profitable business means it is sellable

Most SME owners would interpret profitable business as high quality and desirable business. In their own mind, they would think that there will be buyers since it is profitable and generates cashflow. This is not necessarily true.

Most SME owners focus mainly on 3 aspects: Profit, Operation and Cashflow. Which is perfectly fine as an owner operator since your main objective is to see the money appearing in your company bank account at the end of the day.

Whereas an investor would typically prioritise a different set of metrics: Cashflow, Risk, Scalability, Moat (Defensibility) and Profitability. Under the risk aspect, it would be further broken down into several component:

Owner dependency risk
Supplier risk
Customer concentration risk
Contractual risk
Obsolescence risk
Quality of Earning risk

The differences in the view point from 2 opposing parties can create a valuation gap, which might render a successful transaction challenging, or occasionally impossible.

Myth #3 - Time is on your side

Most SME owners would optimistically think that time is always on their side, which I respectfully disagree. Majority of the sellers I meet tend to be in their early 50s to early 70s. At this stage of their life, they tend to be in one of the following categories:

Wants to retire
Pursue a different venture
Poor health

They tend to overlook the time taken to sell a business and post-sale transition can easily take 2 - 4 years. Often time, it tends to drag further especially when the owners have a very optimistic asking price. (It's common for them to equate selling price, based on the goodwill they expect from the years and effort they put into the business)

During this period, they might have rejected serious buyers who put up a reasonable market-rate offer. Every business has it's own cycle (The up season and down season). The moment the business is in the down season, it will have a severe impact on the enterprise value. (Selling price)