In this guide
A business is worth less when a buyer sees risk. The ten most common causes in Malaysian SMEs are: the business depends on the owner, the profit is thin once the owner is paid fairly, the records are hard to trust, the revenue does not repeat, one or two customers pay most of the bills, there is no second line of managers, the work is not written down, new customers only come through the owner, customers choose on price or on the owner, and the paperwork has gaps. Each one can be checked, and most can be worked on.
Every owner asks the same question: what is my business worth? I cannot answer it. I am a strategist, not a valuer. A qualified business valuer, your accountant or a corporate finance adviser can give you a figure.
What I can tell you is what makes a buyer pay less. It is not a mystery. A buyer looks for risk. The more risk they see, the less they pay, or the more conditions they add. Sometimes they walk away.
This guide lists ten causes I see in Malaysian SMEs. For each one you get what a buyer sees, and where to start.
How a buyer thinks
A buyer asks three questions. How much does this business really earn? How safe is that income? How easily can I take it over?
Two businesses can earn the same profit. If one depends on its owner and the other does not, they are not equal. The buyer sees more risk in the first one.
A bank, an investor or a family member who will take over asks the same three questions. Everything below is a version of them.
The ten causes
Cause 1The business depends on you
What a buyer sees. Decisions, key customers and know-how sit with one person. If you leave, the business may stop. The buyer has little to buy and has to hope you stay.
Where to start. List the decisions only you make. Hand over the smaller ones, with clear limits. Our guide on how to make your business run without you shows how.
Cause 2The profit is thin once you are paid fairly
What a buyer sees. Many owners take a low salary, or run personal costs through the company. A buyer adjusts the numbers. They deduct a fair market salary for someone to do your job. What is left is the profit they count. For some businesses it is much smaller than the owner thinks.
Where to start. Work out your profit after paying yourself, or a manager, a market salary. Know your margin by product and by customer.
Cause 3The records are hard to trust
What a buyer sees. A buyer’s accountant asks for about three years of accounts. They want monthly accounts that are up to date and reviewed. Personal and business spending mixed together slows them down. Sales that were never recorded cannot be counted. Profit that cannot be shown in the accounts counts for little, however real it is to you.
Where to start. Separate personal and business spending. Close the books every month. Make sure tax filings and EPF and SOCSO contributions are on time. Ask your accountant what needs cleaning up and how long it will take. I am not an accountant, so follow their advice.
Cause 4The revenue does not repeat
What a buyer sees. Revenue you must win again every month is less certain than revenue that renews by itself. Contracts, service plans and regular orders give a buyer more comfort than one-off sales.
Where to start. Work out how much of next year’s revenue is already contracted or repeats. Then look for ways to turn one-off customers into regular ones, such as service plans, retainers and annual contracts.
Cause 5One or two customers pay most of the bills
What a buyer sees. When one customer pays more than about a third of your revenue, buyers often see a risk. One decision by that customer could shrink the business. This is common for Malaysian SMEs that supply one large company.
Where to start. Know your top five customers and what share each one pays. Set a limit for how much any one customer should be. Then grow other customers on purpose.
Cause 6There is no second line of managers
What a buyer sees. Key departments run only because of you, or because of one long-serving person who could leave. The buyer asks who will run each area on the first day after the sale.
Where to start. Name one owner for each key area. Write down what they decide and which numbers they watch.
Cause 7The work is not written down
What a buyer sees. If the way work gets done lives in people’s heads, a new owner cannot pass it on. Quality depends on who does the job that day.
Where to start. Write one page for each of your five to ten core jobs. Let the people who do the work write the first draft.
Cause 8New customers only come through you
What a buyer sees. If sales come from your network and your effort, growth stops when your time runs out. A buyer cannot buy your friendships.
Where to start. Build a way to win customers that works without you. That means a clear offer, a simple sales process, referral partners and marketing that runs every month.
Cause 9Customers choose on price or on you
What a buyer sees. Customers who stay for price will leave for a cheaper offer. Customers who stay because they know you may leave when you do. Neither group passes to a new owner. A reputation that belongs to the company is easier to hand over.
Where to start. Ask your best customers why they chose you and why they stayed. Use their words to say what the company is known for. Then make sure the team delivers it every time.
Cause 10The paperwork has gaps
What a buyer sees. A buyer’s lawyer checks contracts, licences and who owns what. Verbal deals, expired licences, a brand or domain name in your personal name, or a shop lot or factory lease that is about to end can delay a sale or lower the price.
Where to start. Put key customer and supplier deals in writing. Check that licences and permits are current. Register your brand with MyIPO if you have not. Keep the domain name and social media accounts in the company’s name. Check how long your lease has left and whether it can be passed on. Ask a lawyer to review the rest.
Where to start
Do not try to fix all ten at once. Buyers tend to check the first three first: how much the business depends on you, what it really earns, and whether the records can be trusted. Start there. Records are often the quickest to improve, and they make the other gaps easier to see.
Some gaps take weeks to close. Others take a year or more. The order you work in matters more than the speed.
What fixing these does and does not do
Fixing these gaps lowers the risk a buyer sees. It does not set a price. The price depends on your industry, the market, the buyer and the deal. I do not promise that a business will sell for more.
I can help you see the gaps and work on them. For a figure, speak to a qualified valuer or your accountant. For the legal side, speak to a lawyer.
Even if you never sell, these ten fixes make the business easier to run, easier to finance and easier to hand over to the family. If that is your plan, read how to prepare a family business for succession.
Questions owners ask
How is a business valued in Malaysia?
There is no single formula. A valuer usually looks at what the business earns, what it owns and owes, and what similar businesses have sold for. The right method depends on the type of business. I am a strategist, not a valuer, so I do not give figures. Ask a qualified business valuer, your accountant or a corporate finance adviser.
What lowers the value of a business the most?
It depends on the business. The most common cause is dependence on the owner. When the business stops without the owner, the buyer has little to buy. Next come profit that cannot be proved in the accounts, and one or two customers paying most of the bills.
Does a small profit mean a low value?
Not always. A buyer also looks at risk, repeat revenue and how easily the business can be taken over. A smaller profit that is steady and well recorded can look safer than a larger profit that is not. Profit that cannot be shown in the accounts counts for little.
How early should I prepare my business for a sale?
As early as you can. I suggest at least two years. Buyers ask for about three years of clear accounts, and changes such as building a second line of managers take time.
Can I fix these problems myself?
Some you can. You can separate personal and business spending, write down the key jobs and put deals in writing. Others need help. Cleaning up accounts needs an accountant, ownership papers need a lawyer, and stepping back from the business is easier with an outside strategist who asks the hard questions.
I work alongside Malaysian SME owners so they spend their time on the business, not only in it. I help them decide what to stop doing and build a business that can be handed over. I am HRD Corp certified, a John Maxwell Team coach and a 10X Strategy Coach, based in Kuala Lumpur.
This guide is general information for business owners. It is not legal, tax, accounting or valuation advice. I am a strategist, not a valuer, lawyer or accountant. Speak to a qualified adviser before you act on any part of it.
