Need for business valuation for SMEs

EVERYDAY, business entities are bought and sold.

And with more focus given to the SME sector, small businesses could see more corporate activities in the coming days. As such, there is a greater need for SME business valuation in the industry.

In a Business Valuation Seminar held last month, it can be observed that there is growing interest from the industry with regards to methodologies used to value the new breed of firms in the technology sector and how their valuations are used in fundraising, sale and merger exercises.

The event was organised by the Business Valuation Association of Malaysia (BVAM), which was set up in 2015.

William Hanlin Jr, president of the International Association of Consultants, Valuators and Analysts in Seattle, USA, says there are essentially two types of people in the SME segment – business owners as well as those who want to set up their own small-scale business.

The association trains and promotes business valuation theory and models.

He notes that SMEs form the backbone of a country’s economic power base, and while the owners of these entities are contented to remain small or medium in size, many eventually do become big corporate players.

It stands to reason then that these business entities must be valued based on a set standard and that is what BVAM is advocating.

Among SMEs, there are mergers and acquisitions (M&A), financial reporting following accounting standards and tax issues, which need to be considered, he says.

Hanlin says in the US, banks and underwriters require their SMEs to follow accounting standards using “fair value” when seeking initial public offering, acquisition of another company, allocation of purchase price arising from an acquisition and testing for impairment of the assets as recorded at the acquisition, among other things.

“In the past, a business owner of many years may just end up closing his or her business when retiring, or dying. Now there is an affordable means to value the business for a reasonable value at the time of sale, ” he says.

Hanlin says a valuation report can be prepared by the valuator to provide background information that a buyer can rely on when making an acquisition.

Hanlin, who gave a talk on the importance of business valuation at the seminar, has been coming to Malaysia the last few years to help local property consultancies who are expanding their scope of business and are interested to apply their valuation methods to help SMEs.

Hanlin says these small property consultancy firms, which provide business valuation services for SMEs, are not really competing with large auditing companies like KMPG, Ernst & Young, Deloitte, PricewaterhouseCoopers and merchant bankers.

“They (the big companies) are unable to generate their required level of fees from smaller businesses. Big companies will always go to bigger valuation providers for various reasons, ” he says.

These bigger firms will also charge enormous fees which are not viable for SMEs, he adds, which makes smaller companies who provide this service for a fee a more attractive option.

Additionally, these small consultancy firms may extend their services to include family issues like divorce settlements and dispute resolution, which call for evaluators to value assets and award damages.

In all these, Hanlin says there is a set of standards to follow.

In Malaysia, he sees potential for these small valuation companies to grow as the BVAM has the ear of regulators like the Securities Commission who acknowledges that valuation services is not the sole province of the accounting community.

Malaysia’s SMEs will be put on a more solid footing as the number of firms providing this service grows, he says.

According to the Department of Statistics, there are more than 900,000 (SMEs) in Malaysia as at end-2018. Nearly 90% of them are involved in providing some form of service. The rest of these SMEs are involved in manufacturing, construction, agriculture and mining and quarrying.

“Most of them are in business because they want to work their own hours and be their own boss. And if successful, they also want to earn more than if they were to remain an employee.

“There are also many who would like to have their own business, but who don’t want to pay too much, ” notes Hanlin.

In this case, there is a growing pool of resources that they will be able to tap on to help them get the right valuation whether they are interested to acquire or sell a business.