Last week, I asked one SME boss a simple question.
“Boss, how much do you think your company is worth?”

He answered very confidently.

“Mr Koh, last year sales RM5 million. So company value should be around RM5million lah.”

I smiled. This is where many SME bosses get valuation wrong.

Sales RM5million does not mean company value RM5 million.

A buyer does not pay you because your sales look big.
A buyer pays for profit.
A buyer pays for cash flow.
A buyer pays for systems.
A buyer pays for customers that can stay.
A buyer pays for a business that can still run after the boss walks out.

This is the painful part.

To the boss, the company is his baby.
30 years of hard work.
Sunday also work.
Public holiday also answer customer call.
Bank loan, supplier pressure, staff problem, customer problem, IRB letter, everything also he handles.

So when someone says the company may not be worth what he thinks, he feels hurt.

But valuation is not based on feeling.

A company with RM5 million sales but only 2% net margin may be less attractive than a smaller company with RM3 million sales and strong recurring profit.

Revenue is nice for storytelling.
Profit is nicer for valuation.
Cash flow is even nicer.
And clean documentation is the most beautiful.

Many SME bosses also think audited accounts already equal valuation.
No.
Audited accounts answer one question : “Are the financial statements fairly presented?”

Valuation asks another question : “What will a serious buyer actually pay for this business?”

Very different question.
Because a buyer will ask:

Are the profits sustainable?
Are customers too dependent on the founder?
Are personal expenses mixed inside the company?
Are directors’ salaries at market rate?
Are related party transactions properly recorded?
Can the business continue without the boss sitting in office every day?

If the answer is no, the value will be discounted.
Sometimes very heavily.

Now valuation is no longer only for selling business.
It matters for Capital Gains Tax on unlisted shares.
It matters for stamp duty on share transfers.
It matters for succession planning.
It matters when shareholders want to exit.
It matters when family business passes to the next generation.
It matters when IRB asks, “How did you arrive at this value?”

The biggest mistake?

Many SME owners only think about valuation when someone wants to buy their company.

By then, too late already.

Value is built years before the sale.
Clean accounts.
Less boss dependency.
Better margins.
Good systems.
Clear documents.
Proper governance.

All these boring things make buyers pay better.

So boss, don’t wait until someone offers you a low price, then only get angry and say : “Why my business so cheap?”