Sale of business in Singapore is never straight forward. Why do some loss-making businesses sell at a high price while profit-making businesses sell at a low price? Isn't it important the profitable of the company comes first? How do you value the businesses in current environment? Why do companies like Spotify, Uber, Wework and Grab which are making huge losses be valued at such a high price?
Investors nowadays are willing to invest in unprofitable companies if they see strong potential in the business model. With the success of Internet Businesses like Alibaba and Amazon which were making losses in their initial years, investors are now more comfortable with investing in start-up companies making losses, i.e. buying loss-making companies. Many investors focus on the market share a company can gain. If the company can eventually monopolize the market with new technology (i.e. new way of doing things with IT) or new discoveries (e.g. drugs and treatment), investors will be even more willing to put money into the companies.
It appears that investors love future growth prospects more than historical profitability. They want to see company with good story to conquer the future rather than just boring profit numbers in the past. Investors definitely will not be so interested in old businesses with flat or declining profit. Then it comes the next question - For sale of business, how do we value a company without historical profits or rather with few years of losses?
Value and Sell a Business with Losses
Without historical profits to value a company, there is more subjectivity in valuing a loss-making business for sale. You can no longer use a multiple of historical net profit. Price earning ratio is not applicable because there is only loss. As such, the valuation of loss making business focuses on the following:
- Revenue growth and the speed of annual growth;
- Market Share and level of annual growth; and
- Technology Potential and Intangible Assets (Patent, research and new discovery).
Based on the above and some assumptions, the business may be valued using discounted future cash flow method (i.e. forecasting the future cash flows and discounting the future cash flow to arrive at the present value) well as other methods. The business broker must also be able to see how the current loss making company can add value to the buyer's current businesses, i.e. convincing the buyer that the synergy of the business to be acquired and the existing businesses will generate even more revenue and profit in the future.
Sale of Business at a Good Price
To sell your business, especially loss making business, at a reasonably good price, you need a good business broker who can paint the right picture at the buyer's mind and let the buyer sees the true worth of the business. The business broker must be patient and must not be seen to be trying to sell the business at a hurry. The broker must understand your business and the businesses of potential buyers in order to sell the business effectively. He or she must have the right marketing channel (i.e. both sales staff and online marketing) to reach out to the buyer, know how to position and price your business and great negotiation skills to close the deal at a good price.
If you need a business broker to help you to sell, let us know and we shall connect you. Our accounting services also help customers to value their business and support various business broker when it comes to valuation of business.
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