(VALUE UPDATE) The Myth of Valuation: Why Most Malaysian SMEs Get It Wrong

A perspective from Mr Koh Teck Peng, An Approved Auditor and Licensed Tax Agent in Malaysia and Member of IACV (International Association of Certified Valuators).

Introduction

Ask ten SME owners in Johor what their business is worth, and you will likely get ten confident answers.

Valuation has become one of the most discussed yet least understood subjects among Malaysian SMEs. With the introduction of Capital Gains Tax on unlisted shares, the maturing of the local M&A market, and a generation of founders approaching succession, the question "what is my business worth?" has moved from idle curiosity to commercial necessity.

Yet in our practice, we continue to see the same misconceptions repeated across industries, deal sizes, and ownership structures. This article unpacks the most persistent valuation myths we encounter, and what every SME owner in Malaysia should understand instead.

Myth 1: "Revenue tells the story"

Many owners benchmark their worth against top-line revenue. "We did RM20 million last year, we must be worth RM20 million."

Revenue is a vanity metric in valuation. Investors and acquirers pay for sustainable, transferable cash flows, not turnover. A trading company doing RM20 million at 2% net margin is rarely worth more than a niche services firm doing RM5 million at 25%.

The reality: Quality of earnings outweighs quantity of revenue. EBITDA, margin stability, and customer concentration matter more than the headline number.

Myth 2: "There is a standard industry multiple"

The "x times PAT" or "x times EBITDA" rule of thumb is the most dangerous shortcut in SME valuation. We have seen owners reject genuine offers because "my industry trades at 8x", a figure typically extracted from a listed-company comparable that bears little resemblance to their reality.

Listed multiples reflect liquidity, scale, governance, and minority-interest pricing. Applying them directly to an owner-managed SME, without adjusting for size discount, illiquidity discount, and key-person risk, overstates value by 30% to 60% in most cases we have reviewed.

The reality: Multiples are a sanity check, not a method. A proper valuation triangulates income, market, and asset approaches as set out under International Valuation Standards (IVS).

Myth 3: "Audited financials equal a valuation"

A clean audit report tells you the financials are fairly stated under MFRS. It does not tell you what the business is worth.

In fact, audited accounts of Malaysian SMEs often understate true earnings power because of how owners structure their affairs. Directors' remuneration is set for tax efficiency rather than market rate, personal expenses are absorbed by the company, related-party rentals are recorded at non-arm's-length terms, and undocumented cash transactions cannot be recognised by auditors.

The reality: Valuation requires normalisation, a re-statement of historical earnings to reflect what a third-party buyer would actually inherit. This is where most DIY valuations collapse.

Myth 4: "My competitor sold for RM30 million, so I am worth the same"

Comparable transactions are useful, until they are not. The reported figure is rarely the cash figure. Malaysian SME deals are routinely structured with earn-outs, deferred consideration, vendor financing, escrow holdbacks, and management retention packages. The "RM30 million" your competitor announced may have been RM18 million in headline cash with RM12 million tied to three-year performance targets that may never be hit.

The reality: Deal value and enterprise value are different conversations. Without access to the underlying terms, comparables mislead more than they inform.

Myth 5: "The business runs itself, so that is reflected in the value"

Owners frequently believe their reduced day-to-day involvement is a selling point. In valuation, the opposite question is asked: what happens to earnings the day the founder walks out?

If customer relationships, supplier terms, key technical know-how, or banking facilities are concentrated in the founder, a buyer will discount aggressively for key-person risk, or insist on extended earn-outs that defer real consideration. This is one of the largest preventable value gaps we observe in family-owned Malaysian SMEs.

The reality: Transferability of earnings is a precondition for value, not an afterthought.

Myth 6: "Valuation only matters when I want to sell"

This is perhaps the costliest myth of all. Valuation is increasingly relevant for:

Capital Gains Tax on disposal of unlisted shares, where IRB scrutiny of consideration is rising. Stamp duty on share transfers under the Stamp Act 1949. Section 140 transfer pricing adjustments on related-party transactions. Estate and succession planning, particularly where shares pass between generations. Bank financing and private credit, where lenders increasingly require third-party valuation. Shareholder disputes and exits, where the absence of an agreed methodology becomes the dispute itself.

The reality: A business owner who only thinks about valuation at the point of sale is already too late.

KTP's View

The myth at the heart of SME valuation in Malaysia is the belief that value is a number, fixed, discoverable, and ideally large. It is not.

Value is a range, derived from method, defensible under scrutiny, and shaped as much by what a buyer is willing to pay as by what the seller believes they are owed.

The owners who realise this earliest are the ones who build value deliberately over five to seven years, strengthening recurring revenue, reducing owner dependency, formalising governance, cleaning up related-party arrangements, and documenting the intangibles that auditors never capture.

The owners who realise it too late discover, often at the negotiation table, that the business they spent thirty years building is worth considerably less than they assumed, and considerably more than they could have made it, had they started preparing earlier.

If your business is approaching a transaction, succession, restructuring, or tax-driven valuation event, the right time to engage a professional is before the conversation begins, not after the offer arrives.

Disclaimer : The contents of this article are for general information only and do not constitute professional advice. Legislation, regulatory guidelines, and market practice may change after the date of publication. KTP & Company PLT accepts no liability for reliance placed on this material. Please consult a qualified professional before acting on any matter discussed.

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