5 Company Valuation Methods for Malaysian SMEs 

Valuation is a standard step in fundraising, mergers and acquisitions, shareholder exits or business restructuring exercises, and the most suitable method depends on the business model and transaction objectives.

For example, in a fundraising context, valuation determines how much equity is being offered and how much ownership founders are giving away. 

As a result, it is always advisable to engage a qualified financial adviser to ensure the approach aligns with your goals. 

5 common valuation methods  

Different methods apply depending on the company’s stage, profitability, and available financial data. In practice, a combination of methods may be used to arrive at a reasonable valuation range rather than a single exact number. 

Below are some common business valuation methods used for private companies and startups. 

1. Comparable company analysis (market approach) 

This method is commonly used in both fundraising and M&A. It looks at how similar companies are valued in the market, usually using valuation multiples such as EBITDA, revenue or price-to-earnings multiples. It provides a useful benchmark but may not always reflect the realities of private SMEs or early-stage startups. Adjustments may also be needed because private companies are typically less liquid and less comparable to listed companies. 

2. Precedent transactions method (market approach) 

This method is commercially relevant and common in M&A deals as it is based on actual past transactions involving similar businesses. It reflects what buyers are willing to pay in real deals. However, reliable data can be limited, especially in the Malaysian SME space or for niche industries. 

3. Discounted cash flow (income approach) 

This method is also commonly used in both fundraising and M&A. It values a business based on its projected future cash flows, discounted back to present value. While theoretically sound, it relies heavily on assumptions. For businesses without stable or predictable cash flow, this method may be less reliable. 

4. Asset-based valuation (book value / net asset value) 

This method calculates value based on net assets (assets minus liabilities). It is commonly used for asset-heavy businesses, but less suitable where value is driven by intangibles or growth potential. 

5. Venture capital method (for startups) 

For early-stage startups, valuation is often based more on future potential than current profits.  

The venture capital method estimates a future exit value and works backwards to determine today’s valuation, taking into account the investor’s expected return. 

How valuation affects fundraising and M&A terms  

Once a valuation is determined, it helps inform share pricing, investor equity percentages, or purchase price expectations in fundraising and M&A discussions. 

A higher valuation may reduce immediate dilution but comes with higher performance expectations, while a lower valuation may make it easier to attract investors but results in more equity being given up by owners.  

Valuation also becomes relevant in scenarios such as: 

• future funding rounds  
• anti-dilution adjustments  
• share swaps in exit transactions  
• conversion of preference shares into ordinary shares  

Early valuation is especially important to avoid unintended dilution and misalignment with investors. Founders should understand the valuation method used, take into account future funding rounds and avoid relying on rough estimates.  

Key takeaway: Valuation has long-term implications on ownership and control.   

Let ELP be your M&A legal support 

Hiring a qualified financial adviser and the right corporate lawyer will ensure your term sheet and transaction documents properly reflect and protect your interests. If you are already at the term sheet stage, we can help draft or review it. Contact us for an initial consultation.