Corporate Finance Decisions for Malaysian SMEs: A Practical Preparation Guide

Corporate-finance decisions — raising funding, acquiring a business, selling one, or reorganising ownership — turn on strategy, cash generation, risk, ownership records, documentation and the expectations of whoever sits on the other side of the table. Preparation makes the decision clearer and the process shorter. It does not make funding or a transaction more likely to occur, and it should not be presented as though it does.

For an owner-managed Malaysian company, the difficulty is rarely a shortage of options. It is that the objective, the information and the governance get settled in the wrong order — usually after an external party has already asked for something the company cannot produce.

Settle the decision before running a process

Four questions should have written answers before any lender, buyer or investor is approached.

• What is the objective? Growth capital, refinancing an existing facility, working-capital headroom, a partial cash-out for a founder, a full exit, a management buy-out, and separating a trading business from a property asset are different objectives requiring different processes. They are often conflated because each can be described as raising money.
• How much, and on what basis? A figure derived from a cash-flow forecast can be defended. A figure derived from what the owner hopes to receive cannot, and it rarely survives the first meeting.
• What is the timing constraint? A facility expiry, a lease renewal, a shareholder deadline, a tender requirement or a filing date each leaves a different amount of usable preparation time.
• Who decides? The shareholding, the constitution, any shareholders' agreement and any existing financing documents may each limit what the board can commit to. Establish decision authority before negotiating.

An objective that cannot be stated in two sentences is not yet a decision. A process built on one consumes management time without producing a result.

Lenders and equity investors test different things

Owners frequently prepare a single information pack and send it to everyone. That treats two different questions as one.

A lender is principally testing whether the company can service and repay the facility from cash generated in the ordinary course, and what could be recovered if it cannot. Its attention goes to historical cash conversion, the ageing and reliability of receivables, security available and charges already registered, guarantees given, covenant headroom, and whether the management accounts reconcile to the filed financial statements.

An equity investor is testing whether the business can grow, whether that growth is repeatable, whether the earnings belong to the business rather than to the owner personally, and how and when its money might come back. Its attention goes to customer concentration, margin durability, the strength of management below the owner, the shareholding structure, and the terms on which it could exit.

A repayment case presented to an investment committee, or a growth narrative presented to a credit committee, is not a presentational error. It answers the wrong question — and the usual response is silence rather than a rejection that explains itself.

What information readiness actually means

Readiness is not a folder of documents. It is a set of records that agree with one another and can be explained by someone inside the business.

• Financial statements for at least the last three financial years, with current-year management accounts reconciled to them rather than prepared on a different basis.
• A cash-flow forecast built from operational drivers — volumes, prices, collection and payment cycles — rather than a percentage applied to last year.
• A complete and current ownership record: register of members, share transfers, any options or convertible instruments, and any arrangement held outside the register.
• Material contracts, including any change-of-control or assignment provisions, together with leases, licences and permits.
• Banking facilities, charges registered, guarantees given, and any covenant currently in force.
• The tax position: filings made, assessments raised, any matter under correspondence, and indirect-tax registrations.
• Employment records, statutory contributions, and any entitlement that has become an expectation without being documented.

Two consistency tests are worth running before anything is sent out. Does every set of figures reconcile to every other set? And can one person explain any number on any page without retrieving it from somewhere else? A pack failing either test transfers the cost of reconciliation to the counterparty, who will price that time and that uncertainty.

Owner-managed results usually need normalising first

Where the owner is also the principal director, and often the landlord, reported profit reflects decisions taken for tax, family and cash-flow reasons rather than to depict a trading result. Those decisions may be entirely proper. They are simply not what an external party is trying to measure.

Identify, quantify and evidence the recurring items before someone else raises them: remuneration set above or below a market rate, rent paid to a related property-owning company, vehicles and travel borne by the business, family members on the payroll, one-off items presented as ordinary, and director or shareholder balances that will need to be settled or formalised. Disclosing these with supporting evidence is a materially different position from having them presented back as findings.

Company-law approvals are planned, not discovered

Several steps in a funding or transaction process require a shareholder decision under the Companies Act 2016, and the sequence matters:

• Under section 75, directors must not exercise a power to allot shares unless prior approval by resolution of the company has been obtained.
• Under section 85, where new shares rank equally with existing shares as to voting or distribution rights, they must first be offered to existing shareholders in proportion to their holdings, unless the constitution provides otherwise.
• Under section 223, shareholder approval is required for an acquisition or disposal of property or of an undertaking of a substantial value.

How these provisions apply to a particular allotment or disposal, and how they interact with one another, is a legal question that has been the subject of litigation. It should be settled with legal advice before documents are signed rather than corrected afterwards. The current text of the Act is published by SSM.

Structure decides the tax outcome, and structure is decided early

Whether a transaction is framed as a sale of shares or a sale of a business and its assets, and whether the disposing shareholder is an individual or a company, changes the tax and duty consequences rather than merely their administration.

Two points illustrate why the question cannot wait. First, the charge to capital gains tax on the disposal of unlisted shares in a Malaysian-incorporated company falls on a company, limited liability partnership, trust body or co-operative society; an individual disposing the same shares is not a chargeable person for that charge, although a different charge may apply depending on what the company owns. Second, an instrument transferring shares is assessed to stamp duty on the consideration or the value, whichever is the greater, so a transfer at a nominal price does not produce a nominal duty.

Both positions depend on the facts and on rules that are revised from time to time. Confirm the current treatment against the guidelines published by HASiL, and model the consequence while the structure is still open rather than after heads of terms are agreed.

Test the plan against the downside

A forecast that supports the request is not evidence. What carries weight with a credit or investment committee is a forecast that has been stressed and still works, or that fails in a way management has already considered.

Vary the assumptions carrying the most weight — volume, price, collection period, cost inflation, and the timing of the funding itself — one at a time, and establish the point at which the business breaches a covenant, exhausts headroom or cannot meet a repayment. Then state what management would do at that point. An owner who can answer what happens if revenue runs twenty per cent below plan for two quarters, with a specific operational response, is in a different position from one whose model carries no downside case at all.

A workable sequence

1. Write the objective, the amount, the timing constraint and the decision authority on a single page, and have the board approve it.
2. Reconcile the financial records and complete the ownership and contract files before approaching anyone.
3. Identify and evidence the normalisation adjustments rather than waiting for them to be raised.
4. Establish which shareholder approvals are required, and in what order, before terms are agreed.
5. Model the tax, duty and cash consequences of each structure while alternatives remain open.
6. Stress the forecast and prepare a specific response for each downside scenario.
7. Obtain current legal, tax and financial-reporting input on the points the facts actually turn on.

When outside support helps, and when it may not

Not every funding decision calls for external advisers. A modest facility renewal with an existing bank, on broadly unchanged terms and supported by records already in good order, is frequently handled well by the company's own finance function. Bringing in advisers for it adds cost without changing the outcome.

The considerations differ where the amounts are material relative to the business, where several shareholders hold divergent interests, where the structure affects tax or duty, where the counterparty is professionally advised and the company is not, or where the records would not withstand examination in their current state. Even then, the value lies in the preparation and in the questions asked before commitments are made, rather than in the presence of an adviser as such.

General-information limitation

This article is general information only. It does not provide legal, tax, valuation, investment, insolvency or transaction advice for any particular organisation, and it does not determine whether funding should be sought, whether a transaction should proceed, or on what terms. Company-law, tax and duty requirements are periodically revised and their application depends on the facts. Confirm the current position against the issuing authority's own published material and obtain advice based on your circumstances before acting.

To discuss your circumstances, contact Saifudin & Co.