Friday, September 30, 2016

How Is A Humble Chicken Rice Recipe Worth S$2 Million?

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Timothy Ho of Dollars and Sense tries to make sense out of the S$2 million valuation of Hong Kong Soya Sauce’s S$2 chicken rice recipe. Can a chicken rice recipe really be worth S$2 million? That’s the question many Singaporeans are wondering after it was reported that the chef-owner of Hong Kong Soya Sauce Chicken Rice And Noodle at Chinatown Food Complex, Mr Chan Hong Meng, is looking to explore a partnership opportunity to expand his Michelin hawker brand. The price? S$2,000,000. Along with a few other conditions that any partner will have to also meet. Valuing the price of a recipe, or the business that currently holds the recipe, is a tricky task. So does one start with the valuation? Here are some possible ways we can think of.
 
 
1. Peer Comparison
One of the most straightforward methods would be peer comparison. Investors and business owners look at similar companies within the same industry that have been sold (or valued) in recent years, taking its value as a base, before adding a premium or discount to it. Mr Chan have said that his asking price was based on the $4 million dollars that Aztech Group paid for Kay Lee Roast Meat in 2014, which also included $2 million for the shop that they own. The possible flaw in his argument, however, could be whether or not he is actually selling his business, as what the former owners of Kay Lee did, or simply looking for a strategic partner to help him expand the brand. If he is selling his business, that valuation could make sense based on the deal that was done for Kay Lee Roast Meat. However, if he is looking for a business partner, then the $2 million dollar is similar to what is called in the venture capital space as taking “cash off the table”. This means that in spite of being a future partner in the business as what he said he wanted to be, the founder is also personally cashing out a significant chunk of value in the form of the $2 million payouts. Don’t get us wrong. There is nothing wrong with enjoying a great one-time off payout especially in the later years when you are near retirement or contemplating the possibility of retirement. But one cannot have it both ways. Unless Mr Chan holds the majority in the new partnership, he is unlikely to have any say or control of the future expansion of the business.
 
2. Multiple Of Revenue
Another way to valuate a business would be to base it on a multiple of its revenue.  But how much revenue does Mr Chan stall generate? Let’s do some estimates. Mr Chan shared that he sells about 180 chickens a day. At a price of $14 per chicken, we can estimate his sales to be about $2,520 each day.
Chicken Sold Per Day
180
Price Per Chicken
$14
Revenue Per Day
$2,520
Days Per Month
24
Total Revenue Per Annum
$725,000
If we assume 24 days a month schedule, that would give us a revenue of about $725,000 per annum. Based on a valuation of 2 times revenue, such a business could be worth about $1.45 million. Add in the Michelin star that it has and the valuation of $2 million would reasonable.
 
3. Projected Future Profits
Instead of revenue, an investor could also base current valuation on projected future profits. For example, if we assume that the current net profit margin the business enjoys is 25% (this is just a guess and include labour, rental, taxes and cost of goods sold), then current profit based on estimated revenue would be about $180,000 per annum. An investor could be confident of expanding the brand both locally and globally. They may also aim to charge more to increase profit margin, which wouldn’t be a bad idea given the brand name of the business and the willingness of Singaporeans to queue and pay for good food. Given the current brand value that the company already has, increasing profits by about 4 times could be the goal. If that happens, net profit could be about $720,000 per annum. Assuming a price-to-earning (P/E) of about 6 times, we could be looking at a business that might be worth about $4.5 million in the future. That’s not a lot, especially for a strategic investor.
 
4. Brand Value And Operational Synergy
A strategic investor who is already known in the F&B sector could find the potential partnership with Hong Kong Soya Sauce Chicken Rice an attractive one. Given the fact that the stall already has a loyal fan base in Singapore, it is likely to be able to generate its own cashflow for years to come. In addition, the Michelin Star it has already earned puts it on the tourist map, a strategic investor could see limited downside to the investment. At the same time, the upside could potentially be quite high, especially if operational synergy can be obtained.
 
Is S$2 Million Too Much To Pay For A Chicken Rice Hawker Stall?  
In our opinion, a non-strategic investor would find the sum of $2 million to be too high. Unless they have access to lots of capital to expand aggressively, in addition to the $2 million they have to pay, it would be difficult to grow. Another Chicken Rice brand, Sin Kee Famous Chicken Rice Recipe, was also sold recently for $42,600. That could represent better value for money if getting a recipe is what a buyer is looking at. On the other hand, a strategic investor, perhaps a Group that is already running a few F&B businesses, could find this a meaningful partnership to enter into. For such a group, the downside to this investment would be limited, given the brand name already established. If an investor is able to sync up the chicken stall to its existing business operations, the returns could prove lucrative. Only time would tell how well this development pan out.

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