Would You Pay $500,000 for a Hawker Recipe?

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16 Aug 2022

If you’re reading this article, you might have come across news that some hawker owners are trying to sell their recipes for anywhere between $500,000 and $1 million.

This may have been your reaction when you read the news, as these figures seem to be plucked out from the sky.

But crazy as it sounds, there were cases where recipes and/or businesses were sold for millions.

So are these recipes worth?

Let’s find out!

Breaking Even Would Take Years

For some, buying a hawker recipe for $500,000 might seem crazy because you could have gotten a new HDB flat with the money instead.

Some have argued that it does not make sense as it will take years to breakeven (the point at which cost and income are equal and there is neither profit nor loss).

At the cost of $500,000, if a bowl of Bak Chor Mee (minced meat noodles) is priced at $4.50, this means that the new owners will have to sell 111,111 bowls.

Even if we don’t include the other costs incurred for the business (e.g. ingredients), assuming 100 bowls are sold every day, this would take the new owner 1,112 days, or at least three years to breakeven!

But is this the only way to determine if it’s worth it?

To be specific, there are high-profile million-dollar business acquisitions, and it seemed like they looked beyond breaking even.

These examples include:

Roast meat eatery Kay Lee was sold for $4 million to Aztech Group
Liao Fan Hong Kong Soya Sauce Chicken Rice & Noodle, which was rebranded to Hawker Chan, signed a $1 million partnership deal with Hersing Culinary
Peach Garden was sold for $10.2 million to Select Group (started as a restaurant).

Given that there were such cases that could not be ignored, I’ve looked into the principles of valuation.

Read more:

Understanding the Principles of Valuation

For the uninitiated, valuation is the underlying value of an asset (i.e. recipe), and does not equate to cash flow recoverability (i.e., breaking even).

“When someone says that a business is worth $50 million, that is not a meaningful statement to a valuer. Is $50 million what you get when you sell the business in an orderly transaction? In a fire sale? Or is that what you get when you liquidate the business and sell its component parts… To really understand what the value means, we need to know its basis of value,”

~ Mr Loh Yee Chuan, CVA, Director, Corporate Finance, Valuations in KPMG in Singapore

We want to determine if $500,000 is reasonably valued, overvalued or undervalued.

To determine this we are taking a look at the Singapore Accountancy Commission’s three principles of business valuation that are commonly used by accountants and auditors:

Approaches	Description
Income Approach	This approach is often employed when the primary factor influencing the asset's value, is its capacity to produce income/revenue. This method discounts the asset's projected future cash flow to a present value, and the discount rate should take into account the risks associated with the projected cash flows.
Market Approach	The asset is compared to comparable or identical ones for which pricing information is accessible. Such price data may come from recently completed transactions involving the equivalent assets that are regularly traded. Valuers will consider the industry, stage of development, growth rates, margins, and capital requirements, among other things, and adjust for differences between the asset being valued and the chosen similar assets.
Cost Approach	This method is used based on the assumption that a buyer will pay no more for an asset than the cost it would take to acquire one of equal utility. It may be used when the asset does not generate income directly, or when its unique nature rules out using the market and income approaches. The cost approach to valuation includes a number of techniques. The replacement cost technique calculates an asset's worth by figuring out how much an asset with comparable usefulness would cost. The reproduction cost method figures out how much it would cost to make a duplicate of the asset. The summation method values an asset by adding the values of its component parts.

Adopting The Valuation Approaches

Every business model comprises tangible and intangible assets.

The tangible aspect of the business includes shop space, equipment & machines – things that determine the book values reported on the balance sheet of assets and liabilities, or financial statements (e.g., cash flow).

If the hawker business has a balance sheet that’s consistently growing and generating revenue while the business expands, this means that the stall is profitable.

The intangible aspect includes patents, trademarks, copyrights, goodwill, brand recognition and business methodologies (in this case, the recipe), and this is often termed ‘goodwill’.

Let’s examine how the Lai Heng Bak Chor Mee stall might have derived its valuation.

Income Approach

Contrary to the cost approach, the income approach considers the intangible asset of the business, i.e., the customer base.

Lai Heng Bak Chor Mee has been around for 37 years and is known for its long queue. Assuming they generate a revenue of $1,500 per day and work six days a week, their revenue will be ~$36,000 per month.

In a year, the revenue will be $432,000!

The stall might’ve derived the value of $500,000 using this method (close enough).

However, it is good to note that the income approach is very easily manipulated and not reflective of the current market if the seller projects the cash flow to be very positive and overvalued.

Market Approach

Well, the market approach identifies and compares similar brands and uses them as a proxy.

In this case, Lai Heng Bak Chor Mee can use its competitors’ value of the business as a gauge when putting up their business for sale.

Up to this point, the hawker stalls that are generating buzz are selling their recipes at $500,000.

Could this be how Lai Heng derived its value? We can’t say for sure.

Cost Approach

Using the summation method and attaching a value to every tangible component of the business, we can determine the value of the business based on the summation of all these components.

Such tangible components include operational costs. In the context of hawker stalls, as stalls are owned by the National Environmental Agency, there is no land value per se.

It’s important to note that this approach does not take into account costs like the time spent managing the hawker stall and developing the recipe, hawkers also do not have fixtures, unlike a shopfront.

So, this approach might not have been used for valuation.

Afterthoughts

I’m not sure about you, but I’ll always go back to the same stall, despite any slight increase in price.

At most, I’d cut back on eating there if it gets too expensive.

If most people are like me, this means that brand and customer loyalty and brand recognition might be more valuable as people will keep going back for more.

However, a strong caveat is that the quality of food must remain the same, or even better.

It might be worth it if the new owner manages to pull it off eventually.

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About Hui Juan Neo

A savvy shopper and foodie at heart, I'm always on a lookout for discounts and deals to snag the best bargains.

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