Musings on business value, sale preparation, sale negotiations, sale structure.

Pitch Deck 02 Suppliers

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Risky business The ultimate sale of your business is a risky thing for that business. Sellers either realise this and react accordingly, or they give it no thought at all and blunder into a mass dissemination of previously guarded intellectual property – a course which will damage the business in the future, for whoever owns it.

You need to be wary of how you present the information given to potential buyers, some of whom are not as honest as we would like them to be. Consider two different businesses:

  • The owner of a small supermarket on the one hand, with his very wide range of suppliers, all well known in the market place; and on the other hand
  • A niche manufacturer of specialized components to the mine drilling fraternity who purchases wear components to fit to his patented head.

The sensitivity of the latter is much higher. In a meeting with the former, and the owner of another supermarket who is looking to invest in other ventures, the conversation might sound like this: “Do you buy direct from Liger Brands, or do you go through the DC? When you deal with Liger, you should ask to speak to the new guy Louis – much more helpful than Joe.”

The niche manufacturer will be far more guarded in even telling the prospect that he imports his components from China, let alone the name of the supplier. These details are more likely to come out through a due diligence process after the deal is signed.

Open up and die

An example: We were involved in the sale of a motorcycle parts wholesaler which had run into cash flow problems associated with rapid growth and a depreciating currency. (At one time they were selling older inventory at the same price as the new replacement goods were costing them – how’s that for a business model? But that’s another story.) The business had sole agencies for a number of lines, and  general agencies for others. They had prepared tables of information on gross margins, sales trends and flow through profits. The prospective purchasers were appreciative, and through the process there was a short tussle between two buyers to become the new shareholder of the business. Eventually it was sold to the higher bidder.

But midway through the process a very well established motorcycle wholesaler entered the fray. The so called “ideal purchaser”. This was very exciting for our client. Then I calmed the waters by asking if it would be usual to supply this information to other competitors. Would it be okay for us to tell Biglad Biker Bloke (BBB) what the margins were on a product we supplied to them; but more than that, to tell them what our sales on that product had been for the past three years? Well of course not. Imagine how upset would another prospect be once the sale had gone through, and he discovers that BBB has had access to the same data he had, and is now using it to force prices down.

Would you normally supply market sensitive data to a competitor?

The situation resolved itself when BBB told us that they were only interested in some of the brands (the most profitable, no doubt) and would be retrenching all the staff in the transfer.  That was the end of that negotiation. More on this in a later instalment.

Non disclosure agreement (NDA)

An important question: If the prospective purchaser picks up the telephone and calls your supplier; how much damage will be done when the supplier discovers your business is for sale? This is an issue which needs to be dealt with by the M&A practitioner guiding you in the sale of your business, and should be dealt with in the non disclosure agreement signed by prospective purchasers prior to even the name of your business being supplied.

In the meantime, the advice here is to limit your output of supplier information in your Pitch Deck to fairly innocuous generic information to start with. Wait until you have a better idea of who you are dealing with, and what their intentions are. A lot of this information can be provided in subsequent handouts, and even as a generic “promise” to be proven with the due diligence.

Bus number

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What is your bus number?

“But Honey, if I get hit by a bus, this life insurance policy will make sure that you and the kids are looked after”. We have all asked the question, or contemplated the ramifications of someone being hit by the proverbial bus.

Lourens Coetzer, a very bright computer genius, turned this around in a discussion we were having recently, and coined the measure “bus number”: The number of people in an organisation which, them all being hit by a bus, it would take to destroy a business.

A stand alone, one man self employed operation obviously has a bus number of 1. Any employee, no matter what he does, and how he earns his crust, has a bus number of 1. Standard Bank has a bus number of hundreds, maybe even thousands, we would think. But what if all the tech wizards were wiped out in a bomb blast at the annual prize giving? That bus number might only be 20.

{Ed: that seems a bit extreme. At least some of the techs would be in the hydrangeas smoking weed.}

More than considering how many people any particular enterprise is able to lose to the bus, it appears that the crucial bus number needs to be considered at the weakest point in the enterprise.

  • The business is entirely dependent on its sales staff to keep the machinery running, with a short lead time, and there is a single rainmaker making up that sales team – the bus number is very low.
  • The sales department is diversified and competitive – the bus number is high.
  • The business is a professional practice – the bus number is determined by the number of competent professionals.
  • A single CAD designer distributing work to a group of machine operators…
  • Software developers in a disorganised or poorly documented project…
  • That single black shareholder/director upon whom the enterprise depends for its BEE score, now that the government appears to be abandoning its “once empowered, always empowered principle.

That quick list demonstrates how tenuous is the grip SMMEs have on their futures, and it is worrying in the present, but even more so in the future, where business values depend on the sustainability of the enterprise.

So the challenge is to raise your bus number, to account for the systems and redundancies built into your business. It is unlikely that any reasonably sized, privately owned business would have a bus number above 3.

  • The owner or CEO, the financial manager and the factory manager
  • The owner or CEO, the sales director and the factory manager
  • Just, the top three sales people

As we develop Lourens’ concept label, all sorts of derivatives spring to mind:

  • Bus number as a proportion of all employees
  • Bus number per turnover
  • Bus number as a proportion of training budget
  • Bus number critical point of failure!
  • Bus number replacement lead time

And as we reconsider the example of the empowerment score card bus number, it appears that ministerial interference is once again threatening the future values of our businesses, with random brain emissions. Thank you, Minister Zwane.

Failing to plan? Planning to fail?

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Brian Tracy said “ Failing to plan means planning to fail”
In the mad rush to increase turnover in the run up to a sale, the very essence of the business is often ignored – its raison d’etre: The bottom line and the sustainability thereof.

The formula seems simple: Raise the sales, cut the expenses any way you can, show a magnificent profit; sell to some greedy purchaser.
Unfortunately it is not this simple for a number of reasons.

  • Good quality business buyers and investors always make their agreements of sale subject to a suspensive condition of sale (or condition precedent) in which they require to be satisfied as to the state of the financials as well as satisfactory answers to a lengthy due diligence questionnaire which they will have formulated over several years. During this process they will look for sustainability.
  • Businesses do not always sell quickly. In fact very often they take a long time to be sold, and during that period they will need to be sustained themselves, for themselves. There is no clause which allows a business to deteriorate during the due diligence and financing phases but which still locks in the purchaser. (Well I suppose there is, but you’ll struggle to get a buyer to sign it.)
  • Businesses need to grow, but at the same time remain sustainable and fundable. Uncontrolled growth sucks up cash flow better than any super sopper mopper you have ever seen. With an impending sale looming, quick last minute growth will sound the death knell for most sellers.

As with so many things of any value in life, businesses need to grow in value in a well structured and planned way which takes time and patience, and they need to have the following elements in place:

  • Sales, margins and profits
  • Infrastructure
  • Intellectual property
  • Sustainability
  • Balance sheet

Sacrificing margin to grow sales helps nobody but the psychologists. Raising sales through good marketing efforts while maintaining margin is great. Great that is, as long as your infrastructure is in place to sustain the delivery to customers. But very often, the infrastructure spend bites into the profit line. Worse than that, spending on more staff and the delegation of responsibilities can also bite into the intellectual property of a business, and where the barrier to entry is very low, even bigger problems can arise.

Strangling a business through ensuring sustainability without pushing the risks a bit will ensure that you have a boring stagnating venture that you wish to sell, if only to stop the boredom.

Planning makes the difference.

Just as planning for the sale of a business will make an enormous difference to your life when the sale happens, so planning the growth of the business beyond just adding sales to the top line will allow the business to grow in a controlled manner rather than in fits and starts of feast followed by cash flow crisis. Your added sales may bolster your cash flow initially, but where will your inventory come from, and who will finance it, pack it and ship it? Who will provide the extra after sales service and explain to the greater number of customers how the widgets work? How will you collect the money, account for it and bank it? And how will you survive in the meantime?

Working through bottle necks in advance will not only save you a lot of grey hair, but will also add value to the business long before you have to, or want to sell it. Of course the added benefit is that you get to enjoy stronger cash flows while you still own the business.

Business owners under the bus

The 2016/17 budget came and went without too much concern from tax payers, given they were all expecting a much harsher tax collection regime. The media in their quest to sell their advertising have concentrated on the effects to their readership because, let’s face it, they need to attract as many interested eyes as possible. I have looked, and seen nothing about how business owners, big or small have been affected. There is nothing I can find, written about how as of now, business owners have become a lot poorer, at the stroke of a pen.

First some history

When capital gains tax (CGT) was introduced in October 2001, there was a lot of panic in the business community about what was perceived to be a crippling tax on the sale of a business. Those fears were reduced to a certain extent by a few apparent concessions from SARS:

  • Businesses could have their businesses valued by a competent authority as at October 2001, which valuation could be used as a base from which the gain would be calculated.
  • Businesses could use their actual acquisition or establishment costs as the base.
  • There was a prorata base for calculating the gain as  well

When the selling event occurred, the business or the owner, could work all three calculations, and use the most beneficial one for his payment of CGT. Crucially, only a portion of the gain was then taxed – 20% for individuals at their marginal rate and 50% for companies at the corporate rate.

That was all good and well. Business owners looked at their valuations, thought about what they could get for their businesses, and realised that the tax payable would be negligible. So they moved on. CGT was relegated from a panic to a mere irritation.

A few years later, business sellers were receiving a bit more on the sale than they had expected, but the CGT tax although payable, was also very bearable.

Something like this: A business selling for R1.2M, with a base rate of R1M, had a gain of R200k. For companies selling the business in an asset deal, the applicable CGT was 50% of R200k = 100k, taxed at 30% (as the corporate rate was then), meant a total CGT of R30K was payable. But for the company owner to get the money into his own pocket, he would have to pay secondary tax on companies of 12.5%. That works out to another R146,250 going to the tax man. The owner walked away with R1,023,750, having paid almost 15% of his selling price to SARS. The CGT implication was dwarfed by, and therefore lost against, the much larger STC.

If the business owner chose rather to sell his shares in the company in the same deal, the tax would have worked out like this: The gain of R200k would have 20% subjected to the CGT, so R40k, and assuming he was at the top tax bracket of 40%, the tax payable would have been R16k or 1.3% of the selling price of the shares.

If the seller was over 55, the first R900k of the gain was not subject to any CGT, and for this example, no tax would be payable.

So why then did business owners not go for the equity deal, rather than the asset deal?

Some essential practical background

In years gone by, business owners were more (how should I put this?) “interested in making profits than doing their paperwork properly”. This left a potential problem of risk in the company (or usually, the close corporation) housing the business. If the owner sold the company as a whole (ie, the shares or equity in the company) the new owner could find himself having to deal with a bunch of skeletons, which often came with crippling price tags. He would then be faced with the prospect of suing an untraceable seller.

So the buyer would prefer to move the assets, the goodwill, the customers, the supplier contracts, the staff, and whatever else as required, into a new company (Newco).

The seller found favour in this arrangement as well, because he knew that almost every bit of paper he had signed on behalf of the company in the past, included a clause tying himself up to the deal in his personal capacity, jointly and severally with the company.

The deal was protected by a clause in the insolvency act – section 34, and some advertising that was done in the press, which nobody ever read.

For many years, that was the way of dong things. I would tell buyers and sellers: “Consider the pros and cons of whether to do the deal as an asset deal or as an equity deal. Then just do the asset deal”. It was the accepted wisdom amongst all professionals in the industry… Despite the extra tax payable. Only in exceptional cases was the equity sale route taken.

Buyers forced sellers to go with the asset deal. Sellers were comfortable with the 15% tax, and took comfort in the protection the structure gave them.

It gave us at Suitegum the idea to launch PrepareYourBusinessForSale™, allowing business owners to take the risk out of the sale of their businesses, gain more value, and save tax. At the same time controlling the inevitable due diligence process, to give greater comfort to the buyer of the business.

Time marches on

Let’s move on by 11 years. You all know about the magic of compound interest –  the greatest force known to man, and all that? Well it turns out that it is not only relevant to interest on interest compounded on your savings bank account.

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The same principle holds for other growth indices, most notably felt through the effects of inflation. But even more pertinently to this conversation, the concept holds for the value of businesses. It holds to such an extent that those valuation exercises done in 2001 on businesses which are being sold today, are of almost no consequence at all in reducing the CGT payable.

If your business is older than 15 years, chances are that shareholders have changed in that time, making calculations awkward, the original base value number is useless in mitigating the effect, and your business value has grown enormously.

So I am going to do what most people do, and base the rest of this on the single selling price. Your accountants and tax professionals can tidy up the bits and bobs for you.

Along came a bus

Our small (and not so small) business owners – you know the cornerstone of employment opportunities in South Africa – merrily went about their business of keeping their heads above water, and helping the economy on the way.

But then a bus appeared out of nowhere.

In 2012 a change was made to two taxes; you guessed it, CGT was one, but the other one was dividends tax.

  • The gain subject to CGT was moved from 20% to 33.3% for individuals
  • More importantly, for companies, the rate moved from 50% to 66%
  • The old secondary tax on companies was replaced with dividends tax, and the rate was pegged at 15%
  • Let’s not ignore the effects of geometrical growth in business values

Back to our business which was valued at R1M in 2001. By 2012, this business was quite likely worth R10M.

An individual selling his shares for R10M would have his gain of R9M having 33% or R3M taxed at 40%, so would have to pay CGT of R1.20M, or 12% of the selling price. That is quite a difference from the previous 1.3%!

Pity the guy who sold his business in an asset deal: R9M gain having 66% or R5.9M taxed at 28% or R1.7M. His company would be left with 8.3M. To get that into his own hands, he would have to declare a dividend, and pay that tax. So he would have a little south of R7.1M to take home to his long suffering life partner. That is total tax of 29%, which is significantly higher than the guy selling his shares.

At that point we had the attention of those who thought about spending a small amount each month to get their businesses prepared properly for their eventual exits! And PrepareYourBusinessForSale™ started to make a difference.

The bus is reversing

That bus which did such a good job of wiping out a chunk of the small business owner’s well earned wealth?

Well it has now been put into reverse. Not, you understand, to undo the damage previously done, but rather, to finish off the job!

Look at what has happened in the 2016/17 budget.

  • Dividends tax has remained the same, thankfully.
  • CGT on companies has been increased to affect 80% of the gain.
  • CGT on individuals has been increased to 40% of the gain.
  • Business values have grown significantly, only because of the hard work of their owners (mostly).

Our old friend, the business which was valued at R1M way back in 2001, is now worth R15M. Well, because that’s the way the compounding geometrical growth curve rolls.

For the asset deal… A gain of R14M… 80% of this is R11.2M. Taxed at 28% is R3.1M, leaves R11.9M. After dividends tax, the owner can walk off with R10.1M. So a total of R4.9M is paid in tax. That is 33%. Thank you for playing!

For the “more risky” equity deal… The owner of the company sells his shares for R15M, with a gain of R14M, 40% of which is subject to CGT (R5.6M) at 40%, making R2.2M payable to the treasury (15% of the selling price).

What could you do with an extra R2.7M in your pocket?

Anyone?

There is another benefit to the equity deal for a shareholder older than 55: The first R1.8M is now not subject to CGT. That relief is not available for the asset deal.

The point is

The point is that CGT was introduced to us in a fundamentally innocuous manner, with a cynical eye on where it would take us in the future. The future has arrived. Please don’t suggest that there is no wealth tax in South Africa. It is right there.

For companies selling businesses, the rate has moved from something which was hardly worth talking about, to something which is quite astounding, given that for the business to have reached this sort of valuation, it had to spend years paying lots of taxes already. Thank you for that. Those retiring shareholders who get all their money out… I hope you spend it before you die, because if you don’t you’ll be posthumously handing a lot more over to SARS.

For individuals selling their shares, things look a lot less generous to Mr Gordhan, or whoever happens to be minister of finance by the time you read this. But that approach has its risks for both buyer and seller. The good news is that the PrepareYourBusinessForSale™ program mitigates that risk for both sides, and for a fraction of the extra tax you would pay otherwise.

The imperative, ladies and gentlemen, is to sell your business by way of an equity deal. That means you sell your shares with the balance sheet intact. There are some other interesting tax advantages to this approach which you may want to investigate with us, once you have signed up for the PrepareYourBusinessForSale™ preparation.

Some salt for those wounds, Sir?

To add insult to injury… If you want to keep up your BEE score card at its current level, the new codes dictate that there’s a small requirement in that you may have to sell a bunch of shares, and pay CGT on the gain, following the sale of those shares. Oh how they like milking this particular cow!

Heads up everybody: I am not a tax professional. Every single business is different. In our PrepareYourBusinessForSale™ program, participants’ accountants and tax practitioners are engaged with closely, in determining an appropriate strategy for each participant, because there is no “one size fits all” solution. The examples used here are for illustrative purposes only.

Four budget speech hurdles

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Not a very official analysis of what will fall out of the 2016/17 budget speech. There is no investigative authority involved. I have not phoned any treasury officials, and I am not privy to an embargoed copy of the speech. #JustSaying. In many respects, this is an alternative to what the popular commentators having been writing for the last week. More importantly, it gives some idea of how the value of your business may be affected.

Small business owners tend to not care too much about the annual budget speech. Like John Lennon who famously said: “I never vote because the government always gets in”, they know that no matter what they think, the budget has been decided and they will be affected – good, bad, or ugly.

This year’s budget is different because of the ramifications of a cock-up following #4DaysInDecember. Investors are watching us, in an environment where the rest of the world is growing, albeit relatively slowly. South Africa has pretty much ground to a halt.

For small business people who are able to nimbly make allowances for changing economic, legislative and tax requirements, the speech means less about talking heads in the immediate aftermath, and more about where loopholes can be exploited, own policies tweaked, and changes taken advantage of.

I think that it is unlikely that the minister will provide us with any short term good news, and nor is it likely that he will mess around with little fiddly changes all over the place. He needs to be seen to be making sweeping changes to effective rates in easily result providing areas. Look out for these pointers

1. VAT

If the VAT rate goes up, you should know that we are really in trouble. Many commentators suggest that this is too hot a political potato to deal with now. It will affect the poor and the rich, and the EFF will scream blue murder. The Davis Tax Commission has reportedly suggested that this is the most efficient way to increase revenue. The poor can be accommodated with a marginal increase in social grants.

Might I suggest that the manner in which the Cabinet backed down on the Tax Amendment Act was the left hand of a deal with Cosatu, allowing the right hand to lift the VAT rate with minimal noise from the trade union congress.

Effect on your business value

Probably minimal. VAT collections are trust moneys, which you need to account for separately to your income statement and balance sheet. If your product has a close link to the retail user, you may come under some short term pressure, but life will go on. Expect some arbitrage around the date on which the VAT rate changes, from the unscrupulous.

2. Amnesties

We are a country of amnesties, and we all understand them very well, from giving amnesty to murderers under the old regime (also committed by members of the new regime), to the various tax amnesties, and the fact that so many small businesses give a monthly amnesty to their debtors by way of a settlement discount to encourage them to pay their bills.

South Africa needs to collect money in a hurry, and an amnesty for all sorts of tax misdemeanours is quite likely, if it means that outstanding taxes are collected quickly and easily.

Effect on your business value

If you have some of these skeletons hiding away, this may give you a opportunity to come clean before risking the process of a due diligence in a sale of your business in the next few years. The improved sleep patterns may also give you further energy to get up and go, for at least a while.

On the negative side, your customers may find themselves cash constrained as they come to terms with having to actually pay those taxes they have been dodging. That may mean fewer, or smaller sales for your business while the system adjusts. Those sales changes will translate into lower profits for a while.

3. Corporate tax

  • In 1980 corporate tax was 42%.
  • In 1982 it rose to 46.2%
  • In 1984 it rose to 50%
  • With the approach of some democracy, Treasury was able to lower it to 48% in 1991, then 40% in 1993. We thought it was Christmas!
  • It got confusing in 1994 with a once off RDP tax of 5%. Nobody seems entirely sure of where that went, but anyway…
  • By 1995 it had dropped to 35%.
  • 1999 it dropped further to 30%
  • 2005 saw 29%
  • And 2009 saw us drop to the current 28%.

Interest rates are rising, and corporate tax is likely to do the same.

According to the Davis Tax Commission, a 3% rise in VAT to 17% will have the same effect as a rise in corporate tax to 33.2%.

Effect on your business value

This is a tricky one, dependent on how you negotiate the sale of your business. You will need to consider other issues, such as whether you are intent on a sale of assets, or the sale of the equity in your business. Currently, the equity deal makes more sense, but that might change after Tuesday.

Either way, all profitable businesses will be equally affected, and the rising tide thing may save us from wild valuation changes. Expect though, that buyers will lean on you either way. Take their nonsense with a pinch of salt. Sit back. Take some advice. Don’t panic.

4. Once off tax on company reserves

Now there is a bombshell waiting to explode.

For a long time the government has been castigating companies about the piles of cash they are sitting on without investing it. There is a mountain of cash sitting doing nothing in many businesses. Government has appealed for this money to be invested. Business has shrugged and suggested that Government should perhaps make things a bit more business friendly (particularly around labour laws).

A once off tax on this enormous reserve would go very far in driving off the ratings agencies.

Effect on your business value

This is a game changer. It is also fool proof. Say 1% tax on all company reserves, which have already been taxed on corporate tax, but not on dividends tax. Perhaps business should be required to use it for investment or submit to a once off taxation. SARS already knows how much it can depend on because we have been submitting our financial statements to them for years.

There will be a lot of money looking for investment homes in small businesses. That will drive business value up sharply and quickly. It will also stimulate the economy like nothing else. This will have a knock on opportunity effect for other taxes to be collected. It will accelerate the capital gains tax collection from business sellers.

It might just be a golden opportunity for well prepared businesses to get out at above average values.

 

Other

You may notice that I have ignored all that talk about Government slowing down on its spending. That’s because we have heard it all before, and we all know it’s not likely to happen. Before Easter we will have some more scandal around one or other minister, MP or director general wasting money on cars, hotels, trips, houses, alcohol or pantypreneurs. Most of us know it will happen. Frankly it is small cheese in comparison, so let’s just concentrate on getting more money in.

 

*PS I am not privy to any ministerial discussions, and the blog written here is pure conjecture in as far as what may be decreed. There is a strong possibility that I have it all wrong. Wouldn’t it be fun if I have it all correct?

Valuation Myths Value is based on turnover

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“Turnover is vanity, profit is sanity and cash flow is reality.” We’ve all heard it said, but a huge number of people have never taken it in, thought it through or understood it.

From time to time we will do some marketing to get some fresh blood into the network; and as the phone starts to ring, we are quick to recognize the “buyers” who have no real understanding as they ask: “What is the turnover?”

You see it does not matter, as a general rule. Of course there are exceptions like petrol stations and supermarkets, both of which work under a fairly standard set of parameters, understood intimately by their operators.

But when it comes to most businesses which battle from day to day to maximise their sales, while buying in their stock as low as possible, and minimizing their expenses, turnover is limited in relevance to calculating the VAT and commissions, and setting records to be graphed on a wall in the owner’s office, usually behind the door.

When it comes to valuing a business, turnover has no importance at all, except to point us in a direction of the business’s growth, and even this can be misleading. When we value a business, our model draws lots of graphs to identify the places that managers of businesses may be going wrong, and one of the anomalies we often see is a sudden rise in turnover coinciding with a fall in gross profit percentage. The inference to be drawn is that the business owner is “purchasing” sales turnover in order to impress someone, usually a hoped for purchaser of the business.

If things are well planned and fixed expenses are rationalised, this may lead to greater profits, but more often than not, the “sale month” leads to lower profits, and the result is exactly opposite to what was intended: Value falls.

Here is the simple calculation:

Two businesses in different cities, manufacturing the same goods with the same turnover and similar expenses, but one has lower cost of sales because it is closer to its principal suppliers.  It has an immediate advantage with stronger cash flows, and after paying the same expenses as its counter part, ends up with more profit.

Given the opportunity and inclination to buy either business, which one would an investor choose? Well the more profitable one of course. And if there were several investors in the same room, there would be a bidding war, and the price would go up, as the less profitable business is ignored.

Does that make sense? Of course it does. Now stop asking about turnover in valuing your business, and concentrate on the net profit and the benefit you really get out of the business as the owner.

Your IP

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How is your IP?

No really; how is your intellectual property? Is it safe? Have you secured it?

When a leading figure in a political dynasty running for the office of the most powerful man in the world neglects to look after his IP, we should all consider that we may have our own weaknesses.

Jeb Bush is the older brother of George W Bush, and the son of George H Bush, both former presidents of the USA. As is required and done, he registered an internet domain (www.jebbush.com). These things require periodic renewal payments.

You guessed it: Donald Trump spotted the ommision, bought the domain name, and now www.jebbush.com reroutes to www.donaldjtrump.com.

Not even in the movies…

So really; how is your IP? If that kind of kindergarten tomfoolery can happen in the pursuit of such power, what chance for us mere mortals?

 

Through their eyes: A different customer

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It is amazing how many sellers approach the sale of their businesses with a dogmatic, arrogant attitude of “take it or leave it.” The basis for the asking price is, too often, the amount required to fund the next stage of the seller’s life; be it retirement, another business or an investment target. Their business valuation is not based on market requirements, but on their own ideal outcomes. They entertain very little discussion and only a single position as a target.

I’m not suggesting that you should change your offering for every prospective purchaser that looks at your business, because this will drive you mad. But you should give some thought to who your likely buyer is, and what they will want to see in the investment.

In Daniel Priesley’s book Key Person of Influence, he writes at the beginning of chapter 2:

“Across all industries, the top opportunities go directly to a small group who present themselves as Key People of Influence in that field. The rest of those in the industry are left to fight over the opportunities that the KPIs turn down. It might sound unfair, but that’s how it is.”

In the book, Priestley’s message is all about being a key person of influence (KPI) in an industry, community, or environment. Something similar may be applied to the disposal of a business, if I might paraphrase Priestley: When a business is “on the shelf ready for sale” the top investment decision goes directly to those businesses which present themselves better than the others”.

If you read Priestley’s book, you will notice that I have borrowed some more from the same chapter:

You need to Productise your business. Beyond your business supplying products and services, it needs to become a product itself. It needs to become an ecosystem for a collection of products or services. You probably have stage 1 in this goal already, which is why you have a business to sell. A successful exit from the business at above average value involves the former suggestion – making the business something more than the rest in terms of PrepareYourBusinnessForSale™: The top opportunities go to those who present themselves best.

It makes sense as an eventual business seller, that you should start thinking about providing a buyer with what he wants. And what the buyer of any business wants is profits and cash flow, presented in a manner which will withstand the rigors of due diligence.

Until you learn to see the business through the eyes of a potential buyer, you will be hard pressed to sell it effectively, and yes, I know that it is not necessarily your intention to sell it right now, but that intention may change suddenly, beyond your control – remember?

Look at this way: If you were buying your business, what would your concerns be, and how can you best deal with these concerns today, knowing what you do about your business, without having your back to the wall in a “must sell” situation?

Friends, enemies and lovers

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One day your business and you will no longer be one.

How often do you talk to your partners in your business and personal life about the eventual exit plan you have?

You don’t have partners? Well I’m sure you do, actually. These can all be considered to be partners, in varying circumstances:

  • Fellow shareholders, directors, members
  • Senior employees, support professionals
  • Funders, suppliers, customers
  • Life partners, parents, children, siblings
  • Extended family members and heirs

So unless you’re a one man blogger living as a recluse in a mountain cabin selling hand carved sex toys online, you probably have partners in your endeavour.

You spend long hours talking about the strategy required to close deals, achieve the best return from your advertising, finding better channels to customers, improving production and delivery, and other necessary discussions. How much time do you dedicate to planning for your exit, or that of one of your partners?

That exit has a direct effect on the lives of the counter parties. Quite apart from the fairness side to the equation, those discussions allow the equity holders to GAIN value. The most successful negotiations I have been involved in over 25 years or so, involve annual involvement of the other partners.

“At some stage in the next 7 to 10 years I intend to retire. Let’s have a chat about what your continued role will be in this business after I have left. How are we going to make sure that you add value to the organisation, and therefore guarantee your position”.

“Look guys; one of you is going to have to buy my shares at some stage in the future”.

“Ladies and gentlemen, we are all involved in building a major asset in the nature of this business. Let’s do more than keep tabs on the performance of the organisation, and do whatever we can to maximise value each and every year for the next five, so that we get to exit with something really meaningful”.

“OK, we all know the country is in a difficult time in history, both politically and economically. What can we do to make sure that we don’t only come out the other side of this time, unscathed, but with a much more valuable company?”

There are hundreds of similar conversations to be had, at levels from the boardroom, down to the mom and pop brushing their teeth at night. Are you party to a similar discussion on a regular basis?

 

Sad realities

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So far this year I have come across three sad stories of exit plans going wrong.

And I am so sorry that the story is yet to be written, and that you have clicked here before it is ready for publication.

My emailer went out a full two days too early. Nobody’s fault except mine.

If you are on my email list you will get notification as soon as it is ready.