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

Mergers of minds

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My father – a teacher – would get very upset when anyone suggested: “there are those who can, and then those who teach”.
Business owners should get upset when anyone says: “there are no such things as mergers – only takeovers”

Considered and well-planned mergers can bring advantage to the smaller of the two, as much as to the apparent “acquirer”.

The textbooks refer to “mergers and acquisitions” or “M&A”. In this twitter-fed and instant gratification world, we truncate that to “merger”. We ignore the “acquisition” part of the phrase. For every acquisition, there has to be a “disposal”. Unless it really is a merger. Then all sorts of stuff happen.

When two businesses are merged, it is almost impossible to get to a position where each contributes exactly 50% to the finished deal. So there has to be a trade-off somewhere, for someone. Finding that split is one of the cores to what we do. It is so rewarding to work with motivated business owners looking for a way to make 1 and 2 equal to 4 at the end of the deal, and equal to 5 soon after. The process involves an initial discovery of each business. Working with the executives as they find their way into each others’ beds holds its own excitement.

Black ownership

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The rush to correct the inequities of the past stalled when the connected got stuck in the trough of excess. The shift in the codes left the little guys lagging, in the interest of ownership. The little guys were slow to start.

But no longer. Now the queues of black investor companies are forming. Longer than a voting queue, and even longer than the line outside a SASSA office. It is time for small business to take advantage of black-owned investment. It is time to keep control.

My client pays R3M every year towards skills development. One would think this would give him the points he needs to do business with the big guys. (He is a biggish guy). This is a big deal. People benefit from this money he invests. He is training people.

But it does not give him enough points. Remarkable.

If he wants to do business with the big guys (who do not have as many points as he does) then he has to become black-owned.

We have worked out a way to do this, on his terms. All legal. Neither smoke nor mirrors.

And here is the thing: he will no longer have to spend R3M every year on training people. But his customers will be happier. They will fall even shorter of his boost in the arm BEE score, with no clear vision of how they will ever match him. But they will have a box ticked.

Vive laBEE!

Of course you have heard of similar stories of madness. First, we kicked the trades into touch by closing the apprenticeship programme. Then we shifted the scope of training to the private sector. Then we encouraged people to become owners of businesses without any training or experience.

The balance of power is shifting in the BEE ownership game. Next up: business owners are able to choose their own partners, in deals to their liking. And as that pendulum swings, the flood of takers for that particular bus is swelling. Soon there will be an oversupply of desirable partners. That will enable current business owners the luxury and strength to choose the best, for one thing; but on their terms as well.

What a time to be alive!

Rental agreements

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PYBFS021

The sale of a business requires a rental agreement. The sooner you ensure that you have yours in your PYBFS file, the better. Why do I say this? Many business owners do not have this very important document because they have never received a copy.

Mad rush

Think back to the time you signed your first lease. There was a mad rush as you prepared to get the whole show on the road. Then there was a rush into the rental agent or landlord, some last minute reading, and queries. Then you rushed out the door to get the next step in place. You know you signed the document. Somehow the landlord always signs last. They called you later, or more likely you had to make several calls yourself. They told you the agreement had been countersigned. In the excitement of moving in, you never received a copy of the agreement. This holds true for a great many business owners I see. Whatever the circumstances, make sure you have a copy of the lease agreement, and place it in your file. Make a scanned copy and save it to your PYBFS desktop folder.

Lease reductions = higher value

While we’re on the subject of lease agreements: You should take any opportunity to lower your rental. You would be well advised to do so in the tough economic conditions we’re currently wading through. You can renegotiate at the end of a lease term. If you’re a very persuasive character, you may be able to negotiate a lower rental cost midterm.
Every Rand lower your rental, your profit will rise by the same amount. This much is obvious. The value of your business will rise by some multiple of each Rand saved. That extra value will go to your pension fund for its own growth, and so on.

So, how can you persuade your landlord to drop your rent to last year’s amount? Or can you persuade him to forego the annual increase this year? Keep in mind the effect on valuations, and you may find yourself negotiating with a bit more vigour!

Depending on your industry, you may think about negotiating a new lease in advance of selling the business. For instance, a retail store without a lease is no longer a business worth selling. Retail landlords know the value of the lease to their tenants. The landlord must commit to the new owner with a lease on the same terms and conditions as those currently enjoyed by the owner.

Most factories can be moved, albeit with some difficulty, and the move shouldn’t trouble the customers too much. Of course in boom times, suitable factory space can be difficult to find. But then again; are we in boom times?

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Storing storms

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Pierre Sussex was as stealthy as a Highveld thunderstorm. He walked his factory several times a day. He liked to keep his machine minders on their toes.

Each one had a schedule to work to. Pierre had worked out the best number of parts each machine could produce per day. “Local-efficiency” was his watchword.
Clipboards hung from the corner of each operator’s workstation. He designed reports so that he could run his finger down the last column at any time of the day, and pass comment.
Pierre regarded himself as scrupulously fair on his staff. As long as they agreed with him. Prayer time took place during tea time, Every day. “It keeps everyone focussed on not cheating me out of the time I pay them for”.
He limped down the aisle between machines lined up in the factory.
Every machine with its own local efficiency. “Keeping machinery and operators on the move maximises my return on investment.
“But now it is time. I am 82 next month, and I have put this place in the right frame for a sale. My son agrees with me. And neither of us want to share the business with a black partner. He only holds 12% of the shares, and if we have another partner move in with us, then he will be a minor shareholder. With a boss who is not his dad.”
We walked into the warehouse. “Take a look at all this stock,” he said.
“Efficient machine use and output justify their cost. My people must work. The stock must build up. We will always be able to sell the finished goods.
“We have a part for the battery of every single car which exists on the continent, right now. Nobody else has that. And our customers don’t like to hold stock, so we hold it for them. I will have to build on to the warehouse next year because we will soon fill this one. I put all my profits into stock. If we have a prolonged strike, we will be the only people on the continent with the right parts.”

On a wing and a prayer

We trundled off to the boardroom. And a prayer. Pierre was big on his prayer sessions.
“We make specific parts for the internal part of a battery. They are very specific to each battery size. But our market is opening up now. The new batteries required for the new electric vehicles will all require our parts.
“No, I don’t have any fitted beyond the prototypes right now. But this technological wave is moving fast in our direction. I think we have enough finished parts in the warehouse to supply for a year without having to turn a machine. You know we are in for big political and social upheaval in this country. It is not the same wonderful place I grew up in. I worry for my grandchildren.
“Anyway, here are the financial statements. I want 200M for the business, and then we can talk about the property as well.”
I put my head into the accountant’s office. “Any chance you can get these to me on email?” I asked. We stopped using paper in our office five years back. It had become a nightmare of control issues over clients’ private papers. The risk of fire, and the sheer storage space required, notwithstanding. We prefer electronic storage.
But back to Pierre and his business.
He was a new client. He was 82. He was also an old client. He thought it was a good time to find another owner. He wanted us to manage the process. We had done so for a family member of his two years before.
He was also stuck on the 200M. And that was a problem. Our job is to manage these merger, acquisition, and disposal processes. We have been doing so since 1991. That is a long time in which to learn what works. The stuff which does not work fails for business sellers almost daily.
So there I sat with a hopeful business owner. He had a target upon which he had based his entire retirement planning. He was secure in the knowledge which closeted his own perception of value.
But he was wrong. And that is devastating to a person who wants to get back in the saddle on a farm in the Western Cape. He was tired of the staff, and the sirens, and the stock control, and the late payers, and the approaching social upheaval which he believes is coming.
He was wrong in as much as his business is not worth anything close to 200M. It is not even within striking range of that number. But he has believed for the last decade that this is exactly where he would step off the tram. He has not once, asked for a proper opinion of the value of the business.
Had he done so, he would have been able to adjust his expectations and those of his family. But more likely, he would have been able to address the weaknesses in his business. He may have been able to turn the weaknesses to the benefit of his future.

Therapy stories

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I was following Google Maps, and it had saved me a significant amount of time. I came off William Nicol off-ramp. The choked lane to turn right off the off-ramp on William Nicol trailed back onto the highway itself.
So I took the left lane, thinking there would be a gap somewhere to get into the right-hand lane. There was none. In fact, the right-hand lane was being choked to death by taxis trying to get into the flow, right at the top. They had resorted to jumping over the island to get into the flow.
So trapped in the left lane I continued into William Nicol going the wrong way. I have done this before. Up to the first traffic lights and do a U-turn. And I was on William Nicol where I wanted to be, missing the chokehold on the off-ramp.
I was very pleased with myself and moved into the right-hand lane to get past the accident before Lesley. As the traffic in the lane moved at a reasonable pace, a big BMW 750 jumped across in front of me. I let him go, and gave him space. No “thank you” from the driver.
The lights at Kingfisher were red. I stopped behind the BMW. I needed to get to the Clicks at Broadacres, and it was getting on in time. So I checked Google to see what time they closed, while cars were stationary.
Then there was at least one person right next to the car. I felt there was a second person as well. I looked to the right and saw him open his jacket, and cock what looked like a 9mm pistol very close to his belt buckle. He was right up against the car.
Without thinking, I swung the steering wheel very hard to the right and hit the gas.
There were two very loud shots next to my ear. The ear still buzzed the next morning.
I bumped the perpetrator as I swung right, then corrected left. I was in a clear right-turn-only lane, and the lights had turned green. I roared down the lane, past the three or four cars ahead of me, and across the intersection.
I jumped all the lanes to get to the left lane, and up the ramp onto Witkoppen Road.
As I went up the ramp, I was aware of a cold feeling on my upper body. I remember thinking that there was no great feeling of adrenalin rush that I would have expected. There was no fear. Just this icy cold on my chest. And anyway, the feeling was subsiding.
Did they shoot me? was the cold feeling my blood running out? As I cruised down Witkoppen, I started feeling my upper body for wounds. Nothing.
The lights at Cedar changed to green as I approached. I continued down Witkoppen towards the Dougalsdale police station. I drove straight into the parking in front of the station and parked in a reserved space.
When I got out of the car, I looked at the sides of the vehicle to see if there were any shots in the car. I was almost disappointed that there were none.
I hurried into the charge office. It was almost empty. Two people were helping someone with some papers. One was a reservist volunteer, there to help with the flow of work.
A constable was sitting at the general desk, with his head on the palm of his hand, elbow on the desk. He looked bored. I went straight to him and told him that someone had tried to highjack me, that two shots had been fired, and that I had knocked over someone. I may have injured the perpetrator with my car.
The constable hardly moved. His head still in his hand. It struck me that this older man, in the police force, had no rank insignia at all on him. How does a policeman spend years in the force, and have no rank? This thought went through my frazzled mind as he mumbled something. I started repeating myself. There was no reaction.
“Well, I can see that you have no interest”. I stormed out of the station. But I really stormed, not 702’s version of an Ashwin Willemse “storm”.
OK, so I didn’t slam doors and throw dustbins over. but I moved out of there loudly and quickly. It was a small storm. With some Anglo Saxon adjectives.
I got to the car. Started it, and reversed out of the parking place. As I moved towards the exit and realised that if I had injured one or both of the perpetrators, there might be a hit and run report or something coming at me soon.
So I sat in the car with the engine running. I started putting a short report on Whatsapp to our neighbourhood group. I wanted there to be a record that I was at the police station. I wanted the record that I had attempted to report the matter. With a time stamp. I wanted a record that I had done what was required.
As I sat tapping out the third or fourth transmission, the civilian volunteer came to my window. He said I should go into another office, and talk to the guy there. “He will listen. He is very good.”
I went into the office. There was a man sitting in a police uniform, with a castle and star on his shoulders. I tried to remember what rank it was. In the military that had been a “Kommandant”, back in the 80’s. But there was a thing about the police then, that they preferred the title “Lieutenant Colonel”. So in the midst of this violent drama, I had this crazy series of thoughts running through my mind. After 1994 there was some other directive that to change this in the military as well. And then another thought that a lieutenant colonel is not addressed as such, but rather as “colonel”. I tried that. “is that correct?” I asked. He smiled and confirmed it was right.
I smiled too.
I told him the story of what had happened. I told him that I was concerned that I had driven over someone, who might be lying in a ditch. I had driven away from the scene. And I started having doubts that I had been shot at, at all. But my ear was ringing, and dammit, it had really happened!
He was very friendly, and helpful. He stilled my fears that I may have hurt someone. His reasoning that a sideswipe from a stationary position is never going to do much damage. There was nothing they could do. The guy will have run away. and there would be nothing for them to see.
He was right of course. He said that he would write it up in the incident report. He passed a piece of paper and a pen to me. “Put your details here.” I wrote my name, ID number, and address. Then I fluffed my telephone number, crossed it out and wrote again. I had to think hard about getting the telephone number right.
So there it was. On a scrap of paper. He would enter my details into the incident report. Maybe.
But what else was there for me to do?
I went back to the car and again looked for any damage. There really was none.
I sat in the car and tapped out a message to the family group. I started with “I am ok”
Then I told them about an attempted highjacking, and I would be home soon.
I was running out of time for Clicks. So I drove there. As I pulled into the parking, they were closing the doors. It was after 7. Perhaps I could persuade myself into the doors. No chance. My phone was ringing. It was Ness. It had been ringing for a while, and it stopped as I answered. I tried calling her back, but it would not connect. I think she was still on the line.
I walked down the line towards Spar.
She called again. Or I called her. I don’t remember. They were on their way to the police station to be with me. But I am at Spar. Do we need anything? No! Come home. We are turning around.
So I went home. They were parking in the garage as I got there. All four of them.
It was great to be home with the people I love.

Post script:
I have a vivid memory of the gun against the window. I saw him pull his jacket aside. The pistol was in his right hand, lying parallel to the car, pointing to the back of the car. With his left hand, he pushed the slide back. But before his hand covered the slide, I saw the ribbing on the slide. A grip engraved into the weapon. Like the side of a Glock. But a chromed slide, rather than the blued slide of a Glock. And the ribbing was further forward. This was not a cheap gun. As he did this I thought, that if a man was going into a robbery, he would have already chambered a round, before getting to his target. “This is not for real”. But I must get out of there. As I whipped the steering wheel to the right, the turbo took a moment to wake up, and then we were off. At the moment that turbo was waking, the shots were fired. And they weren’t fired by an amateur. It was a quick tap-tap. People need to practice to get that right. Everything else worked in my favour. The gap between me and the BMW was enough. The right turn only lane next to me was clear. I was far enough back in the queue to block other motorists from entering the lane.
The car behaved beautifully. Power steering under full throttle is wonderful. I like to think that I fishtailed in a cloud of burning tyres, but I think that is probably not the case.

The colonel I spoke to at the station was Lt. Colonel Simango. While talking, a captain walked past and stopped to listen. He confirmed that there had been a report of shots fired at that intersection. So that was my first confirmation that I had not imagined the gun.

As we finished dinner, I remembered that my recorder had been recording while this was happening. I downloaded the clip and found the approximate time. And there very clearly, the two shots. Then the roar of the engine. This is all very real.

I lay in bed, playing on Whatsapp, chatting to the community who were all very supportive. Then I figured I should get some sleep, so I turned off the blue light of the tablet and started reading my Kindle. Dead Man’s Walk by Larry McMurtry. It is recommended reading by Stephen King in his memoir about writing. I am enjoying it.
So I read for an hour before I started feeling sleepy.
12:20 and the book was falling from my hands. So I rolled over and turned off the light.
The mindfulness of the book was gone. There was total darkness. And the shots were being fired again. And the sight of that weapon, and the casual way in which this guy sidled up to the car, with other cars all around. And the scene played through my mind over and over again.
I was not going to sleep. I lay awake wondering why we are able to take evasive action, get frustrated with the cops, and still go to Clicks, and then to Spar.
What are we doing here?

Pitch Deck 03 Products and services

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PYBFS020

When a potential business investor looks at what he’s buying, he wants to know exactly how the business derives its income.

What do you do?

Businesses receive money in exchange for one of two things; the sale of goods or the delivery of a service. Perhaps there is a combination of the two. Sellers are often complacent in describing the activity or product. It is easy for this to happen because they are au fait with what they do. Their conversations run away with details of plans and opportunities.
Slow it down a bit. Describe from first principles the background need for your product or service. Where does your business fit into the supply chain of an end product? Where does the final product benefit the end consumer?
It is important to give your prospect a bit of a background to the products or services. If you place the story in context he will find his bearings sooner. He is less likely to shift his interest to an easier to understand business.

Pressure in the minority

You will do well to remember that yours is not the only business on the market. So make it as easy as possible for the buyer to understand things. You want lots of interest. The negotiating power of the seller goes up with the number of interested buyers.

Vaguelly specific

Do not create problems for yourself in the supply chain, or in the market. Avoid using brand names unless you have sole or proprietary rights to a product. If you have a clear competitive edge in a very full market, then the exposure may help the sale. But be careful about letting suppliers know that you ever intend to sell. Suppliers pulling back credit limits can damage your sale prospects.

Non-disclosure agreements are a good start, but they are not foolproof. A drunken braai saturated yob, who looks like the kingpin Monday to Friday, can do you a lot of unintended damage on a Saturday afternoon with his like-minded friends.

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Get your AFS into gear

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Jim’s business was jalapeño hot. He told me all about it in about 30 seconds of polished elevator pitch over a poor cell phone line. It got me into my car on the way to Springs within half an hour.


PrepareYourBusinessForSale™ is all about getting exactly that done. But in going the PYBFS route, you also get to add value to your business. Here is why.


Early engagements

I walked into an old house. It had been kitted out for the administration of a business designed to churn out products in volume. We had a good natter. He told me some stories. I told him a few of my own. We drank his very nice coffee, and a few hours went by as I went through my interview process.

The house was one the owner had inherited from his mother. It was more than adequate for what it housed.
The growth curve of the business had been steepening. Jim felt that he needed to get an equity partner into the operation to help fund the continuing growth. The only thing that did not flow in the day, was the financial information. There were some issues. “But I will get onto my auditors as soon as you leave, and I will email the financials to you before the end of the week.”

Cape Town

The next day I had an appointment with another business owner who also wanted to sell his business. This time in Cape Town. He had arranged for me to see him as soon as got back from his trip to Italy. So I was up early, and onto a plane. I spent the better part of an afternoon with Mario as well. He also had nice coffee.

Mario has had his business valued by us every year for a long time. He had sent his latest financial statements to my office the previous day. My team picked them up and started putting them into our valuation model.

He also had a very nice business which had a similar problem with growth. He needed to buy some impressive machinery so that the business could continue to grow at the same rate. His financial advisor said it would be a better idea to sell some equity, rather than push the debt level higher. So that was what he intended to do. I am not a financial advisor. I just listen to those guys.

Network

We maintain a detailed mind map database of businesses, funders, and clients. It’s a veritable who owns whom, gleaned from discussions and web pages. It has now grown into a thing of beauty. A few years ago, it was more rudimentary than it is today.
So on the plane home, I went through the database mind map. I kind of killed two birds with the same stone, mid-flight, so to speak. I was looking for relationships between each of two clients and listed companies.

As it happened, Jim had more prospects for what we thought he wanted to do, than Mario did.

When I got back to Jozi, Mario’s financial inputs were complete. I was able to start the pitch analysis with a full deck of cards (and a search for a few more metaphors to throw into the mix). We still always start with an exercise to determine what the market would bear. We do this for every new client.

We stepped up our research of the agendas of the targets for both businesses. For targets, the easiest route to growth is often through acquisition. The intelligence gathering has always been very beneficial. And boy does our industry talk about who wants what. So keeping the database up to date is easy, albeit time-consuming.

It was going to be an interesting time, I thought. The weekend came, and so did Monday. As always.

I called Jim. He was still waiting for his auditor. There was another problem.

Processes

We collected the rest of Mario’s documents which would be necessary for the sale. His web person made some changes to his website which we thought would help. Jim made similar changes himself. He was very good at that sort of stuff.

Both provided company documents for interrogation during a due diligence. We quickly added debtor lists, supplier agreements, bank accounts and employment histories. They were all easily forthcoming from both. All was going well, three weeks into each respective engagement.

Except Jim’s financial statements were still not available.

I should explain at this point. We always ask new clients to supply five years of financial statements. We can build a very good story from that sort of history. Jim could give everything except the last two years. We had all Mario’s history on file.

Jim’s trial balances and draft income statements for the last two years showed great results. There was no reason to doubt them. But it is the financial statements which investors want. The ability to provide annual reports in good time tests the whole governance issue.

Mario goes to market

Six weeks into the Cape Town engagement, and we had prepared Mario to talk to investors. It did not take many, and he had something which made financial sense. His machinery would be ordered soon.

Jim, in the meantime, was struggling. But he was also getting pushy. He wanted to talk to investors as well. So, he sat down with one of them. It was a great meeting. They loved what they saw. He would have the financials to them next week Tuesday, he said.

Tuesday came. The investor called. It looked like it would take a few more days. “A really fine business”, said the potential investor.

A week later, and Jim wanted to see another investor. “Just to have a plan B”. But he was already screwing with Plan A. But he met with Plan B. Then with Plans C, D, and E. And still, the auditors (apparently) were dragging their feet.

All the prospective Plans A to E did not so much lose patience, as simply wander off elsewhere. As business owners, we have limited resources. Sometimes we need to appreciate that the attention span of professionals, faced with various options, only have so much bandwidth.

Jim gets his stuff together

Jim’s financials were published. The trial balance figures were largely confirmed.

Plan A came back from his trip. It was difficult to get hold of him. When Jim did, he did not have much time to talk. Another fantastic deal had presented itself, and he was going hell for leather after it. “You know, that price may have been a bit steep”, he suggested. “Let’s talk next month”.

When Plan B did not return calls, Jim worried. So when he spoke to PlanC, he had lost some of his form. By Plan D, the picture was not pretty. The closing price was always going to be lower than the original nibble.

And over to you now

As much as this is a fiction, it is only partly so. I have written this with a collection of similar experiences over more than 25 years of helping business owners to change their lives. When a business for sale cannot provide information quickly and accurately, the momentum in the deal is lost. Value suffers. Always. When the third prospect goes cold, the seller gets desperate to keep the others happy. Silly things happen.

So what about your financial statements? Don’t be like Jim. Be like Mario. Don’t let them stand in abeyance with your auditor or accounting officer for more than six months, at the outside. If you can get them into your filing cabinet within four months, you will have the edge.

Business valuations | Various applications and costs

Accurate business valuations empower you to make proper decisions.

Divorce or partnership valuations

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When partners split up, there are problems with money and value. Almost always. Oh yes; there was that one time…

This post refers to a dissolving marriage as a model. But the points made, hold for most partnership dissolutions. They are not pleasant, but applying some rules keeps things fair.

Complications arise when married people split their joint estate. If one of the assets includes a business, the recipe is more than “take the white from the egg”.

  1. What is the value of the business?
  2. Where are business proceeds entering each spouse’s pocket?
  3. Open and fair negotiation

1. What is the business value?

The dissolution of any partnership is a transaction itself. It should be accounted for, with a market-related valuation. Business valuation methods start with the company’s financial statements. But the concurrent interrogation of key valuation indicators in the business is critical.

Competent and confident valuers are bold in declaring shortfalls in the discovery. Do not ignore their messages. The valuer will have taken heed of the shortfalls, in arriving at a number. Those noted shortfalls can provide valuable information for later use.

2. Where is each partner currently benefiting?

Every valuation accounts for an element of “normalising” the income statement. This involves removing or adding items which are “out of the ordinary”.
That exercise should also examine what each partner receives before the dissolution, and adjust for what each will receive after the dissolution. Consider adjustments for replacing the partner in day to day work. Understated assets and income, or exaggerated liabilities and expenses mean lower business valuations.

3. Negotiation

A fair negotiation recognises pre partnership equity. The change since then is what you are after.
A fair settlement considers an ex-partner receiving double recovery for a single asset. That would be inequitable.

The most significant asset in a marital estate is often the family business. A fair resolution hinges on an accurate valuation of it. Work with an experienced valuation expert who understands sound valuation concepts. Don’t play the “tarms 20” game.

Shareholder register

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PYBFS019

Who owns your business?

Who are the owners of your business? I ask this because a surprising number of business owners do not know. Many have forgotten the history of the enterprise. It was once a very convenient relationship. Now it is a muddle. It is easier to get confused about this, and many people do. Here is a scenario:

Some of our clients started out in difficult circumstances. Today’s successful business was not always so calm. He may have founded the business from a position of desperation. A retrenched former employee needed to put food on his table, and clothe his kids.
Having been an employee for years, he ventured out into the small-business world. To call him naive would be accurate. (Yip; it wasn’t only you. And if you weren’t naive, I’m sure you know somebody) The business ran into trouble. Creditors liquidated it. Then his bank sequestrated him. He was not a disciple of Peter Carruthers.

Wiser, and desperate to survive, he started out again. Only this time, he did so from home, without the expense of a landlord. But the second time around there was a small complication in that he had several judgments to his name. We can be so unforgiving of those brave souls who step to the fore. They give effect to the politicians’ platitudes. You know; about small businesses being the cornerstone of our economies.

Our less naive, and now more resourceful entrepreneur, had to make a plan. He approached a friend to stand as a silent partner. That friend would also be the legal frontman of the business.
People do this.

White people fronted for entrepreneurial black people under the old corrupt mob. You know, before the current corrupt mob. Brave or greedy, these white people saw an opportunity. It was an economic reality. Race-based fronting is not new. It was illegal then too.

Some businesses which thrive today, still have the original owners on paper. The friends of the actual businessmen. Owners who never go near the businesses. Owners who have no idea that they own businesses.
This can get tricky at the time of selling the business. And you know, all businesses get sold if they can keep their heads above water long enough. Have I mentioned before that businesses are very valuable retirement assets? Your business might be gold.

Divorce

  • There are many reasons for, and examples of, legacy shareholders still owning businesses.
  • Husband and wife start out in business together and then get divorced.
  • Siblings take over the business from their parents, without defining duties and expectations.
  • Seed capital partners who themselves have diluted or merged.

This is not an issue for most readers. But you do not know until you look at your share register. Your eventual new owner of the business will want to see it.

Go get it out. And give it some thought.

Consider this

It once was preferable to sell your business out of the company or cc. The asset deal was the safest option for the seller and the buyer. For a developing set of circumstances, it is now better to sell your shares. The equity deal could save about 60% of the tax bill on the transaction in the entrepreneur’s hands. Tax calculations have changed to benefit the shareholder as an individual.

Shareholder agreements may have participation and preemptive requirements. The memorandum of incorporation of your business will define these requirements. If your fellow shareholders are not who you assume them to be, then this could get interesting.

It is better to deal with this stuff now than when you are staring down the boardroom table of a due diligence. Do so before you are dead, dismembered, or comatose. Your heirs will thank you for taking action on this advice. They will write songs about you.

Motivation in valuation

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Here’s a game I don’t play:

  • “look I need to have as high a value placed on my business as possible, for purposes of
    • taking my partner for as much as possible
    • to prove to my bank that my balance sheet is really strong
    • to show my employees that the long term investment plan is worth them getting no increase this year”
  • “I need you to keep the value as low as possible so that
    • my ex-wife gets nothing
    • I can offer this guy almost nothing for his shares
    • to make a stupid offer for the business”

If Suitegum conducts a valuation on your business, you should understand that under the conditions mentioned in the report, you are going to be able to get that value for your business in the open market.

I have a simple test for the veracity of business valuations which leave my office:

  • If this valuation is too high, to what extent am I exposing us to a damages claim from the owner of the business being valued when he is unable to realise the value, and exposes himself unnecessarily?
  • If the valuation is too low, to what extent would a commission based broker lose out on potential income if he sells it at that value?
  • If I am hauled in front of a bunch of geniuses (auditors, attorneys, judges, magistrates) will I be able to defend each and every finding in the valuation report?

So far that has worked out well.

So when I received a phone call last week suggesting that our valuation had been cast aside in favour of two other valuations conducted by auditors, both of which came in at more than twice the Suitegum value; I sat up straight and asked a few questions.

The circumstances are that the client has had his business valued by us several times over a six year period. The results have been consistent with time and performance. He found himself in the divorce courts in recent times. It wasn’t pretty. A liquidator was appointed to give judgement as to the value of a minority interest.

He kicked the Suitegum valuation into touch, and appointed two audit firms to conduct their own investigation.

In the final analysis, the liquidator was working for a proportion of the valued figure as his remuneration. We have a valuation competitor in the market who charges on that basis. Somewhat compromising, I believe, and in violation of the USPAP (Uniform Standards of Professional Appraisal Practice). With time, someone will test those valuations. Perhaps there will be some explaining to do. Probably not.

Auditors are not covering themselves in glorious integrity at the moment. A profession becomes a business when it chases money at the cost of principle. Why do we expect professional bodies to hold them to account?

Hashtag: 6 CAs on the board of Steinhoff.