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

Archive for November, 2012

The problem with Business Rescue

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Business Rescue (BR) is an exciting new addition to the tools available to company directors in escaping from their mistakes, keeping their jobs, and perhaps some of their employees’ jobs too.

It’s a wonderful idea.

Except a lot of other small business owners are going to get screwed by people using the provisions in the new Companies Act. It’s that simple. Close on 1,000 businesses will by now have been “placed in BR”. A few dozen have been rescued. The balance have either been liquidated, or are languishing in BR, waiting for someone to complain.

The biggest problem is that too few attorneys and other professionals have been exposed to the provisions to know when they are being had.

There are many restrictions governing exactly how the BR practitioners can behave. I bet few of them accurately understand the provisions properly, and many of them are going to be paying for their lack of knowledge by digging into their own nest eggs.

If a BR practitioner acts outside the provisions of the Act, he may be held personally liable by creditors. Ask me how. I have been involved in a number of these things in the last eighteen months or so.

It is only a matter of time before a BR Practitioner is taken to task by a creditor, for not following the law closely. It is also only a matter of time before a business rescue is declared a nullity, also because the rules were not followed properly.

If you intend to take your own business into BR in the near future, you should plan for it properly.

Mark

Disclosing your value

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Following on from last week’s epistle on business value, I had several requests to help adjudicate in deals which are under way. In two instances the sellers’ auditors had placed values on the businesses, and in both instances the buyers, post due diligence, had some difficulty agreeing on a transfer price with their buyers. While I accept the difficulty such a civilised discussion can elicit in the last days before the seller rides off into the sunset, I cannot help but sigh. There are much better ways of running such events. They are ways which are far easier and less stressful, and which result in less contested pricing agreements.

Let me take you back a few steps, and into another industry. Motorcars. We live in a very consumer oriented society, and most of us renew our cars every three to five years. (Only my most successful clients tend to drive old, working, paid for, adequate vehicles. True story.) So most of us know how to go about buying a car: We go to the show room, compare the asking price to other comparable vehicles we have looked at, and we make a decision. Perhaps we’ll haggle a bit over some or other compromise around mag wheels, fat tail pipes or leather trim. That’s pretty much it.

Of course if it is a used car and a private deal with no dealer, there is more scope for getting a better price. This is because as private sellers, people do not deal in the sale of cars for a living, and they are easily taken, generally speaking.

If I continue the simile through to purchasing a business. Prospective purchasers always ask about the asking price; almost immediately in most cases. I’ve been doing this for twenty years, and there have been few exceptions. Towards the end of discussions there is often some haggling around price and terms. If it is handled properly, it is fairly stress free for the seller. It may not be stress free for the purchaser, but that is not our problem. If I have my way, the stress is all on the purchaser as he competes against other prospective buyers – imagined or real.

The problem comes in most often when a competitor, supplier or customer walks through the door and announces that he wants to buy your business, unsolicited. These guys almost all follow the same modus operandi: They listen to your glowing reports about your baby, ask a few innocent questions, including “what sort of price are you asking for?” No matter your answer, you will be placing a ceiling on the price, and you can be sure that it will be progressively lowered as the prospective buyer, through his auditor, systematically lowers your expectations.

Your weakness? The buyer has no competition in the deal. He raises and accommodates your expectations to start with. You get the fever. You talk excitedly to your spouse every evening. You plan your future. Then his auditor starts to carve away at those dreams. You get defensive, and a little gatvol. Through this process your prospective buyer has had unfettered access to all sorts of details regarding suppliers, customers, accounting policies, marketing plans…. argh… the blood runs cold.

How much damage is being done?

There is a better way. I contend that every business owner should always know what his business would fetch on the open market. How else can you plan for the future? How else can you negotiate meaningfully?

Further, every business owner should always have certain information available for prospective purchasers which does not lay bare the soul of the business. You should have prepared strategy for dealing with unsolicited and flattering advances from trolls looking to abuse you and your business, and leave you flat and violated. Well perhaps it will be a nice short love affair, but that would be the exception. Experience has demonstrated something less pleasant is more likely.

  • If you don’t know the value of your business, you cannot develop a BATNA (Best alternative to a negotiated settlement).
  • If you don’t know, in advance, the value of your business, you may spend weeks arguing over a deal that could never happen.
  • If you don’t know the value of your business, you might be planning right now to exit something which in reality cannot realise enough for your other dreams.
  • If you don’t measure it (know the value) how do you control it?

Take some time over the coming holiday period to plan your future with some facts at your finger tips.

Mark

Business rescue – 1Time

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After several months of being “in business rescue”, the plug was finally pulled on 1Time Airlines at 3pm, Friday afternoon. It appears that the big white knight got himself some cold feet, and trotted off into the sunset. I guess the real truth will surface in the coming weeks and months.

Of course this has all been very traumatic for those who have recently purchased tickets, particularly those who paid cash, or by way of EFT, and are unable to claim non performance refunds through their credit card companies. “How are we gonna get our money back?” They are all shouting at radio stations right now.

A good question, and one that needs answering, because these customers have, at the decision of the business rescue practitioner, become creditors, and concurrent creditors at that. Effectively they have lent money to the business, after the start of business rescue proceedings (Post BR).

The answer also holds interest for small business people who find themselves inadvertently supplying their customers who have gone into business rescue.

Most business people are acutely aware of the order of payout in the event of a liquidation: Liquidator, secured creditors, preferent creditors (employees, SARS and general notarial bond holders), concurrent creditors (suppliers and unsatisfied customers).

Once a business rescue (BR) process has been entered into, things change around a bit; it’s as if a new estate has been registered, and finance coming into the new estate ranks above the pre BR claims, and in a different order:

  1. BR practitioner expenses
  2. Employees for that portion earned after BR began
  3. Secured lenders after BR began
  4. Unsecured lenders and other creditors for any loan or supply after BR began.
  5. And only then the pre BR creditors in the same order as earlier described.

So new creditors, no matter how insignificant they may feel right now, rank above even the bond holders pre BR.

The point is that ticket holders and suppliers post BR will be ranked in their claims ahead of all the backlog which got 1Time into this mess in the first place. So assuming that the main creditors were fuel suppliers (a reasonable assumption), and I heard on Friday that ACSA was owed more than 100M; they will simply have to wait until the current ticket holders are paid in full, before claiming their first cent.

Now it is also important to note two things:

  1. The business rescue practitioner (BRP) should not have continued with the BR attempt beyond ten days if he did not reasonably believe that the business was rescuable.
  2. The creditors at the time the business was placed into BR had to vote on his initial rescue plan at that ten day meeting. They would not have voted in its favour had they not believed that the rescue was achievable.

In addition, the BRP could not allow the business post BR to run into a position where it was trading in insolvent circumstances in its new balance sheet. To do so, opens him up to claims in his personal capacity from thousands of ticket holders.

So it is likely that all ticket holders will get their money back.

As a business owner, you may be able to draw on the above knowledge in dealing with your own customers and suppliers who have gone into business rescue.

Mark Corke

Business valuation

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I am often called by someone I have never spoken to before, but who has obviously done a Google search looking for companies or people like Suitegum. Long story short; the caller would normally need to sell his business in the next two weeks – by the end of the month, actually. I give them the courtesy of going through the usual questions and basic investigations with them.

One of our issues which is not negotiable before agreeing on terms of engagement, is that we insist on doing a proper valuation of each and every business we take on to sell, before we try to do so. The reasons for this insistence are twofold:

  1. It gives us an opportunity to discover up front what skeletons lurk within the business; it gives us an opportunity to bring ourselves up to speed with things the way they are, rather than the way that sellers would have us believe they are. There is nothing worse than working (on risk) for some weeks, only to discover that we have been wasting our time.
  2. It gives us an opportunity to canvas the real value of the business, and not simply the lowest fall back option of the seller – either too high or too low.

So when the desperate seller calls, I apprised him of our standards, to which he will often reply: “I know the value of my business, and it is not negotiable”. That is never a good start, but I press on with a few questions designed to shine some light on the attitude.

Why, so often, the sudden urgency to sell something which someone has been running for only nine months? And how is he so sure of his value after only nine months, anyway?

If you are interested in delving a little further into the myths and realities of business valuation, take a few minutes to read this article.

Mark