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

Archive for December, 2012

Mangaung and the value of your business

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It is no secret that I have a fascination with developing politics and world events. So much so, that I follow events, often on two different media at the same time.

I was listening to President Zuma’s opening address at Mangaung. There was some really good singing by the man, and then some introductions and welcomes. He was careful around the business of introducing his election opponent Kgalema Motlanthe. He did so by saying his name, pausing, then saying: “Deputy president”.

No matter the views we may hold on his performance or motivations in running for a second term, our president is a very clever political campaigner in both rising to power to now maintaining it.

But this isn’t about that speech, as much it is about perceptions. When Zuma introduced the deputy president, I looked down at my Twitter feed, and saw three independent commentaries on the introduction:

  1. @MandyWiener: #Mangaung Zuma begins by greeting everyone. Particularly loud clapping for Motlanthe. Original Tweet: http://twitter.com/MandyWiener/status/280266396426985474
  2. @carienduplessis: The crowd goes wild. But as Zuma mentions Motlanthe they go lukewarm #ANC2012 #Mangaung. Original Tweet: http://twitter.com/carienduplessis/status/280266416349908992
  3. @KarinLaB: #Mangaung awkward moment as Zuma acknowledges DP Motlanthe here…and absolute silence from delegation @Jacanews KL
    Original Tweet: http://twitter.com/KarinLaB/status/280266564811513857

How is that possible? Three well trained and respected journalists. All three of them sitting in the same tent. All three of them tweeting within seconds of one another. All listening to the same person, All within the same realm of the audience. And yet they have such totally removed responses:

  1. “Loud clapping”.
  2. “Lukewarm”.
  3. “Absolute silence”.

If you follow the links to the original tweets, you will notice that they all three tweets went out within a minute of one another. You will also notice from the comments attached by their followers, that I was not the only one to notice the discrepancy.

I have witnessed similar differences in perception when taking more than one person to see a business seller. The first guy walks out full of objections, while the next guy cannot be more excited about the prospects of the business, going forward. To the first person, the business is dead and the asking price is a pipe dream, while for the second, within his own paradigm, sees great prospects.

So two things spring to mind when we consider approaches to negotiating the sale of your business, particularly in the light of almost guaranteed differing perceptions:

  1. Keep your valuation of your business close to your chest. As soon as you declare an asking price or a value, you have effectively clamped a lid on the upside. From there, the price can only go down. We counsel all our valuation clients to keep the results to themselves, using it as a benchmark to gauge the progress of negotiations, rather than a weapon to beat your opponent with. If he believes the business has little value, you will be unable to beat him into submission. If he sees a higher value than you, well you have a winner.
  2. Negotiate with more than one person concurrently. I stop short of saying “as many potential buyers as possible”, only because if you are using a good agent, this may become logistically very difficult, and needs to be managed carefully. But certainly spread the negotiation widely, so as to give you every advantage, and the luxury of walking away from difficult or obnoxious buyers. Having several buyers at one time improves the outcome significantly. In tense discussions of selling price, the concerned buyer will always ask if there are other interested buyers. Your answer will make a tremendous difference to your life, but more on that in another blog…. By doing this you will be well set to make the most of differing perceptions.

Your eventual deal will happen when your expectation is usurped by the perception of value which your buyer sees. In this instance he applies his own values within the spectre of what he intends to do with the business. He will never make an offer higher than what he believes the value of the business is to him going forward, so don’t worry about ripping him off. (And nor can you ever be accused of ripping him off). You can only be held to warranty on the figures you have achieved, and withholding information in your knowledge which will have a detrimental effect on the business going forward.

This is where preparation of the sale is so important. Proper preparation takes some time to get together, and should be tackled sooner rather than later. Our PrepareYourBusinessForSale program is a first class initiative to help you with this, ranging from a free offering over time, to paid for options for the more urgent.

Just a reminder: There are only a few days left in the year to take advantage of our end of year valuation special, although the Johnny Walker has now “walked”.

Oh, and in case you have been on another planet, President Zuma despatched Kgalema Motlanthe into the ANC wilderness, and the throbbing masses took that great disciple of Big Black Boss Enrichment Enterprises (BBBEE), Cyril Ramaphosa, to their hearts, giving him more votes than any other candidate for any other position. They will now try to convince us that a man with more than 200 directorships can act impartially in the interests of the country. Viva!

 

Business rescue – first defence

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This is going to happen to someone reading this blog, in the next few weeks, while everyone is on holiday. It is inevitable.

A major debtor is going to put itself into business rescue (BR), and you are not going to be paid. The bigger the debtor, the longer he has been outstanding, and the easier it is to talk to him at present – the more likely it is for him to go into BR over Christmas.

Right now that debtor is hanging onto life by his finger nails, waiting for the holidays, when he can take care of a lot of statutory time while the wolves are sleeping. That is what planning for BR is all about.

But creditors should also plan. By this I mean that every company should have in place a BR plan, just as you have a fire escape plan, a business continuity plan, a flood plan, a backup plan, and so on. (Of course you have those other things – right?)

What do you do in the event you are sent a fax or email advising you that your largest debtor has been placed in BR? Worse, what do you do over Christmas when a fax lies unattended, or your email is being given a break? Does the security guard know what to do with service by the sheriff?

For many, the plan involves frantic phone calls, out of time, to an over worked BR practitioner (BRP) or to the directors of the company who are not answering their phones in January.

Take a step back. Take a breath. There are provisions in the Companies Act which require the BRP to act within very carefully defined parameters, particularly before the creditors have been asked to vote for the first time. Those voting parameters in the first instance, should be interrogated carefully by all creditors.

In particular, the coming holiday period should be monitored for opportunities where BRPs might take advantage of the general lethargy, to gain an unfair advantage.

Chief amongst early day abuses will be the requirements for all creditors to be notified, and invited to the first meeting. There are only a few days within which this must happen. If the BRP screws up, he is at enormous risk, personally. If you know he has screwed up, you could have a nice advantage. They do screw up, but without creditors noticing.

So what is your BR plan?

  • Nominate someone within your organisation, today, to be “on duty” for the holiday period. He must have access to a recognised official method of acceptance of legal delivery, on all days, including Christmas and New Year.
  • Notify any debtors acting suspiciously that if they are contemplating business rescue proceedings, that the method of delivery is as decided above. Send this by registered mail, or obtain a written confirmation of receipt. Under the proper circumstances, email, and even SMS is legal and binding. If they are being difficult, record a telephone conversation.
  • Send a general circular to all your debtors advising them of your BR official’s details.

Suitegum offers this service, and someone will be on duty 24/7 through the holiday period with a watching brief for our Splinter clients. The fee is small, but well worth the price as cover for potential disaster while you enjoy your holiday.

Let me know on 061 410 2421 or drop me an email if you need more information.

Profit trends and multipliers

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If everybody believed what everybody else believed, everybody would set the same price on everything. The middle-aged men on the stock exchange floor could quit hollering and go have lunch.

(PJ O’Rourke)

I have previously mentioned that there are 26 different variables which need to be considered in the valuation of a business. This flies in the face of “valuations” which take the profit of a business, and apply a standard multiplier without regards for other circumstances. Let me prove to you why this stand alone simple multiplier approach guarantees to rob someone; buyer or seller.

The basis for a multiplier approach is that the valuer takes one of: the monthly net profit before tax, the net profit after tax, or the free cash flow of a business and multiplies the number by 20 (usually). There are various theories on which one of NPBT, NPAT or FCF to use, depending on how many mirrors, and how much smoke is used. Some even use sales turnover as the basis! More on that on another day.

The theory goes that the more the business is making (or the owner is able to remove for himself) the more the business is worth. I have no real problem there, but the straight line relationship is a problem. If a business is making no money, it is therefore worth nothing, according to this approach. Really? Well if one listens to these guys, yes.

By the same token, a business which reported a profit of R100,000 at the end of last month is worth twice that of a business which made R50,000 in the same month? No, actually; Not even these valuation methods are that simplistic. They will take the average for the last twelve months if they have a modicum of self respect. But that too, is problematic. Take a look at this illustration of profits:

Trends are key to business valuation

Which business would you prefer to invest in?

The red business has been rising nicely through the years, reporting constantly rising returns for its owners. The blue company, on the other hand, while it has the same profit in the last year as the red company, has a very different history. How does one ever place the same value on the two companies? To compound the problems of this theory, the green company will be apportioned the same value, despite the fact that its fortunes have been waning for some years.

Remember that these are annual figures in the illustration, so the monthly average has been taken care of. Of course there cannot be a straight line correlation between their values and their profits.

“Tarmstwenty” protagonists will often call into effect an average of the last three years. Well that compounds the error even further. Simple mathematics (for those with an average above 13% in grade 7) decrees that in this approach will work against red (gaining momentum) and for a weakening green.

Do yourself a favour – get the job done professionally. Rather you know well in advance what you are going to be up against in the sale of your business, than you find out when it is too late. Find out more about professional business valuations.