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

Archive for May, 2013

Value and “value”

So I suggested to a potential seller of a business last week, that he should have a professional, definitive valuation conducted on his business before taking it to market.

The response was astounding as always, but not unique:

“I don’t need your valuation. I need sufficient money to cover the overdraft, the balance owing on the vehicles, all the creditors… ”

Good point in that nobody needs my valuation. after all there are lots of free instant tools all over the interwebs. You can tailor many of them to tell you exactly what you need to hear.

Consider this: A real, well considered valuation will tell you the truth. Perhaps the truth will warn you up front that you don’t have a prayer of getting “what you require”, and you would be better off putting effort into the next year or so, in improving the value. Perhaps it will tell you that your business is worth a great deal more than what you require to settle all your debts, in which case you might ride off into the sunset with a pleasant jingle in your pocket.

Yes, it will cost you some money, but then so does a checkup at the dentist, a mammogram, a prostate check and a brazilian wax. A valuation is a lot less unpleasant than any of those, and may put you in a better position to afford some of them. {Disclaimer – my experience in some of those is somewhat limited}.

I will be going into some depth as to what determines the value of a business in our upcoming seminar on 18 July. Have you booked a seat?

Mandela Day PrepareYourBusinessForSale™

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OK, so it’s happening…

The PrepareYourBusinessForSale™ seminar is happening on 18 July 2013 in Johannesburg.

Last week I sent out an exploratory email to see what sort of response I was likely to get. The result was very encouraging, and so I tentatively approached the cause which we are sponsoring. This is how it will work:

Several years ago I ran these seminars on a regular basis. Many of the attendees took heed of the lessons, and years later have become my clients and friends. After many seminars, it all became a bit much, and I got quite ill, and had to stop them. For the last year I have been toying with the idea of restarting them.

Nelson Mandela Day is a celebration of the icon’s birthday. It is a day on which people are asked to contribute 67 minutes of their time to the community, for free. So I have chosen to do so for the small and medium size business community. The problem I am faced with is that a free seminar will attract all sort of people with no commitment. So I am asking every attendee to contribute a donation to The Vula Programme, of not less than R380-00.

Amongst a broad range of issues I will explore with you on the evening are:

  • issues around what needs to be taken into account when conducting a valuation of a business – any business
  • the principle of always being ready for sale, even now when you don’t want to sell
  • what to tell someone when he walks unsolicited into your business and asks if it is for sale
  • how to deal with a business which will not sell for enough to satisfy your needs.

You should know the following before booking your seat:

  • 100% of the donations received for the evening will go to Vula. The executive of the programme has agreed to accept the donations directly into its own account, issue receipts and section 18A certificates directly to you or your business. There are valuable BBBEE points to be gathered here.
  • The seminar will be significantly longer than 67 minutes. As a mark of respect to Madiba, we will pause at 67 minutes for tea and coffee (if I can find a sponsor to provide tea and coffee on the evening)
  • We are still negotiating for the donation of a venue for the evening, with a few possible hosts. It will be in Sandton, and there will be plenty of safe parking.
  • This is probably a once off.

You can book and pay here.

Why The Vula Programme? I mentioned last week that I was looking for a charity to benefit from the evening, and was toying with a few in and around Jozi. After much debate within my family, it was decided with a hefty nudge from my son Devan.

It will take another twenty five years to see the benefits of an improved education system if it were fixed from top to bottom today. If we start fixing from grade 1 and move the “fix” with that year, we are a quarter century away from seeing the benefits. My father’s last meeting of his life was on his hospital bed, negotiating with the owners of C&A in Holland to contribute meaningfully to the education of poor rural kids in South Africa. He died that evening. Forty years of his professional life was dedicated to educating able and willing kids, irrespective of their race, when it wasn’t a very sexy thing to do.

We cannot afford to start from scratch. There is a lot of catching up to be done at a much older level, and this by necessity requires continued adult education in aiding teachers to teach their pupils. This is what Vula does in KwaZulu Natal. As much as we may be unhappy with the current leadership of the country, and the lack of meaningful results, in the spirit of Lead South Africa, it sometimes falls to the ordinary people to make a small contribution. Let’s skip the blue lights, the hot air and commissioned SMS contributions, and each make a small contribution to something worthwhile.

Educating children is without doubt the single biggest challenge in the fight for equality and employment. While we make our small contributions, we can have a meaningful discussion about how to make our own retirements more comfortable, or give a leg up to the next phase of our lives, or simply make our businesses more profitable.

I hope to see you there.

 

Surviving the sweat

I deal with hundreds of buyers of businesses. It’s a part of what I do. The more buyers I deal with, the better chance my seller clients have of getting a good price.

A business buyer has it relatively easy: He has the funds he knows about (cash), and the access to funds he knows he can get (having spoken to banks). He investigates a number of businesses and eventually chooses the one which suits him best. It is not uncommon for a business buyer to be concurrently dealing with three or four business brokers or owners. It is the easiest thing in the world for him to simply walk away from a deal, even if he doesn’t know everything about the target business; it is a simple process of elimination, and that elimination often happens prematurely.

First he discounts the least attractive, be it by price or industry or location or customer or supplier or a personality clash with the seller, or simply because he struggles too much to get the information he wants. Then he starts to look at what’s left on his list, and starts his negotiation. It is likely that at this point he will pick out one particular favourite, and negotiate in earnest with that seller. If it doesn’t work out, he moves on to the other sellers, and the others who have entered the market in the meantime. Most of the time he does not even bother to let the unsuccessful sellers know that he is no longer in the game.

What of the seller? Well the seller generally only has one business – the one he is trying to sell. There simply isn’t a lot of option available there. There are some micro options, if you like: Price, terms of payment, hand over period and restraint. Obviously the  most important of these is the price, and yet it is often the last element which is negotiated because the seller works off the wrong base to start with.

“Let us do a due dilligence so we can pay you a fair price”, says the buyer. Hopeless, I say. What if the buyer wades through all your secret information “in good faith”, and then offers you way below what you believe the business is worth? What do you do then? Of course you’ll argue, but to what end? The buyer knows that you have given him everything he needs to go into competition with you, and he knows you know that. Hardly a fair negotiation for the seller.

Responsible business owners know all the time what their businesses are worth. Why? Well, simply

  • because they do not know when someone will walk through the door and suggest he is interested in buying the business
  • because we should all know what our wealth score is, and a business is part of that count
  • because an early warning of a lack of value is more valuable to anyone’s exit plan than many other things
  • because our new tool allows you to build your business up to your target value in bite size, manageable chunks

Or more likely, if your business is worth less than what you need to move on to the next phase of your life, at least you can do something about it now, and not when it is too late. Sometimes living a happier life is less about chasing that extra sale, kissing that dislikeable customer’s own exit system, and more about gross margin, net margin, creditor days, debtor days, inventory turnover and finding a way of financing all this wonderful extra value without destroying your business in the process!

Buyers can hop from one offering to another in their quest. Sellers generally only have one business. Sellers are easy to find. Good quality buyers are not. Don’t stuff up the opportunity.