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

Archive for December, 2014

It’s about the extras

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The old laugh out loud advert had the air hostess walking down the aisle of the plane chirping “chicken or beef, chicken or beef?” The point of the advert was that this was the limit of choice on some airlines. Soon after, the possibility of à la carte snacks being purchased on budget airlines was introduced. The add on revenue of the snack shop at zero risk to the airline was born. If the chips weren’t bought, they were carried over to the next flight. The air hostesses were already employed, but now they had something useful to do in flight; and make a profit for the airline.

More recently the airlines have latched onto the concept of really overcharging hugely for every extra pound brought abroad (as long as it is not intracellular about the passengers’ waists! Then, seemingly, one could bring aboard as much as the neighbouring seat could be laid claim to. But I digress…) The point is that extra baggage, trapped in an airport, bound to the throbbing being of the passenger, is now an easy target for revenue.

The geeks, ponytails and marketers may be heard talking about “monetisation”or more likely “monetization”.

The word “revenue generating” has worked for a long time, and doesn’t really need to be replaced by new geeky words, but English is a wonderfully evolving language, so we’ll roll with it.

It is that concept of monetisation which is at the root of this blog (another new word) I wrote about previously. It was one of the concepts behind the reason for seemingly outlandish values paid for some start up tech companies with short or even no revenue track record.

Take Snapchat for example. It makes no money. It does have a following which generates 700 million snaps each day. Therein lies the value for Facebook, who’s offer of US$3 billion was turned down by Snapchat owners, who later also turned down US$4 billion by Google. They obviously saw more value in the business than what the suitors were prepared to pay. That, for a business which makes no money. It takes a set of goolies to turn down that amount of money, and carry on fighting for cashflow and yet more numbers. All the more so, when you are only 24 years old!

The reason is uncertain. It could be that the owners enjoy doing what they do, without having the overbearing attitude of the corporate investor demanding a return, looking over their strange behaviour. It could be that they believe it is worth a lot more, which is a wonderful reason to turn down a huge offer, as long you are right. Oh, it could be any one of several issues which could range from stupid and ill advised to brilliant and ballsy.

So let’s look at why buyers place such high values on businesses, and what you can do to help this happen to yours:

If your business is struggling to deliver its product reliably through the South African Post Office – not necessarily because its workers have gone on strike yet again – then you have to make a plan. The plan involves spending some money on alternative delivery systems.

  • resort to a private courier
  • develop a network of industry competitors working together to solve a common problem
  • use a drop shipment plan
  • buy your own delivery fleet
  • add a scooter or two
  • whatever

All of these plans involve money. Another alternative, is for your business to purchase another business which already has an independent way of getting product to market without relying on the Post Office. However, in addition to the infrastructure, it also has its own reliable positive cash flow and profits.

But your hated competitor has his own eye on this business for sale, for the same reasons. It now becomes a matter of pride and survival that you get this thing into your yard safely, ahead of him. Are you going to pay more than the original asking price?

You bet you are. But only if you have the money, or access to it.

And you do.

So you do.

That is how your potential purchaser thinks about the acquisition of your business. If you have something to offer which adds more value to his business than what he will be required to spend on the acquisition, then you will have a deal. But it needs to be real and sustainable and obvious.