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

Archive for June, 2015

The losers have it

Amongst the malaise and depression in otherwise productive people not looking for a freebie in life, there emerges some typical old fashioned South African “boer maak ‘n plan” business addapting.

It goes like this:

The businesses are all

  • growing strongly in their sales,
  • manufacturing or fabricating their particular products,
  • constrained by cash flow and/or
  • have capacity issues.

In addition they have in recent times been faced with a difficult decision as to whether to take on more workers, start a second shift or ask their employees to work overtime several times per week. All of these involve higher operating costs.

They are now faced with the same issues that frustrate the living heck out of almost all of us – electrical service delivery failure. Euphemistically labeled “loadshedding” by those who prefer to relabel the reality of swimming pools, chicken runs and cattle kraals; “fire pools” and “security features”.

So here they sit in an environment where they might have employed more people or paid their workers more, in order to get the product out the door, but run the risk of being without power to facilitate the process.

They might also have incurred the extra capital cost of first purchasing the generator, and then the operating cost of feeding the thing with diesel which is in demand by the people who should have foreseen the current crisis (euphemistically: “challenge”).

They have chosen instead, to constrain their own growth in sales by putting up the price of their products in the hope that they sell fewer items, so that their production is able to work within the limits set by a combination of labour laws and energy availability.

The result is that they are chasing gross profit, at the same, and even lower operating expense. The bottom line has more profit, in theory. The longer term result is more value in the business, in theory. The units sold will fall, in theory. Given that they are all quality products in demand; I have some doubts!

If the units sold remain unchanged, and the gross profit goes up, then the problem is solved and surpassed.

Capitalists and entrepreneurially minded individuals work within an environment, and use whatever means are at their disposal to maximise value. In the short term they may bow to global policy decisions which cost them profits, but in the long run they will make the most of opportunities and threats to make a profit and add value.

That is why they took the risk in the first place: They saw an opportunity in not being dictated to by others. When the rules change, they change their own modus operandi. They see opportunity in all challenges, crises or firepools. So instead of going with the flow of incurring extra cost to keep things the same, they steer into the wind and gain altitude for greater speed in the future.

Will it work? They don’t really know. But they are willing to take a calculated risk. The alternative is to incur extra costs now, and be forced to hike prices in the future, except then it would be to stay afloat. Raised prices is an easy position to unwind. Having an unused generator and extra staff is not.

Some will lead. Others will follow. The survivors will be the ones who adapted.

 

 

Create your customer

Peter Drucker said: “The purpose of business is to create a customer”.

And then a whole industry blossomed from this determination.

As a business owner – Actually I think I should start referring to business owners as retirement vehicle drivers.

Anyway, as I was saying… Business owners in a helicopter view have a different purpose, I believe.

The purpose of the business owner is to look after himself selfishly. He can do this by selflessly looking after aspects of his business to improve it as a target for acquisition.

Let me unpack that:

  1. Just as the business makes its services and products as attractive as possible to its customers,
  2. so are businesses made attractive to acquirers,
  3. so that when several businesses are for sale, the most attractive business will get the better attention.
  4. When there is more than one buyer interested in one business the potential acquirers become more honest and competitive,
  5. the price goes up,
  6. the business owner hops into the driving seat.
  7.  To set this situation up, there are parts of the business which need to be ship-shape.
  8. That takes sometimes uncomfortable action, as opposed to comfortable inaction.
  9. The result is a winning one for the business owner retirement vehicle driver.

For a long time I have preached that is important to know what your business’ value is. Let me fine tune that slightly for drivers who are still on the road, nowhere near an exit. It is more important to know what gives your business value, than to know its actual value.

Will this decision add to the value of my business? This question, regardless of what the current value is should be at the forefront of every driver’s business decisions, every day.

This might help.