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

Archive for November, 2015

Play the right card

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“If we had another scooter, we could sell more pizza. So the buyer of my business must just buy another scooter, and pay me for the future profits”.

Of course that would never happen. Buyers of, and investors in businesses, buy something which they can add value with their own resources – financial, intellectual, networks, and so on. They look for good deals to which they can add their own value. They do not pay value for something which they will have to make the changing contribution to.

The value add may come around simply on a time basis in the natural course of leaving the business to run as it currently is.

More likely, the buyer will look to adding value.

Missing in the somewhat immature small business community, is the possibility of attracting investment into the small business, not necessarily for the total shareholding, but for only a portion.

Here is a scenario:

There are investors (really there are) who are not interested in running the day to day affairs of the business. They are happy to have a minority interest, but participate in the growth that they are able to bring by way of:

  • financial investment
  • broad financial management
  • networking with their other investments on a preferentially constructive basis
  • experience
  • door opening
  • supply chain options
  • introductions

Take a look through that list, and consider where (if anywhere) any of those scenarios might benefit your business, without taking away the control of the business. If there is an opportunity, we should talk.

But that is not all…

Five years down the road, your investor will look at exiting the business entirely, and in five years time, you may (probably will) want to exit as well. You will particularly be interested in exiting if the business is worth ten times what it is currently worth. That sort of growth in value is not just a thumbsuck, it can often be a reality, if you play your cards right.

 

 

 

Set up & Maintenance 2

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PYBFS006
 

Previously you put together an empty lever arch file with file dividers, and created a folder on the desk top of your computer called PYBFS. Doing that was laid out in the last issue of Prepare Your Business For Sale.

If you haven’t done so already, don’t worry. You are no worse off than 89% of your fellow small business owners. They also have not done anything about preparing their businesses for sale, and when the time comes, their businesses will also languish with the rest of the unprepared, battling to sell, also ran unsold, alongside yours!

So what are we going to put into this file? Well, let’s start off with the things you already have at hand (or should have).

Get copies of all your financial statements that you have, punch them neatly, and put them into the file behind a file divider labeled “Financial Statements”. So obvious, isn’t it? I think you’ll find that most of this series is “so obvious”, but I am always stunned that so many business owners have to revert to their accountants to get more than the most recent financials. And even those have already gone missing.

Now, I know I said “…all your financial statements that you have”, but you may have to do a bit better than that. So get hold of your accountant, and ask her for all of your financials. Go back as far as possible. Put them into the file in chronological order.

Most accountants now provide their clients with their financials in a “pdf” format. If this is the case, save a copy of each year in your PYBFS folder on your desk top. Rename them “Financials 2014”, “Financials 2013”, etc. Make sure that the “2014” refers to the fact that the end of your financial year was in Feb, Mar, Aug (or whatever) of 2014. Don’t complicate things by getting into the “Financials Mar 2013 to Feb 2014” naming structure. Sometime people will use “Financials 20140228” to be more exact. That’s also okay.

So that was fairly painless wasn’t it? Well, here’s a stunning fact: You are now better off than about 47% of the businesses being brought to market.

Mind blowing, isn’t it? But not untrue. As I write this, during this last week I have spoken to a dozen people wanting to start the process of selling their businesses by having a valuation of their business done. Seven of them will come back to me once they have their financials from their accountants. Three of those probably won’t come back to me at all because they will never get the financials sorted out. Please don’t be one of them.

Post business rescue financing

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Businesses in trouble wait too long before going into business rescue. This creates more problems than it should.

  • The longer a business waits to avoid the “disgrace”, the less likely it is to rescued
  • A director who avoids the business rescue provisions, and then has his business liquidated, can be held personally liable for the claims of creditors.

Of course as they wait and wait and wait…. for that miracle… time based bills fall due and then over due. And then when it is too late, they do the business rescue thing.

Part of the problem is that banks have been spectacularly reluctant to think like they have moved into the 21st century with the rest of us (apart from providing some “mobile app”) and they steadfastly refuse to get involved in post rescue financing. I even had one bank renege on its agreement to keep existing financing in place because it later discovered that the main shareholder had stood surety in the deep dark past, and if the liquidator acted quickly… You can imagine.

Well now there are forward thinking people who are able to help with risk capital, in conjunction with the business rescue practitioner, particularly if a business is able to be rescued, jobs will be saved, and there is equity available for acquisition.

This is not primarily loan capital. It is particularly for the acquisition of part of the equity, plus some specialist knowledge in a variety of disciplines, plus some lending if necessary.

It is also necessary that the business is not only rescue-able, but is also able and willing to grow, so that the white knight gets a good return on his investment. Let me know if this is something you need to talk about. 011 875 2330.

Set up and maintenance 1

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PYBFS005
 

A long time ago, a very successful factory owner with a wonderful product told me that the secret to his success was not attributable so much to his product as to his record keeping and accounting.

So before we move on to the rest of the Prepare Your Business For Sale series, I want you to find yourself a good quality lever arch type file, a new pack of file dividers, and a safe place to keep it.

Once you have that physically in place, you should create a new folder on your computer’s desk top. Call it “PYBFS”, and password protect it.

Consider your lever arch file and where you intend to keep it. You need a balance between security and safety, and ease of access. Call it something appropriate, so that in the event of you not being available to hand it to a suitable business transfer intermediary, it will be identified!

“Security and safety” because some fairly confidential information is going to go into that file, and depending on your circumstances, you may want to give no hint to staff that you are preparing your business for sale. It is possible that they will take it the wrong way. After all, how are they to know that you are preparing for a possible event, and not an imminent one? At the same time, you want this file in a place where you have ready access to it, are reminded to update it every month, but most importantly where your loved ones will find it in the event of an unfortunate event.

With regard to the folder on the desk top, let your spouse / partner / significant other / someone… know that it is there, and tell them what the password is! You may want to consider making it a shared folder in Dropbox, GoogleDrive, Box, OneDrive or whatever your level 1 backup system is. You don’t have one? We should talk!

In addition, have access details for both your lever arch file and your computer folder placed in your will…. Ouch! That struck a note, didn’t it?

Well contrary to your current mindset, you are not immortal, even the more so for the fact that you feel that an annual medical checkup is not necessary.

Next we’ll look at what we’re going to put into the file and folder.