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

Archive for January, 2016

Sad realities

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So far this year I have come across three sad stories of exit plans going wrong.

And I am so sorry that the story is yet to be written, and that you have clicked here before it is ready for publication.

My emailer went out a full two days too early. Nobody’s fault except mine.

If you are on my email list you will get notification as soon as it is ready.

 

Through their eyes

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Within the paradigm of always being ready; I as not!

The email link you have probably clicked on to get here was sent out in error. and way too early.

It will be ready in the next few days, and I will notify you again.

Sorry for the inconvenience.

{Note to self…. NEVER allow a newsletter to go out at 6am on a Monday again. What was I thinking?}

Oh wait… I was not thinking.

Imagine there’s a way

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One of the examples I give in my seminars, on the phone, in meetings when I start to ramble (as one does) is an exchange I had about twenty years back with the owner of a pizza place.

I had queried her on the asking price of her business, which was frankly, just too high. “Well if could buy just two more scooters we would sell more pizza, then the value would be right. So the new owner just has to believe, and buy the scooters as well as the business”. When I asked her why she had not bought the scooters, it was all about the cost of the scooters. We moved on.

Of course scooters have become a metaphor in my lexicon for “if only we could just {add your own dream here}.

Well, imagine there is a way to add that value to your business without paying out vast amounts of capital money. This is not about borrowing hard cash from a bank or investor. It is not about raising trade finance, leasing vehicles or machinery, or bonding a property.

This more of an ephemeral investment in your business, strictly to make it more valuable. When I say “more valuable”, I don’t want you to be dreaming of adding 50% or even 100% value to your business with your “scooters”. This plan is for those who want to add 500% to their value. Or 1,000%. OK, I don’t want to sound like a politician in an election year, but you get the idea.

So this is not for the guy who desperately needs a new truck in his business.

This is all about getting top dollar time investment in your business of people and resources who can make things happen. So if you need

  1. software to run a particular process which will make your business hugely scalable
  2. an “app” to interact with more customers or make some sort of reporting happen
  3. your production and sales relationship aligned with customer expectations to forever get rid of lost production, late delivery, and broken promises
  4. processes to work between you and your customers allowing them to instantly and automatically let you know about each one of their stock movements
  5. your start up idea to move from “ideation” to production
  6. better ways of managing cashflow, that actually work
  7. a concept to be designed and produced

then you should be asking more.

Nobody is going to be giving you any money. But they will be investing time and effort in your business, and they will want to make a profit if it works out. So you will pay them on the success of the dream, and you will pay a bit of money up front. 90% of something is usually better than 100% of less than something.

This is particularly for those who have been freaking out about an idea, but have no money to make it work. If it is that good an idea, opportunity, constraint, then you should have it committed to some sort of presentable plan by now.

Don’t leave a message in the comments section. Send me an email on mark@suitegum.co.za

Toilet paper was invented in Greenbay Wisconsin in 1902. They struggled. It was only in 1935 that they could guarantee that would be splinter free. If this opportunity was available then, the world may have prevented a cuppla big wars!

 

Why would you sell your business anyway?

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This is the tenth instalment in the series, and I thought it might be an idea to take stock of where we are now, and ask the question: “Why sell your business anyway?”

I think that’s a pertinent question, and one which should be answered by every potential seller of a business. It is certainly a question which is asked by every purchaser. The thing is, you know exactly how your business works; you know about the cash flow of your customers, you know how they pay, and you may even know them personally. Add to that: you know your product or service intimately, and by leaving the industry you will have to venture into the great unknown, to learn about new customers, cash flow in different circumstances, how far you can push new suppliers, and you may even have to learn a new skill.

So why does the typical seller want to sell her business? Does it really matter? Well no, in the final analysis, it doesn’t matter; but at the beginning of the process it matters hugely to the buyer. He needs to be sure he isn’t having the wool pulled over his eyes, and that there isn’t a long and dark tunnel about to open up in front of him. An ice breaker in the initial investigation is “so why are you selling?”

What’s wrong with simply selling for profit? Of course there’s nothing wrong with that, but unfortunately it doesn’t instill great confidence in any buyer, and so sellers find all sorts of “reasons for the sale”.

Consider whether or not your motivation in selling the business is honorable. This is a matter for your conscience at this stage. Bear in mind though; dishonorable and fraudulent reasons for sales have a habit of biting sellers in the backside at a time which least suits them. Yes, they get a clump of money up front, but ultimately they end up scrambling for other sources of funds later in defense of their subterfuge. A sort of short term gains for long term losses scenario.

Part of my motivation in persuading people to embark on this long term program of PrepareYourBusinessForSale is to attract and keep business people with a long term business goal in mind, rather than those who are desperate to transform a personal cash flow crisis into a fire sale of their businesses.

A very telling answer can often be elicited from a seller by asking the question “What will you do after the sale?” Sometimes the answer is weighed up carefully by a buyer in combination with other answers.

Let’s leave the finer nuances of selling strategies to another day for now, and instead consider the question in a straight forward way. If you are selling for any other reason that retirement, ill health or death:

  • Do you have another income producing activity to get yourself into?
  • Will you make so much money out of the sale of your business that you will never have to work again?
  • Have you forgotten the heartache and sleepless nights you went through, learning the ropes of this business in the first place?

On many occasions I have advised prospective sellers to hang on to their little money spinners. Of course I am seldom listened to, which I guess is just as well, as I’m in the business of helping business owners to sell their businesses.

More often than anybody would like, I am asked to sell a business which needs to be sold today, rather than tomorrow because of some personal calamity like serious illness or death. In those circumstances, the sale of the properly prepared business can yield enough to make a sick owner more comfortable, or a widow self sufficient. And it is those instances which prompted me to prepare and present this course.

A properly prepared business on the market sells efficiently and for a good price. A poorly prepared business on the market is on a hiding to nothing. You are here for the efficiency, I know

Please never forget this: Something awful may happen to you, rendering you incapable of either running your business or selling it. Your heirs, survivors or dependents may need to sell the business for you or your estate; and without your input, just how complicated is that going to be? And how much simpler would it be if you prepare your Pitchdeck diligently. (You thought I was going to say “prepare your business for sale”, didn’t you?

So please go back to the last instalment and consider the questions asked around preparing that Pitchdeck, and look back through the earlier instalments, get out your “Prepare Your Business For Sale” file and make sure you have covered the requirements properly. Scan paper documents reducing them to digital equivalents able to be transmitted around the world, and store them in your “PYBFS” folder on your desk top.

Pitch Deck 01

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Background

Sometimes known by other names such as the “executive summary”, the pitch deck as we shall call it, is the first real contact that your prospective purchaser is going to have with your business, apart from the somewhat frivolous “business nets R1000’s per month, asking the bargain basement price of RMillions. Please call Frank…” advertisement that you may place in the local classifieds.

Your pitch deck is a document which will lay out the basics of the business, and show what you are able to offer the purchaser. The aim of the pitch deck is to give your prospect enough information to make a decision as to whether or not she wants to move to second base, and come visit you at your place. At the same time you do not want to give away so much information that you find yourself with an extra competitor, or worse, with an existing competitor with more information than he had before.

So we won’t be giving away any strategic information that will compromise us later, and will leave us regretting our honesty and forthrightness. We want to leave her with the need to know more about something she wants, and if she wants to see ours, she’s going to have to shows us hers first, so to say.

Apart from ultimately using the pitch deck as stage one in eventually selling your business, there are other usefulnesses which should not be ignored.

As we continue through this series, your pitch deck will unfold as I ask you to answer the sorts of questions which buyers will ask. Some of these questions may stretch you a bit, but may open your eyes to various aspects of your business. Obviously that will help you to evaluate your business and its value to both yourself and a prospective purchaser.

Through that exercise, it will also help you to identify areas which can be improved with a little effort, and understand areas that will be targeted by a quality buyer. It will give you an idea of what goes through a buyer’s mind as she evaluates your business. The pitch deck is the one document that will not only capture your purchaser’s interest, but will actually sell your business for you. More than that though, your pitch deck can become the basis for an operations manual, which we will learn more of later. For the time being, I want you to give some thought as to how you would describe your business.

Start by expanding on the type of business you are selling. Remember that this paragraph is the very first interaction which your prospective purchaser will be having with your business, and for some business – prospect combinations this start can kill the deal for you. It is one thing to say “pizza takeaway”; we all understand that. But perhaps you run an engineering shop. Most prospective buyers will not understand “plant automation, simulation, optimisation and information systems”. But then this type of business will be aimed at those that do understand, and are not looking at any type of takeaway, anyway. So consider your opening very carefully, to be aimed at your target market.

  • How long has the business been running?
  • How long has the present owner been in control?
  • What is the owner’s background?
  • Is it important that the new owner has a similar background?

Give a brief idea of how the business is run on a daily basis, by the owner and by the management, and describe the level of interaction between owner and management. This is very important. Many years ago we were selling a bakery which to our thinking was a brilliant deal. Very little response was received when we targeted our database of buyers. That was both surprising and disappointing. However, once we amended the report to show that the owner left the bakery to be run by management until 11am in the morning, we were swamped with interest. Potential buyers had seen “bakery” and assumed “opens at 4am”.

Describe the products and services of the business. In particular, if the business has some type of proprietary machinery, process, service or product; scream about it. Many buyers are looking to be involved in something different to the mundane.

Interesting

“Scientists have developed a powerful new weapon that destroys people but leaves buildings standing — it’s called the 17% interest rate.”

– Johnny Carson


An interesting concept – interest. It’s great when you’re earning it. It kinda sucks when you’re paying it. But either way, its compounding performance can be impressive when the rate rises to 10% and higher.

As far as the sale of businesses is concerned, a rise in interest rates, at the obvious value level:

  • From the buyer it is:
    • more expensive to borrow money to buy businesses (or to “leverage” the acquisition)
    • harder for buyers to convince banks that the deal is a good one
    • more attractive to earn interest with cash money in the bank than to risk it in a business

The result is that there are fewer buyers of businesses. Demand is lower.

  • For the business owner it is:
    • more difficult to do business as an economy slows down
    • more difficult to meet monthly interest payments which are higher
    • difficult to hear of more customers struggling to pay on time
    • an attractive option to exit the business and put the cash in the bank

The result is that there are more businesses on the market for sale, all chasing a shrinking number of prospective buyers. Supply is higher.

Economics 101:

Lower demand leads to lower prices

Higher supply leads to lower prices

Those two statuses lead to an interesting situation, where far from the basic economics of buying potatoes at the market, the buyers in the case of businesses, are risking a lot of money. The result is that they are more careful in a situation where they do not need to be pressed by the risk of losing any particular opportunity to a competing buyer. They have time to look at many other businesses for sale at the same or similar asking price. This puts pressure on the sellers. This leads to lower prices.

There is another compounding problem. When interest rates rise, expenses go up and profits fall. Lower profits are less attractive to buyers of businesses. Values of businesses fall.

 

 

 

Compliance

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The biggest fear of any purchaser of a business is that she is going to be swindled in the deal. As Peter Carruthers is so fond of saying: “When a man with experience meets a man with money, the man with experience gets the money, and the man who had the money ends up with experience.” Or words to that effect anyway. If you have been in business for any length of time, you will know what that observation means. If you don’t understand, be careful because chances are that you will gain that experience in the future!

So how do we put the prospective purchaser’s mind at rest? The starting point is a single word: Compliance.

As a prospective purchaser of a business once said to me: “If this guy is brave enough to take on SARS by not declaring his business truthfully, and if he steals the VAT paid by his customers and does not pay it across, why would he think twice about defrauding me?” I don’t think that I could have put it any better than that.

There is a myriad of compliance issues that can be examined, and which we will delve into as this series unfolds, but for now I want to deal with four important areas.

Tax returns need to be submitted, we know. And taxes need to be paid, and “strangely” this has become one of the most complied with issues in the last decade and more. SARS wields a big stick, which has made a difference. However, there are still taxes dodgers out there, and without fail these guys battle to sell their businesses at a fair price. The reason for this is that buyers know that the most reliable source of reported figures is those supplied to SARS, simply because they are unlikely to be inflated. By the same token, properly prepared financial statements submitted yield higher values than management accounts, and much higher values than spreadsheet projections.

VAT returns must be on file, and less importantly, VAT receipts. Returns report your turnover, while receipts merely provide the amount that was paid over, and can vary immensely in their relevance from one business to another.

Staff details are usually on file together with the related contracts. Most businesses have little trouble dealing with this, simply because staff members themselves insist on compliance, nagging for their contracts until they are produced and signed! Make sure that you have accurate records of addresses and ID numbers and particularly leave details. When the transfer of your business happens, you will need to know how much leave is outstanding to each of your employees. So take your existing leave schedule, make sure that ID numbers, addresses and wages are included for each employee, and put this into your Prepare Your Business For Sale file and make a pdf copy for your desktop PYBFS folder.

Perhaps the biggest culprit of noncompliance which often becomes a hindrance to transferring a business is the asset register. Even though the maintenance of this register is a legislated requirement, many, many businesses flout this requirement, and thereby commit an offence. But not only do they commit an offence, they also bog down the sale of their businesses unnecessarily. Purchasers of businesses want to know what they are buying, for goodness sake! That’s not unfair, is it?

Something we are going to learn in this series, and hammer it home, time after time is the simple fact that when you sell a business, that business competes with all the other businesses out there that are on sale at the time. So give the purchaser what she wants!

Get your asset register up to date, and put it into your Prepare Your Business For Sale file.