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

Archive for December, 2017

Motivation in valuation

Posted on No Comments

Here’s a game I don’t play:

  • “look I need to have as high a value placed on my business as possible, for purposes of
    • taking my partner for as much as possible
    • to prove to my bank that my balance sheet is really strong
    • to show my employees that the long term investment plan is worth them getting no increase this year”
  • “I need you to keep the value as low as possible so that
    • my ex-wife gets nothing
    • I can offer this guy almost nothing for his shares
    • to make a stupid offer for the business”

If Suitegum conducts a valuation on your business, you should understand that under the conditions mentioned in the report, you are going to be able to get that value for your business in the open market.

I have a simple test for the veracity of business valuations which leave my office:

  • If this valuation is too high, to what extent am I exposing us to a damages claim from the owner of the business being valued when he is unable to realise the value, and exposes himself unnecessarily?
  • If the valuation is too low, to what extent would a commission based broker lose out on potential income if he sells it at that value?
  • If I am hauled in front of a bunch of geniuses (auditors, attorneys, judges, magistrates) will I be able to defend each and every finding in the valuation report?

So far that has worked out well.

So when I received a phone call last week suggesting that our valuation had been cast aside in favour of two other valuations conducted by auditors, both of which came in at more than twice the Suitegum value; I sat up straight and asked a few questions.

The circumstances are that the client has had his business valued by us several times over a six year period. The results have been consistent with time and performance. He found himself in the divorce courts in recent times. It wasn’t pretty. A liquidator was appointed to give judgement as to the value of a minority interest.

He kicked the Suitegum valuation into touch, and appointed two audit firms to conduct their own investigation.

In the final analysis, the liquidator was working for a proportion of the valued figure as his remuneration. We have a valuation competitor in the market who charges on that basis. Somewhat compromising, I believe, and in violation of the USPAP (Uniform Standards of Professional Appraisal Practice). With time, someone will test those valuations. Perhaps there will be some explaining to do. Probably not.

Auditors are not covering themselves in glorious integrity at the moment. A profession becomes a business when it chases money at the cost of principle. Why do we expect professional bodies to hold them to account?

Hashtag: 6 CAs on the board of Steinhoff.

 

Restraint agreements

Posted on No Comments
PYBFS018

Sometimes you need to look at the end effect of what you’re trying to achieve, at the start of, rather than during the process. So, let’s jump ahead to a time when you actually sell your business, or (as I like to remind you) have it sold for you.

He said, she said

There will be an agreement of sale, which should be in writing. Even though verbal agreements are binding, my experience is that verbal agreements are worth the paper they are written on. There is too much of the “he said, I said” for verbal agreements to make sense.

At the time of reaching that agreement, the question of restraints will be raised twice.

In the first instance, and most obviously, you will be restrained from competing against the purchaser and your old business for a period, in a region. Give some thought to the consequences and start planning accordingly. Think about what you are or not prepared to accept, and if there are a whole lot of reasonable conditions you are not prepared to accept, ask yourself why you are selling this business in the first place.

It is reasonable for a purchaser of a business to expect to not have to compete with the guy who knows all his customers really well. Allowing the seller to market himself to these same customers could put any new owner out of business really quickly.

What have you been up to?

The second, less obvious instance of restraints, refers to the restraints that your business itself may be subject to. Many buyers’ attorneys ignore this very important element for some reason, I suppose because it is not so obvious.

But can you imagine the problems which would precipitate out of this situation: A buyer, makes a careful study of the target business and is satisfied with the cash flow issues discussed with a seller, and decides to buy. He then satisfies himself that together with his plan to acquire the rights to several other lines, the value of this investment warrants him taking out a second bond on his home, and borrowing some money from his elderly parents. Six months after the deal has been consummated, his biggest and most important supplier pulls the plug because the seller never told the buyer that this major supplier had only agreed to supply him on condition that he did not represent the supplier’s biggest competitor, which the buyer now does, albeit without being aware that he has breached an agreement.

When Suitegum is involved in the transfer of a business it does so, generally on behalf of the seller, but in good faith for the purchaser as well. One of the elements which we interrogate through our valuation process is the integrity of, and the exposure to suppliers.

So…

Think about what restraints you will be prepared to subject yourself to, once the business is sold, and have another think about what promises you have made to suppliers with respect to giving them special prominence in your business. The latter should be listed in your PYBFS files, both electronic and hardcopy.

Imagined reality of business value

Posted on No Comments

The owner of a business has a reality of value based on his real experience of the benefits which flow to him on a consistent basis. He knows 100% that “the business” makes money for him. He knows that it is more valuable to hold on to it, than to sell it below that value reality.

If a perceived premium offer is made – one which tips the scales of value from worthwhile holding, to worthwhile disposal; the run of play changes. In other words, if the offer received “makes sense” in that the owner will be happier as a former owner than as the current owner, then he will sell.

A buyer of a business can only act on imagined reality. Sure, that imagined reality is based upon thorough investigation; but until it is actually lived, the reality can only be imagined. That imagination is unique to the human race, and I suggest is bound up in the fear and greed dichotomy which grips us all, in all the decisions which we make.

For a business owner to dispose of his business, it is incumbent on him to translate his reality of value into perception of value – imagined reality – in someone else’s hands. Again, in other words; he needs to convince the purchaser of the value. Essentially, he needs to sell the darn thing, just as he would sell anything else.

That is what we strive to achieve with our clients – in helping them through the “PrepareYourBusinessForSale™” program to make them “Prepaired” with their eventual new masters. “Prepaired” is not a spelling mistake. It is what shareholders do in advance of selling their equity: They identify the market, and they make what they’re selling, attractive to that market. They pair their offering with the anticipated requirements of the future owners. They get “prepaired” through PrepareYourBusinessForSale™.

Where realised value meets imagined reality – made incarnate through the transfer of retirement funds. That’s a good thing!