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

Archive for the ‘Deal structure’ Category

Mergers of minds

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My father – a teacher – would get very upset when anyone suggested: “there are those who can, and then those who teach”.
Business owners should get upset when anyone says: “there are no such things as mergers – only takeovers”

Considered and well-planned mergers can bring advantage to the smaller of the two, as much as to the apparent “acquirer”.

The textbooks refer to “mergers and acquisitions” or “M&A”. In this twitter-fed and instant gratification world, we truncate that to “merger”. We ignore the “acquisition” part of the phrase. For every acquisition, there has to be a “disposal”. Unless it really is a merger. Then all sorts of stuff happen.

When two businesses are merged, it is almost impossible to get to a position where each contributes exactly 50% to the finished deal. So there has to be a trade-off somewhere, for someone. Finding that split is one of the cores to what we do. It is so rewarding to work with motivated business owners looking for a way to make 1 and 2 equal to 4 at the end of the deal, and equal to 5 soon after. The process involves an initial discovery of each business. Working with the executives as they find their way into each others’ beds holds its own excitement.

The paradigm of trust

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When a potential buyer of a business first looks at his intended target, he fits somewhere in the spectrum ranging from deep distrust of everything which will be presented – even before it is shown, to wilfull acceptance of anything presented.

  • The former because the buyer is either very conservative or very experienced;
  • The latter because the purchaser is intent on acquiring that business, come what may, and perceives himself to have very few alternatives.

As a potential seller of a business, it is in the seller’s ambit of control to be able to still the fears and mistrust of the former by having all the facts at hand in an accessible and accurate format.

It is helpful to be able to deal with the latter by impressing him even further (and dissuade him from looking for alternatives) with the good records you have. This is in the realms of PrepareYourBusinessForSale™.

How’s about we indulge in a little bit of prepare your mind for sale.

Selling a business can be very quick, which yields poor results; or it can be slow and mellow, to yield far greater satisfaction. As an outsider to the emotion which fills the minds of business owners, who invariably become business sellers, I have the luxury of being able to stare them in the eye, knowingly, at times. With a knowing smile, sometimes.

“I don’t ever want to have partners EVER again”, says the scared and previously bitten engineering shop owner. He went into business many years back with his brother in law. Now there is a split in the family, and a missing million Rands. They could never agree on the marketing budget, nor on the terms of tying down that large order from Malawi.

“Sure I can sell some equity now, and the rest in a few years. How else will we hand over this lot?”

  • The mind of a man who understands that having a bus number of 1 has always been a problem for the business, his wife, and himself.
  • The mind of the child who never go to grow up, and who is having too much time to see her happiness destroyed by the search for cash flow from the 20th of the month to the 15th of the following month because her passion is causing the business to grow and grow and grow.
  • The mind of the a woman who has run out of talent in the workshop, and know she will burn out without better machinery; expensive machinery.
  • The mind of the guy who is running out of BEE points. And cash. And time. And who just has no more figs to give!

Pre planning, beating a drum to slightly different rhythm, and getting one’s A into G, will set you up to

  • trust a new shareholder, and
  • be trusted as a fellow shareholder

The paradigm of trust. Good feelings.




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In all my years of helping people to sell their businesses, the biggest frustration was not in finding buyers. There is never any shortage of people wanting to own good, profitable, well prepared businesses.

The real frustration always came in when the would-be owner had to find funding to enable the deal. The seller was faced with a choice:

  1. Look for alternative buyers while the one in hand seeks funding
  2. Wait for the current buyer to find his funding

I generally recommended the first option, in a low key, non threatening (to the buyer) manner. Problems arose if the buyer found out his deal was threatened, which often resulted in him losing motivation to carry through with the project. Similarly, funders insisted on exclusivity for a period while they conducted their due diligences. If, as often happened, the business passed muster, but the buyer did not, the deal failed. We were left looking for another buyer anyway, as if we had waited on option 2.

Taking the funding on offer from buyer 1’s bank often helped subsequent, more suitable buyers, if the seller stayed the course.


If you ever go into a car dealership to buy a car, as soon as you have got through all the salesman bluster, and shown your buy signal, and you have chosen your colour, seats, extras and so on, you will be ushered to the financing “department”.

Of course this is not a department of the dealership, necessarily. In reality, the “department” is an individual who is a bank clerk with a desk at a dealership. The bank has previously vetted the product and the dealership. Of principal interest to the dealership and the bank now is the viability of the customer – you.

White goods

Similarly for cars, the customer is shown a seat at the “finance desk” of the department store selling washing machines, TVs, laptops, smartphones, and so on. Things are a bit different for these goods because often the financing of the goods sold contributes significantly to the bottom line of the parent company, for reasons which have become abundantly clear over recent times.

Never the less, the metaphor(ish) holds: Goods and services stay sold if the funding is easy to come by. The funding is product approved in advance by the funder, subject only to a suitable buyer.

So why are business sales not pre-approved for funding?

Well they are, and they can be. It is not as simple as the process of a bank getting into bed with a car dealership group, but it can be done.

Our PrepareYourBusinessForSale™ initiative has been expanded into its obvious next step… being “PREPAIRED”. It is a process which takes time and is not easy to wedge into a fixed algorithm, given the complex differences between different businesses. But a guided and considered approach can achieve remarkably rewarding results.

Speak to possible funders of your exit plan well in advance, and get a feel for what they are going to require in

  • Your business
  • The new owner
  • The deal structure
  • The deal value

Keep in mind that you will have to work with your funder in placing the correct new owner, when the time comes.

“I am just so sick of the uncertainty. My business is really doing well, and it has some good years ahead of it, so it is time to get ‘Prepaired’”.

The coming tsunami

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The thing with Tsunami warnings is that they appear over and over again following reports of earth quakes, but they seldom manifest in anything discernible to those on the shore. So with time, people, cities, and governments start to ignore the warnings. Frogs in warming water.

When the big event occurs. The unprepared citizens witness first hand entire towns being washed off the face of the coast, nuclear power stations being shut down, or not. And vending machines being left unlooted. This was once a real thing in a first world country.

My South African clients are giving giving vent to any number of local scenarios, ranging between two extremes:

  • Zuma will be out by Christmas, and in jail by the new year (Unlikely)
  • All is lost, the country has been entirely captured. Democracy is a myth in South Africa. Stock up on canned goods and buy Bitcoin. (Also unlikely, although I do find myself attracted by the notion of a finite issue, decentralised, non fiat, digital asset)

We all have our own expectations of the future, and our actions or inactions will be influenced by the current turmoil in the political, social, and economic malaise; but that malaise is the single biggest reason for so many of our clients retaining us in the last year.

As Stephen Grootes says:
“The next five months in our politics could determine the coming decade”.

As luck would have it for those approaching retirement in the near future; there is a growing number of investors looking to expand their own projects into business owners’ horizontals and, or, verticals. They are getting their own acts together for a strong upturn which is quite possible, once the madness is over.

  1. Horizontals – competitors, industry related, and complementary businesses.
    A franchisee in a successful chain of restaurants buys a store of the same franchise which becomes available on the other side of town, and also makes an offer for the new store being contemplated in the new mall.
    A hairdresser buys a nail salon in the same mall so that it can cross sell to both businesses’ customers.
  2. Verticals – in the same supply chain to an end user.
    A large group owning a logistics company, an abattoir, and a coffee bean importer, purchases a national chain of restaurants to enable spare capacity in the abattoir and the logistics businesses to be utilised, while securing a market for its beans.
    The supplier of beauty products buys both the hairdresser and the nail salon so that it can benefit from gross margins on a longer chain.

The potential investment situation is evidenced by the large amount of money sitting unused in large businesses, corporates, and in pension funds. It is the same money which Bell Pottinger might suggest is being held ransom by white monopoly capital (WMC) – an apparent thing – for defined performance by the ruling elite.

Psst… it is money being held back looking for decent investment. Stop being a box!

As a business owner entering the closing years of an exit plan, you have an unprecedented opportunity to tap into that enormous resource; but only if you play your cards right. PrepareYourBusinessForSale™. Get prepaired. The group or company which buys your business is not going to pay over the top. They will pay the value you are able to confidently demonstrate. It’s up to you to demonstrate that value. If you are not adequately prepared, you will leave money on the table.

Think outside the box for a while. Really; give it some serious thought:

  • Who would be interested in buying your business in the coming years?
  • What would they want to buy?
  • Does your business have the capacity to excite, simplify, or add security to a new owner?
  • How do you get things in the right “place” for them?
  • How do you maximise your own value, while enticing the acquiring person / business / group to see the greater future picture?

Those are the current and ongoing challenges for all business owners. Don’t neglect them.

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

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!


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.




Romans, romance and exhaustive examination

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Legend has it that in Ancient Rome when the supports used for building an archway were removed, the builder was required to stand under the arch as an assurance that the thing would stand. Those that still stand today, had builders who lived long fruitful lives.

When a business is placed on the market, the eventual buyer needs some sort of assurance that he isn’t buying a bag full of lemons. This assurance is generally gained through the due diligence process. The due diligence (DD) can take many forms and be of varying degrees. I am always very wary of an open ended DD. There is just too much risk for the seller. Instead I prefer to work on the promise – prove or lose – format. The DD should be defined around the purchaser expectations, so the seller knows in advance whether or not the deal is on.

It works like this:

  1. Give enough information to all prospective buyers to enable them to make a decision about whether or not this business might be a proposition for them within their own scope of expertise, ability, interest, expectation etc.
  2. Provide them with enough high level financial information for them to arrive at a preliminary opinion of value to them. Discuss that value expectation with the buyer.
  3. In order provide a value proposition, the seller will have to make some bold statements around the way things are done. It is important that these be kept to within reasonable limits, and be 100% verifiable.
  4. Let me say that again… For this process to work, everything must be 100% true and verifiable.
  5. If, subject to the seller proving all the promises he has made, the purchaser’s value paradigm settles the seller’s expectations, we have a deal.
  6. Back briefly to the 100% promise. If the seller has been honest in his promises, there is no reason why the deal should fail, other than through a failure to perform by the buyer.
  7. Before the DD progresses, the seller should satisfy himself that the buyer makes promises about his ability to perform – to pay. If that promise is broken, then the seller should have meaningful and material recourse by way of break fees, deposits and the like.

With that all in place as a departure point, the buyer is then able to constitute his offer to purchase. With the help of a skilled intermediary, this should be put together as agreement of sale, with input from both sides, rather than the somewhat ham handed bully approach of “this offer expires at the close of business on Friday”. The ultimatum tactic has its place sometimes, but should be avoided if possible.

In formulating the agreement of sale, both buyer and seller can be kept happy with the use of suspensive conditions of sale (or conditions precedent). That particular process works like this:

  1. The seller’s promises are put to the test in the agreement of sale.
  2. If any of the promises fail, the buyer gets to walk away without having lost anything except his time.
  3. If the seller goes into the agreement knowing that he is going to be able to prove all his promises, he can also know that he his business is going to stay sold.
  4. The intellectual property remains safe within the realm of the seller until he has a signed agreement of sale, which he knows will be consummated because his promises are all provable.

In a series of articles following this one, I am going to unpack some elements of typical due diligence exercises. Just go to the “due diligence” tag on the right hand side of this blog to get the updates as they are published, or to read past articles.

Two undeniable things

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We are beset by rules of thumb.

Here are two which few would argue with:

  1. There are some big corporations, and even big private businesses sloshing around with cash right now.
  2. Times are tough.

Do the cash flush pay out dividends? They could, and the shareholders could take their money and invest somewhere else. For some, it means a time of shareholder boasting as that shiny red car is bought, to be admired by friends and colleagues.

More likely in the astute business environment, is that the excess money is used to ramp up capacity in the business for the good times which will certainly follow. This can be done by way of training employees, but even that usually follows planning for the acquisition of bigger, better and braver equipment. When production starts to pick up, so existing and new employees can be trained on the new equipment.

Another option is for the cash flush to start “dating” the cash starved within their own industries or perhaps in complementary supply chain businesses, on their own terms. They look for businesses with growth potential, but which simply do not have the resources to grow any further under current constraints, or which have screwed up their cash flow recently, or who have starved themselves of further lines of credit, or which need restructuring, or which need experienced management.

Ashley Madison and Tinder aside, we have been acting as match makers in recent times between the rich and the prospectfully {made up word} future rich. Some exciting deals are in the pipeline.

These big brother investors are able to offer so many of the talents which are often lacking in growing businesses, and of course chief amongst them is cash for growth. While this may seem like a bit of a liberty to the business owner who has got his business this far, the additional talent can have far reaching consequences for the future prospects of the owner.

Let me explain.

In days gone by, the owner wanted “to sell my business”. This progressed to him wanting “to get out”. The euphemism is now “exit”, and its more laborious “exit plan”.

Investors with an agenda understand the concept of “plan” in the “exit plan” colloquialism. Often we are told by business owners that when the buyer comes along, “he must just come with cash”. The problem with this approach is that it is aiming to remove all future risk from the seller, and transfer it to the buyer, and significantly so. The result is a poor sale.

How is this for an alternative: A part sale, accompanied by significant investment in terms of money, talent, resources, connections and synergies. This is soon followed by significant growth with resources. Under the auspices of a well designed agreement, the owner is able to exit the balance of his shares only a few years later, with the remainder of his shares worth a heck of a lot more (per share) than they were originally. Significantly more!

Who would not want to do it this way? And why not?

You are where you are because you have pushed darn hard to get here. What if you were given a good healthy kick in the bum to get you really rocking and rolling for a few years?

You know… because getting here has not always been conducive to saving for retirement, the next project, or a better life. Here is your chance for growth.


Statues must fall

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Agreements are agreements. “But you agreed”. “Let’s look at the agreement”. “We have it in writing”.

Businesses are sold on a daily basis; here in South Africa and around the world. For the most part those agreements are reduced to writing, with much hither and thither to sort out and negotiate the small print. Eventually the bottom line is reduced to the seller worrying about receiving the money promised, and the purchaser being satisfied that he is not buying a lemon – the fruit of an elaborate scam.

Generally amongst much nervousness, the deal is done.

The early 90s were momentous years for South Africa. (Bear with me here, please) As negotiations progressed, demonstrations and lawlessness continued. Free trade sound bytes were born and done to death: “AK47 wielding gunmen”, “levelling the playing fields”, “nothing is set in stone”.

“Nothing is set in stone” has had special meaning for one of our clients recently. Some background:

  • Kiyosaki wrote about a business only being a business if it could run itself without the intervention of the owner
  • Gerber wrote about having a franchise type operations manual, so the business could be run without the owner
  • Carpenter wrote about the joy of systemising absolutely everything
  • Marrillow finally put them all together in a series of “Ted’s tips”.

The common theme for all these gurus is simply; if the business cannot be run without the owner, then it is at best a self employment vehicle.

With that in mind, and the establishment of another business, our client had made sure that the target business was going to be run by professionals. He had one of the best men in the industry working for him, and everything ran smoothly with little more than a brief weekly meeting to take the blood pressure, pulse and temperature of the operation.

Mindful of the fact that one day he may want to sell the business, he entered into an agreement with the general manager that should this ever occur, the GM would receive 20% of the proceeds of the sale. This was reduced to writing, and confirmed by the trustees of the holding trust. All set in stone, one might think.

Several years later, an opportunity arose to sell the business, and we were retained to help negotiate the deal. I initially met with the owner and the GM. As usual, the issues which we anticipated would materialise during the course of negotiations were aired. Chief amongst them was the question of managerial and specialist continuity, post deal. The GM was fully supportive of an exit for the owner, but was not interested in acquiring the business for himself.

And so on we went. Several interested parties, some investigations, and the expected fading of prospective buyers before the eventual buyer arrived at the negotiating table, with some serious intent.

Through that process the price was edged upwards in a few leaps until an amount was agreed. There followed a due diligence, followed by a clanger. The buyer had discovered a flaw in the accounting involving a single customer paying three years in advance, against which the business would have to deliver under the ownership of the buyer, with obvious profit implications. A straight forward, honest mistake, and a product of Ted’s Tip #5 in Built to Sell.

Quite agreeably, a new price was struck subject to the same requirements about the GM agreeing to stay on for at least a year… Which is where the wheels almost came off. The original price agreed had set in the mind of the GM, a 20% share quantum. It was this amount which he had taken to his family over Christmas. It became a fixation amount. So there was no chance that he was ever going to accept 20% of a lower amount. He dug his heels in.

“Mark, you need to understand that without me that business is worth nothing. Now either I get {fixation amount} or I walk.”

The seller was over a very uncomfortable barrel at that point. He had to either give up on his sale, or pay the difference to the GM. Of course we could have played a game of poker for a while, but generally at this sharp end of the game most sellers have had enough. So it proved to be. He paid significantly more than the originally anticipated 20% amount to the GM.

Interestingly, the new owners of the business were fully apprised of all these developments, and so they know what they are up against in the GM, going forward.

So while the undertaking from the shareholder of the company to the GM had been “set in stone” in the mind of the seller, in the final push the GM had no respect for this, and instead chose to insist on something outside the agreement which he knew he could achieve.

Where did our client go wrong? He had a single proxy for himself in the business, handling absolutely everything in his stead. That is almost as weak as a one man owner operation. One of the questions we ask in 0ur valuation of businesses, has to do with the cover of all key personnel, beyond the owner. It is better to be able to go away on holiday at will, leaving the company in the hands of “others”, rather than in the hands of “an other”.

So back to my early paragraph:

South Africa still has AK47 wielding gunmen. Disappointingly, it still has very much unlevel playing fields. While the Constitution of the Republic of South Africa may have come about as a result of a negotiated settlement, “nothing is cast in stone”. We have a president in Jacob Zuma who regularly espouses opinions and plans in direct contradiction of the constitution and the law. Sometimes he is beaten back by “clever blacks” and others. Not always.

Nothing is cast in stone. All statues can fall.



Don’t try this at work

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You want to sell your business. You know it is a bit rich on overhead with employees, particularly after you lost that large contract.

You may not retrench part of your workforce to make the business look more financially attractive. We got over that game in 1995 with the Labour Relations Act. Prior to that it was common practice for a seller to retrench all his employees when he sold his business. The new owner, with the guidance of the old owner would then rehire selectively.

There are many business owners and buyers of businesses who believe that the same rule applies today. It does not.

More importantly, if a business buyer retrenches anybody in his first six months in charge, the business seller can be held liable jointly and severally with the buyer for any unpaid benefits arising from whatever action is subsequently take by disaffected employees.