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

Archive for the ‘Deal structure’ Category

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

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

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.

Retrenchment liability

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So often I speak to sellers of businesses who tell me how concerned they are that the future of their staff will be safe after their businesses have been sold.

While this may be an admirable sentiment, it is rather more self serving than the sellers often realise. The failure of the purchaser to look after the business, keep it afloat, and keep the staff employed is something which should be rather closer to the heart of the seller than one would at first imagine.

For many years the common wisdom is that one only ever sells the assets and goodwill out of a company, and never the shares of the company. This is for reasons of safety. If you have signed any sureties on behalf of the company… and so on. That approach is rapidly changing to one of making darn sure that sureties are dealt with well in advance of a sale, and then selling the shares. The reason is all about capital gains tax and dividends tax. 34% versus 13% from one approach to the other.

Here is another consideration: If you sell the assets and goodwill out of the company, the seller remains liable for any retrenchment liabilities for twelve months after the sale.

So choose your buyer well. If he is undercapitalised and is unable to keep the business afloat, there will be no liquidation assets to pay the staff their retrenchment on liquidation, and you will be chased by them for the money.

If the purchaser decides to retrench to save money in order to avoid retrenchment, you may find yourself dipping into your sales profits.

Your MOI may not be as mooi as you think.

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I sat in a business rescue planning meeting last week. In that meeting was an extremely experienced team made up of an attorney, an accountant and a business turnaround professional. They all nodded wisely as one of them said: “There is a system. Work with it quietly. Don’t rock the boat. Live happily“.

Don’t fight it, people.

There is a system. It is designed for people much more stupid than you or I. The fact that it goes against common sense, interferes with our own plans and will cost a bit of money, is just noise. This goes for many new bits of legislation which are being thrown at us at present.

Go with the system.

Here is something you may not be aware of: Up until recently your shareholder agreement may have a clause in it to the effect that if there is a clash between the shareholder agreement and the memorandum of incorporation (MOI) of the company, then the shareholder agreement will rule. That was not so nice for the public dealing with your company, who have access to the MOI, but not the shareholder agreement, and it might have meant they were dealing with a different animal to the one they believed they were.

Things have changed with the new companies act. Now the MOI rules. It is in the act and it is a law which cannot be contracted out of. If you just fill in the common or garden variety unsliced government issue MOI, you may wish you had taken some professional advice in the not too distant future. That professional advice allows you to choose now, the destiny of your business to a great extent. For instance, the commonly held understanding is that 25% plus 1 share is needed to block certain resolutions. How would your wealth be affected if you woke up on May 2 to discover that this has been changed unilaterally to 15% + 1?

So get some good advice, and if you haven’t already submitted your MOI then get some first class, professional, specialist guidance on establishing your MOI by going to Douglas Shaw’s web site, and then buying some of his time. There are 50 issues to be considered in completing a MOI, and as always, there are repercussions and unintended consequences to look out for. He lays these out in a series of video tutorials, which make sense to us lay people.

Here is his website:

Having your MOI under your control is fundamental to the value of your business. Imagine negotiating a deal with a buyer of your business in years to come, only to discover that the terms of your MOI require that you need the sanction of that one minor recalcitrant shareholder, after all. It could mean the end of months of hard work, soul bearing, dreams and retirement.


Trusts, companies and CGT

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In recent years it has been all the rage to ring fence small business affairs to protect them from the ravages of creditors wanting what is owed to them. This is considered good business practice, and it embraces the spirit of “limited liability company” most effectively. Used carefully it may have even helped protect business owners who traded in insolvent circumstances – criminally.

A few things have changed in recent years:

  • The new Companies Act 71 of 2008
  • Capital Gains Tax (CGT) rates for companies

The first has effectively taken out the six month rule with regard to reversing transactions, and the criminality of trading in insolvent circumstances. Creditors have the power now to go after business owners in their personal capacities, piercing corporate veils if they can be shown to have traded recklessly. Very much motivated, creditors no longer need to rely on criminal prosecutions from an overburdened prosecuting authority. I suspect that some really gatvol creditors will prosecute civilly beyond the economically viable!

More to the point though, as I assume my readers do not trade in insolvent circumstances (ever!) is the change to CGT rates for companies. In 2012 the effective rate on CGT for companies was hiked by an amazing 33%.

The method of choice until recently (and I have preached it far and wide) is to sell the business out of the company, and distribute the funds which are paid, from there. But with the new tax rates, this means getting those funds out has increased by a whopping 40% and some change.

The reason for the asset deal instead of the equity deal (sale of shares) is one of future security for the seller. He remains protected by his limited liability vehicle until it is safe to liquidate it. That may take some years, or at least until any possible claims have prescribed. It is the safe, but now expensive, way of doing things. Much cheaper from a CGT perspective is to go the sale of shares route. But this takes time and planning.

Some more upside: Making the necessary changes to the way things are done will add to the value of your business.


Mangaung and the value of your business

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It is no secret that I have a fascination with developing politics and world events. So much so, that I follow events, often on two different media at the same time.

I was listening to President Zuma’s opening address at Mangaung. There was some really good singing by the man, and then some introductions and welcomes. He was careful around the business of introducing his election opponent Kgalema Motlanthe. He did so by saying his name, pausing, then saying: “Deputy president”.

No matter the views we may hold on his performance or motivations in running for a second term, our president is a very clever political campaigner in both rising to power to now maintaining it.

But this isn’t about that speech, as much it is about perceptions. When Zuma introduced the deputy president, I looked down at my Twitter feed, and saw three independent commentaries on the introduction:

  1. @MandyWiener: #Mangaung Zuma begins by greeting everyone. Particularly loud clapping for Motlanthe. Original Tweet:
  2. @carienduplessis: The crowd goes wild. But as Zuma mentions Motlanthe they go lukewarm #ANC2012 #Mangaung. Original Tweet:
  3. @KarinLaB: #Mangaung awkward moment as Zuma acknowledges DP Motlanthe here…and absolute silence from delegation @Jacanews KL
    Original Tweet:

How is that possible? Three well trained and respected journalists. All three of them sitting in the same tent. All three of them tweeting within seconds of one another. All listening to the same person, All within the same realm of the audience. And yet they have such totally removed responses:

  1. “Loud clapping”.
  2. “Lukewarm”.
  3. “Absolute silence”.

If you follow the links to the original tweets, you will notice that they all three tweets went out within a minute of one another. You will also notice from the comments attached by their followers, that I was not the only one to notice the discrepancy.

I have witnessed similar differences in perception when taking more than one person to see a business seller. The first guy walks out full of objections, while the next guy cannot be more excited about the prospects of the business, going forward. To the first person, the business is dead and the asking price is a pipe dream, while for the second, within his own paradigm, sees great prospects.

So two things spring to mind when we consider approaches to negotiating the sale of your business, particularly in the light of almost guaranteed differing perceptions:

  1. Keep your valuation of your business close to your chest. As soon as you declare an asking price or a value, you have effectively clamped a lid on the upside. From there, the price can only go down. We counsel all our valuation clients to keep the results to themselves, using it as a benchmark to gauge the progress of negotiations, rather than a weapon to beat your opponent with. If he believes the business has little value, you will be unable to beat him into submission. If he sees a higher value than you, well you have a winner.
  2. Negotiate with more than one person concurrently. I stop short of saying “as many potential buyers as possible”, only because if you are using a good agent, this may become logistically very difficult, and needs to be managed carefully. But certainly spread the negotiation widely, so as to give you every advantage, and the luxury of walking away from difficult or obnoxious buyers. Having several buyers at one time improves the outcome significantly. In tense discussions of selling price, the concerned buyer will always ask if there are other interested buyers. Your answer will make a tremendous difference to your life, but more on that in another blog…. By doing this you will be well set to make the most of differing perceptions.

Your eventual deal will happen when your expectation is usurped by the perception of value which your buyer sees. In this instance he applies his own values within the spectre of what he intends to do with the business. He will never make an offer higher than what he believes the value of the business is to him going forward, so don’t worry about ripping him off. (And nor can you ever be accused of ripping him off). You can only be held to warranty on the figures you have achieved, and withholding information in your knowledge which will have a detrimental effect on the business going forward.

This is where preparation of the sale is so important. Proper preparation takes some time to get together, and should be tackled sooner rather than later. Our PrepareYourBusinessForSale program is a first class initiative to help you with this, ranging from a free offering over time, to paid for options for the more urgent.

Just a reminder: There are only a few days left in the year to take advantage of our end of year valuation special, although the Johnny Walker has now “walked”.

Oh, and in case you have been on another planet, President Zuma despatched Kgalema Motlanthe into the ANC wilderness, and the throbbing masses took that great disciple of Big Black Boss Enrichment Enterprises (BBBEE), Cyril Ramaphosa, to their hearts, giving him more votes than any other candidate for any other position. They will now try to convince us that a man with more than 200 directorships can act impartially in the interests of the country. Viva!