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

Archive for the ‘Sounding off’ Category

Source of funds

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Businesses rely on two main “organic” sources of funds to build their capital and grow:

  1. Investor funds
  2. accumulating profit

The first is “dollop” in nature. It arrives in a lump sum, or a series of lump sums, and allows the air to clear, plans to be realised, and sleep to be had.

The second is slow. It requires patience, hard work, and discipline. It also requires good management of resources, based on good decision making.

A third source of funds comes from loan capital and short term creditors. It requires negotiating skills, some ducking and diving, and often, an economy of truth!

There is a delicate balance between several factors which will determine when it is wise and indeed preferable to borrow funds, rather than raise further investment.

Unfortunately, most small business owners have no idea about the science, and resort to borrowing money only, and then usually when they have run out of customer sales and the resulting margins. The banks they apply to are generally able to identify the risks, and ask for the safest collateral. It usually does not exist any longer.

Sometimes the converse occurs, when the customer sales grow too quickly, and the required inventory is just too far away. The knee jerk reaction to this dilemma is usually one of “just give me the sales, and I’ll make a plan afterwards”. The liquidator files will attest to the folly of this thinking. Those that have survived have been lucky, and will often use the experience to become evangelists of good balance sheet management.

This is playing out on a much larger scale right now in South Africa, and some dramatic exchanges of ministerial seats have taken place as a result.

SAA is insolvent, but for the guarantees provided by the government, funded by the tax payers. Former Minister Nene, refused to allow the organisation to take on a third party as a go between on some strange deal. As a result he was taken out of the equation, and I suspect we may find that during his 97 hours and 30 minutes as Minister of Finance, Des van Rooyen signed off the deal.

We are left floundering wondering about whether or not the proposed nuclear arms deal was signed off in the same period, against the wishes of Mr Nene; he who harbours very conservative accounting principles. That quiet time of the year for pushing embarrassing stuff through the process may find us reading, in time to come, about these deals having happened when people were more taken by the smoke screen of #ZumaMustFall, on the eve of the annual morale regeneration in the country’s holiday spots.

When we get back, we will be facing an interesting 2016:

  1. South Africa is on the brink of having its credit rating dropped to junk status.
  2. Interest rates are likely to rise, and rise and rise.
  3. Inflation is likely to rise
  4. There will be much in the way of political posturing – some of it will be racially uncomfortable
  5. There will be municipal elections

The minister in charge of the municipalities is the same one (van Rooyen) who lasted only 97 hours and 30 minutes as minister of finance recently. He is also the one who took Merafong into bankruptcy. Merafong is a small town with about 200,000 inhabitants – the same constituency which in anger, burned down his house and chased him away. That is the guy who His Excellency Jacob Gedleyihlekisa Zuma has put in charge of making sure ALL the municipalities toe the line.


But let’s not denigrate our president, and his impressive list of honorary degrees:

  • Honorary Doctorate in Law from the University of Zambia for his obviously strong adherence to the concept
  • Honorary Doctorate of Literature from the University of Fort Hare for his demonstrably brilliant reading skills
  • Honorary Doctorate of Administration from the University of Zululand for his ability to administer punishment to those who stray
  • Honorary Doctorate of Philosophy from Medical University of Southern Africa because of great ability to outmanoeuvre his opponents
  • Honorary Doctorate in Humane Letters from Texas Southern University because how else does a university confer a doctorate on someone who is so woefully inadequately equipped to wear the “doctorate” badge, other than for political reasons?
  • Honorary Doctorate of leadership from Limkokwing University no doubt because of his bold leadership?
  • Honorary Doctorate in philosophy from the American University of Nigeria
  • Honorary Doctorate by the University of Abomey-Calavi, Cotonou, Republic of Benin

South Africa is precipitously close to being graded as junk, as to make no meaningful difference. In the last year we have had more business owners engaging with us on exit preparation than in any single year in the last six. The foreign entrants into the small business sector has never been so thin. So we are unlikely to see a great “thump” of falling graphs when the announcement eventually comes. The sentiment is probably already priced into the JSE, other than on the top 40.

More likely is a slightly steeper fall in the already downward trending curve.

Our saving grace on the inflation front is the falling oil price which is conveniently balancing out the weakening Rand. Make no mistake, though; the oil price cannot fall for much longer, interest rates are increasing, the Rand will fall further, and inflation will rise.

Your challenges in 2016, as small business operators, will be working with higher inflation and higher interest rates. Business valuations do interesting things in that contextual mix. For many, the next few years are going to be difficult if getting out of business was the plan. It promises to be an interesting year.

Enjoy the break if you’re getting one.

{So you think you have cash flow problems?}

Christmas, Zuma style

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…but I am rebelling against what determines the value of a commodity is the law of supply and demand. I am against this definition. The value of a commodity is the labour time taken in production of that commodity. That’s what determines the value of a commodity.

– His Excellency Jacob Gedleyihlekisa Zuma

 

Someone blinked at SAA. She must have blinked in a particularly alluring way.

Minister Nene is now just Hon Nene, MP.

That you probably know by now. Last week I suggested that something was going to happen at SAA over the holiday period. Soon after, Nene wrote to the board of SAA and told them that they would be in big trouble if they tried to implement a hair brained scheme involving putting a middle man between SAA and Airbus.

The repercussions of that letter (and it is unlikely that Nene did not know this when he signed the letter) were dire for him. He no longer has his blue light brigade, and the Chairman of the Jacob Zuma Trust has put her red light out for a while.

The silence is deafening. The immediate noise from ANC cadres was mixed. Clayson Monyela, the head of DIRCO tweeted “*Prays in tongues*” and “I need to log off and go to bed. Tweeting right now is probaly not a good idea. #JesusTakeTheWheel”. By the morning those tweets, and others were deleted from his time line. When I pointed this out on Twitter, he responded by blocking me from his time line for the foreseeable future. Probably forever.

The sycophant Mzwanele Manye, he who rabbits on about his leader’s brilliant white teeth, tweeted after the speech Zuma gave immediately after announcing Nene’s demise “wow wow wow, what an inspiring unscripted speech by His Excellency Prez Zuma addressing a business meeting in Jhb.”

There are many theories, conspiratorial and otherwise.

My take is that if the ANC does not “redeploy” Zuma before 2016, we will have him as president of our country for the next ten years.

The ANC will not redeploy Zuma because its members are gutless, and its voters are reliant on its patronage to just feed themselves.

If you want to make a difference, do whatever you can to make the population less reliant on handouts. Do something to uplift the poor.

Christmas in SA

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Dreaming of a rainbow Christmas, or a white Christmas or just a Christmas?

The silly season is almost upon us, and from next weeks the roads in Jozi will start to quieten down, while those in the usually quiet seaside hamlets of Cape Town and Durban will become mayhem.

The ruling party has a habit of using this time to release documents for comment, place the population on notice, and generally make use of the quiet time to turn up the temperature under the pot containing us frogs.

I wonder what it will be this year.

One thing that is coming to a head is the debacle surrounding SAA, an insolvent, state owned entity. It requires annual injections of tax cash to keep it able to compete with private enterprise on an unfair basis.

SAA is running with a dysfunctional skeleton board, from which the best uncompromised players have exited in recent years, and more recently. It is unable to put together a quorum to ratify essential negotiated agreements. It is also having difficulties in raising capital, simply because potential lenders don’t trust the government guarantees!

There are existing performance covenants in place with its lenders and suppliers, which it has breached already – it is insolvent to the extent that the most recent financials have not been signed off. Further to this, there exist clauses in the loan agreements, and in a particularly bothersome agreement with Airbus, that if there is any breach with any creditor, then the other creditors can call in their outstandings.

SAA is financially distressed. It cannot pay its debts that are due. It has been placed on terms by Airbus. It has also got an ex parte court order prohibiting the media from publishing a copy of the legal advice it has received from its legal advisors.

SAA should be in business rescue. Any of its creditors can apply for a court order to put it there.

Of course the minister of finance can help it out again by making funds available, but at the cost of something else.

There is some heavy horse trading happening in the background, and I think that something will give over the Christmas period this year. Something which most of us will not care about as we lol around on the white sands of Clifton and Durban.

Robot wars and the future of business

It is being referred to as the third revolution in warfare – the development of artificial intelligence – after gunpowder and nuclear weapons. Think back to the Terminator movies – You know the way that science fiction has a habit of becoming science fact? That concept is now being warned about, by people vastly more intelligent than you and me. (Apologies to HG Wells)

Scarily, it cannot be far off now that a terrorist organisation or freedom fighter (depending on your leaning) flies a bomb laden drone into an unsuspecting target, controlling the weapon with a mobile smartphone in a luxury apartment on the other side of the world, while being cheered on by bikini clad infidels. Such is the pace of change in the age in which we fight for our crust of bread, cup of water and watt of power.

What seems like just the other day, but what in fact was almost two years back, I suggested that the coming and existing technology storm would make a big difference to business values.

It is laid out so very well in The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee. Read it.

This also presents a great challenge to small business. That’s you and me. The big guys have the funds to enable them to retrench thousands of workers, and resort to smart machines for their labour. We apparently don’t.

For a long time the imperatives of BEE have seen the smaller guys training up competent and outwardly loyal workers to be skilled in their jobs, only to have those workers poached by industry, along with the hard earned BEE points.

As the camera of politics pans across to the other side of the stage, we see big business talking to organised labour, and apparently coming up with workable solutions, for now, for surviving the coming economic storm in an environment of government lead ineptitude.

Left unattended in the wings is disorganised labour and small business – the ugly, shy and nerdy, with nobody to talk to at this dance for existence and survival.

Which brings me to an interesting question… What if the great unemployed were more interested in the dignity of having some sort of employment? What if the weight of the unemployed reached such a mass as to make things change, that this vast body realised that the unions do nothing for them, and do not even have their interests at heart? Why would they? The unemployed don’t finance the lifestyle of the average trade union leader! What if the great unemployed mass was to suddenly understand that the unions HAVE to ensure that they remain unemployed, so as to not dilute the bargaining power of the employed?

And (oh the horror of it all) what if the mass of unemployed were to suddenly understand that the labour laws are there to keep them unemployed and unemployable, in the interests of the luxury goods market, otherwise known as the communist ideals inspired; organised labour?

So, what if disorganised labour and unruly small business business was to have its own indaba…

{ed – wake up. You’re having that dream again}

Anyway, as I was saying…

If you want your business to grow in value, you can find ways of embracing ever more affordable smart technology. If you don’t, your competitor will. And before you reach for that tired old argument about 3d printing not having your material available for what you do in your industry, take a look at this runaway locomotive; 3d printing in glass:

 

Look, I’m no brain surgeon, rocket scientist or even concrete mixer, but I can see that if we have the ability, only a few years into this technology, to print with glass, then there is a lot more to come, and whatever your medium is, whatever your application, whatever your product – there is an opportunity here for your business.

Unless you want to hang around and wait for your competitor to make it a threat.

You do know that the competitor is still at high school, don’t you? You do know that he is on the internet via his smart phone, plotting your demise, right now?

Robot wars are coming.

Lucky locomotive

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The founding spirit of small business in South Africa is based on “‘n boer maak ‘n plan“.

It seems this is becoming pervasive in our government owned entities following R600M worth of new railway locomotives having been delivered. That is only part of a R3.5B tender won under interesting circumstances by a Spanish company in the face of South African manufacturers suggesting around half the price. Nothing strange in that, as the water around these frogs slowly warms up.

What is interesting is that the locos are almost 30cm too tall for our railway infrastructure. Think about getting under our bridges and through existing tunnels, sure; but less obvious is the ability to safely, and without electrocuting drivers, staff and passengers, to travel long distances beneath sagging overhead electricity supply cables.

In the true spirit of South African tenderpreneurship the mistake is being transferred to being that of the engineers in a bygone (apartheid) era who

  • built the bridges too low, or
  • built the railway too high, or
  • used railway lines which are too thick.

Not to be outdone by a “challenge” masquerading variously as incompetence, stupidity or corruption prompted opportunism; and to make broad based transformation a reality, the locos are all being adapted for South African conditions:

  • They are being converted to soft top versions
  • Suspension is being lowered with modified sub frames
  • Low profile wheels will be fitted, and
  • For the lowest, most incompetently designed apartheid bridges, trains will be stopped and the tyres deflated.

This last option is expected to create thousands of new jobs in the form of tyre deflators, tyre inflators on the exit of the bridge, and newly registered train guards.

And finally, I kid you not because this sort of satire cannot be made up easily…. The Spanish manufacturer of this locomotive has called it the AFRO4000 series.

The South African conversion will be known as the ChiSKOP3.5GTi.

 

Secret profits

There are few elements of South African labour law which work for business owners. The protection afforded in respect of secret profits being made, is one which does.

Imagine for a minute the devastation to your business if one of your fellow directors were to take the marketing information you had paid so much for in money, time, blood, sweat and tears; and started a similar enterprise in his own time, perhaps on the internet.

Now that would be devastating. As most of us know, a director has a fiduciary duty to his (or her) company to not do such things. However, this fiduciary duty of care extends beyond the board room to agents who act for the business, such as attorneys, accountants and brokers.

But even further beyond the obvious, a fiduciary is anyone who is able to act in a position of trust to his employer or any other person.

  • So if a salesman who has been authorised to give a particularly large discount in order to accelerate cash flow at month end does a secret kickback deal with the customer’s representative, so that somehow he gets a kick back from the customer who is allowed a bigger discount than he would otherwise have insisted upon, then that salesman has made a secret profit.
  • On the other side of the product movement, buyers may be induced to authorise supplies at prices higher than that which the supplies could otherwise be purchased, care of a secret arrangement.

There cannot be any argument in mitigation that the principal had been willing to forego this money anyway, as the contracts were entered into within budget guidelines. The fiduciary has a duty of care to work for the best benefit of the employer; to work towards maximising the profits.

There are elements of this in a relationship of tenders being awarded to suppliers at inflated prices, over the head of less avaricious suppliers, while the heads of departments are able to live beyond their means.

The secret profits made by somebody in this manner can be claimed in their entirety by the legal or natural person to whom the fiduciary duty was owed. It gets even better for the principal, in that it is not necessary for him to have suffered any loss by the fiduciary’s actions. The naughty person is able to claim from the principal, the costs of acquiring the profits, but will have to bear a heavy burden of proving the costs involved.

So if your vindictive juices have been stirred in any way, perhaps it’s time to speak to your attorney about getting some people to pay back the money?

Allergy to BEE stings?

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Keith Levenstein is about to tell us all about where the new BBBEE situation stands in his brief seminars, following the imposition of the new codes next week. At the time of writing this, Rob Davies was intent on imposing the new codes from 1 May. I have a slightly jaundiced view of BEE as a whole, notwithstanding the fact that something (meaningful) needs to be done to sort out the inequities of the past.

I guess I am just a bit tired of poor and indifferent service from people who have jobs because of their skin colour, and not because of their abilities. Indifference arises from the employees knowing that their numbers add to the employer’s score card first, and second; the employees knowledge that employers find it is a leap too far to dismiss the useless, care of the CCMA.

From front line call centre staff to sportsmen in the best teams. They know it and we know it. “Quota” is a four letter word. No really, it is.

There are unintended consequences to this social engineering. None of this is new, of course. When I left school, I was told I would never get a job unless I first got a degree because jobs were all reserved for Afikaners. Life was a lot worse for our black fellow citizens at the time.

Soon after leaving university, I decided that I was unemployable, anyway. Thank goodness for that self realisation as I struggled to create my own space without the luxury of a monthly pay cheque.

That is the thing about the future of South Africa. When the patronising dust has settled, the unintended consequences will simply perpetuate the inequalities of the past and present.

However, it is worth noting that in South Africa in 2015 there are many jobs which are considered very valuable, but falling into a few broad spectra:

  • Most public sector jobs seem to be regarded as “reward – without – work” jobs. But apart from those:
    • Consultants are becoming the life blood of the nation as cadre deployment relies on them to get the job done.
  • BEE has spawned a whole extra layer between those who are able, and those who can connect. Well if nothing else, it is a way of distributing wealth to the connected. We can only hope that some of it filters down to their respective communities. Personally, I have run out of puff, holding that breath.
  • A whole raft of very capable white people who are unable to find employment the various sectors which now place small print at the end of their job adverts: “Preference will be given to PDIs”. Those people become struggling business owners, sometimes employing those with less initiative, other than “always being able to find a job because I am black”.

That last group is going to perpetuate a problem. White people are unable to find jobs commensurate with their abilities. So they take their skills to the small business sector, where they scrape and starve for years, building up one man operations, perhaps with a few staff members in support. The thing with being made to struggle, is that if the struggle does not kill, it strengthens.

When the dust has finally settled, and the strong are left standing, the employers of the future will be the strong who had to fight for their crusts. The workers will be those who rely only on their melanin to get their daily bread. That is a great sadness for a country with so much talent being wasted while it receives handouts.

These “businesses” or “jobs” if you prefer are, in a normal society, difficult to sell. However, South Africa has been an abnormal society for as long as it has had any sort of society in the last 300 years. The current hogs at the trough have no interest in changing that. Much like the pigs before them, and all the previous artiodactylous rulers before them.

The thing with abnormal societies is that abnormal practices flourish. So when a self employed businessman arrives at the end of his career in this abnormal society, there is a ready stream of one man operators willing and desperate to buy themselves into that job. It is not the way it should be. But is the way it is. And it is a meaningful way for small business owners to exit with some accumulated value.

The thing is, while banks may not be interested in financing these acquisitions, the youngsters in question often have access to family funds by way of cash or security, to help put them into jobs which will one day be the employers of the weak sons and daughters of today’s ruling elite.

It’s very depressing for the country as a whole, but it offers a way out for those who need to move on to a new phase in their respective careers.

 


 


 


 

Isuzu, E20, EToll and Evaluation

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This eToll saga is so tired now, and is coming to a head. It’s a bit like two hours of foreplay, and then failing to fire. Or so I’ve heard. Here is the question: How will the etolls affect the value of your business, and how will you as chief executive manage the process? Your choices:

  1. Register with an etag, pay in advance by way of trusting SANRAL with a debit order instruction of your account, and enjoy all the discounts
  2. Register, but wait for the invoices (or as it turns out; the final demands without an invoice – hello SARS?)
  3. Don’t register, wait for the invoices, question each one, obfuscate the whole process and eventually wait for something to snap – you or SANRAL.

Oh wait… Nobody seems to know how many have done what. Final demands were sent out within 20 days or less. Very emotive and scary words have been used. If it wasn’t so important it would be boring.

My car recently broke down outside Warden. While discussing the options for towing with the mechanic, I was struck by the repetitive nature of his various quotes; each punctuated with “plus the tolls”. Now that is obviously something that has become 2nd nature to him, being on the N3, in much the same way as “plus VAT” became a refrain about twenty years ago when we changed from general sales tax to VAT.

At the same time Bruce Whitfield seemed to think he’d get a reaction from industry when asking CEOs of large corporations if they intended to register for eTolls on the eve of their implementation. The result was was a “yes” from all those I heard. They cited their corporate responsibility to their shareholders in maximising profits by being able to enjoy the discounts on offer for easy compliance.

We should have no doubt that the cost will be passed down the line to the consumer, as is every other tax of this sort. “The cost is so much, plus the tolls”. I have no doubt that consumers will all quietly accept the added cent or two on sugar, milk, bread, caviar etc.

We small business people are a little different. Many of us stick to a principle, and we can afford to because most of us are the shareholders and the directors of our own companies. So back to the original question: How much will the imposition of eTolls affect your business value? As I see it (and this is a thinking in progress here), there are two considerations:

  1. The day to day overhead of your business which translates into an annual profit, which has a direct bearing on the value.
  2. More of a macro element; how sellable is a business with a large contingent liability hanging over it, and how will business buyers use this to dodge the asking price?

Let’s deal with the latter first. Recently I was asked to sell a business by a long standing friend and client who happens to run a reasonably sized fleet of vehicles, which have no option but to use the N1, N3, R21 system. He has been on the radio several times about the problems he has with etolls, and every time he sees me he bends my ear some more. He WILL NOT pay the tolls until he receives a bill in the proper manner, and is then summonsed, and the rest of the disaster. He just will not. That is in his personal capacity. But he is selling his business, and hopes to close a deal by Easter. So the question is, how does he go about balancing his moral imperatives with his selling requirements?

His solution is to stick to his guns with his personal vehicle which is registered outside the company, but to reluctantly register and tag each of the company vehicles. That way he will have no come backs in the sale, and he feels he is personally not dodging his principles.

On the first point: Value of a business is based mostly on the profit it produces. If you are going to allow the business to make less profit by playing the OUTA game, then you should accept that the value of your business for now, will be less than it would otherwise have been.

We should all expect that for the immediate future, until a solution is negotiated to this impasse, and that for the canny buyer it will be a negotiating blunt instrument to beat the seller over the head with.

For the record

I have not registered with SANRAL, and I make contributions to the OUTA coffers to help fight this thing. But then I have no intention of selling my business.


Pulling the PIS out of auditors

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When the new companies act was signed into law, effective May 2011, there was great relief from many small business owners, as it greatly reduced the requirement for audits, on the one hand, and on the other hand, close corporation owners were able to easily convert to what traditionally have been more respectable business vehicles, without having to incur large annual auditing costs. They could now run their businesses within the limited liability vehicle of a (Pty) Ltd, but not get bogged down by annual audit requirements.

Let’s rewind a bit:

In the “olden days” all companies were required to have an audit conducted annually. Close corporations (CCs) could submit themselves to an audit, but it was not required. so if a businessman wanted to be left to his own devices, he opted for the CC route. The problem was that only natural persons could be members, until a few years ago when trusts could become members through nominees.

So when we sold a business, companies were pretty much assured of an easier route to market, and a higher price, unless all sorts of warranties were agreed to by the seller members. That is all very much understandable – why would anybody toss more money at a dark hole?

Then along comes the “new companies act” (Companies Act No 71 of 2008). This decrees that there shall be no more CCs registered; only companies. To alleviate the compliance issues, it further directs that only companies with a public interest score (PIS) of 350 or more, need submit themselves to an audit. Below PIS350, the other threshold is 100, below which the old close corporation standard holds. From 100 to 349, an audit is not necessarily required, and unlikely, but the person conducting the review has to have certain qualifications. With obvious relief, many small company shareholders and directors gave the archers’ salute to their auditors, and made friends with a friendly accounting officer to review and sign off their much simpler statutory annual reports.

 

Just as an aside; here is how you calculate your public interest score:
    • The average number of employees in the company for the last financial year (or part thereof). So an answer of 7.8 would give a score of 8. Directors are employees.
    • One point for every R1M of third party debt at the end of the financial year.
    • One point for every R1M of sales turnover during the last financial year.
    • One point for every natural person who at the end of the financial year has a direct or indirect beneficial interest in any of the company’s issued securities (shares). So if shares are owned by a trust, then add up all the beneficiaries for the score.
So you see, it is PIS easy to calculate, and it is only significant businesses who are going to get to 100 or more.

 

This creates an issue for buyers of businesses, because they have little to hold onto in reaching a value. Somehow “trust me, I’m a seller” has less value than a positive bank balance.

So we have started suggesting to companies that intend to sell their businesses, or to shareholders that intend to sell their shares that they maintain their audit record and pay the extra cost each year, in order to make for more successful sales in the future. But things are likely to go a bit further than this, I think:

A lot has been made of business rescue – chapter 6 of the new companies act. It is in these processes that certain abuses are unearthed, which would not have been missed in an audit. I think that creditors in general are likely to get a lot more sticky about certain misdemeanours in the not too distant future, having burned their fingers through not fully understanding the business rescue process.

In particular I wonder

  • how far away we are from banks only extending over draft facilities to companies who are audited annually
  • how many car loans are going to be extend to companies which have not been audited
  • how many company credit cards will be handed out, similarly
  • for how long suppliers are going to allow credit facilities to be extended to companies which have not been audited.

Under the old act there were criminal sanctions in place for directors who flouted the rules. With the advent of the new act, those criminal liabilities which could never be policed and prosecuted effectively, have been replaced with allowing the corporate veil to be pierced by the creditors of a company. So no matter how deep the level of trusts, the housing of assets and the flimsiness of your trading company, an upset creditor with means, can make life very unpleasant for you if you have been silly.

I think though, that they are going to be taking a different view – lend or extend credit only to those companies which are audited – just to add another layer of accountability when the business is put into business rescue.


Middle management cripples

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Last week I sat with a client helping him to assess the value of his business. His is a very smart retail operation. Successful retail stores go into the valuation process a few yards ahead of their similarly profitable manufacturing and wholesaler cousins because their risk associated with customers is hugely spread. In a popular shopping centre they are pretty much guaranteed a wide variety of clientele. All the better if the retailer is also part of a successful franchise group.

Retail customers are less worried about the socially engineered aspects of our society like skin colour of the owners and management, and more worried about the reality of quality, service and price. Mess with any of those definitives and the business has a problem which is soon seen in the income statement, and ultimately the core business value.

The downside of the retail trade is in the big suppliers; banks, landlords and franchisor masters. The typical new franchisee sees herself as stepping out into the world of entrepreneurship. Nothing can be further from the truth. Frankly, franchisors do not see their new franchisees as entrepreneurs. At best, the owner franchisee can hope to become a variation of the middle management level in a larger organisation similar to that from which she recently exited. The abuse is no less severe, except that there is no simple resignation, no CCMA dispute procedure and no early retirement. Once you’re in, it’s going to be for a while.

Abuse? Yip. “These are the rules, and they will be policed by mystery, faceless shoppers and the more overt local representatives”. Penalties are related in one way or another to the bottom line. And therefore the value of the business.

“The store will be revamped every three to five years, in line with latest marketing concept, and this revamp is for your account.”

The landlord presents quite another problem: He has a shopping centre to run, and expects to turn a profit. He knows that he has the franchisee locked in. So while there was a status quo which sold to the new franchisee and tenant five years ago, it becomes something of a movable feast. When it becomes obvious that charging for parking is a great way of gearing one’s investment in the property; well why the hell not? The South African consumer has proven himself extremely accepting of all sorts of salami takings from his disposable income. so charge for that parking!

With investment made in parking bays, ticket billing and the rest, more money can be made by getting them to work for longer. An empty parking bay at midnight is fairly useless, but a full one at 8pm is great. So let’s force shops to remain open to 9pm. The landlord makes more money from a few more parked cars for a few more hours, at very little extra cost. But not many people want their hair done at dinner time, nor do people generally want to have a dinner with their family at a coffee shop. But these guys have to stay open, pay staff, run up unproductive electricity bills on unwelcomed air conditioners, display lighting, music, televisions and so on.

For the small franchise owner, well she probably got into this mess by putting the family home on the line on day 1. In the five years since, that loan has been serviced and reduced, the interest having been a major expense. With that light of value gain and much reduced loan repayment fast growing at the end of the tunnel, she gets an unwelcome wakeup call:

While all other business types have been careful to sit on their profits over the last five years, cautious in the continued uncertainty of what the economy holds for us, the landlord, the franchisor and the bank need to generate cash.

The franchisor exercises his insistence on having the store refurbished. This will almost certainly be an expensive exercise. Probably in the region of R500,000. That is serious dosh for the franchisee. She knows she can access it with the renewed security of her home, but heck, what does this franchisor ever do for her anyway? The opportunities in defranchising suddenly beckon with a glint in the eye and a crooked smile.

So off to the landlord she gaily trips. The lease is up for renewal anyway, and the franchisor had nothing to do with negotiating the lease apart from finding the space.

“Absolutely no way”, says the landlord. “We want a franchise coffee shop in that space. If you defranchise, we will not renew your lease”.

Without a lease, any retail operation has no business worth anything at all .

So options and the future suddenly look bleak. If she parts company with the franchisor, the landlord cuts her off at the knees, and she loses the lot. To raise the required funds for the refurbishment means tying up her house for another five years. The franchisor is secure, the landlord is secure. The bank will be secure. She will work. Perhaps she can delay bringing in that new manager who would have allowed her some spare time…

Wait… What if she sells? Surely this place is worth something by now. Then she can buy a real business with the proceeds of the sale. But here too, are issues.

The broker who sells the business is going to be charging a commission for the job. Of course it’s possible to sell without an agent, although that often results in a below par price. Further to that, the franchise agreement revolves around two other ambush items: The franchisor has to approve the new sucker, and will charge what is called “key money” to him.

Then there is the continued question of that refurbishment. This still has to happen. So here’s the thing: Any buyer with any advice will have an idea of what the business is worth, and this value includes all costs of entry. So that R500,000 is in the value, and so is the key money. The buyer will look for a return on his entire investment.

While independent businesses are able to keep their powder dry, and decide when they intend to pay for new signs and livery, she has to pay for the flipping refurbishment, no matter which way she slices this cake.

Talk about being trapped in a job!

The reliance on suppliers this franchisee has, as a retail operation generally, and a franchise operation in particular is a crippling one. And this ladies and gentlemen, is a fairly typical story in the retail franchise game. When you line up to buy one, the best and greatest in the group will be wheeled out for you to oggle over – the top ten percent – because that is who you want to be compared against.