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

Posts Tagged ‘BBBEE’

Bus number

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What is your bus number?

“But Honey, if I get hit by a bus, this life insurance policy will make sure that you and the kids are looked after”. We have all asked the question, or contemplated the ramifications of someone being hit by the proverbial bus.

Lourens Coetzer, a very bright computer genius, turned this around in a discussion we were having recently, and coined the measure “bus number”: The number of people in an organisation which, them all being hit by a bus, it would take to destroy a business.

A stand alone, one man self employed operation obviously has a bus number of 1. Any employee, no matter what he does, and how he earns his crust, has a bus number of 1. Standard Bank has a bus number of hundreds, maybe even thousands, we would think. But what if all the tech wizards were wiped out in a bomb blast at the annual prize giving? That bus number might only be 20.

{Ed: that seems a bit extreme. At least some of the techs would be in the hydrangeas smoking weed.}

More than considering how many people any particular enterprise is able to lose to the bus, it appears that the crucial bus number needs to be considered at the weakest point in the enterprise.

  • The business is entirely dependent on its sales staff to keep the machinery running, with a short lead time, and there is a single rainmaker making up that sales team – the bus number is very low.
  • The sales department is diversified and competitive – the bus number is high.
  • The business is a professional practice – the bus number is determined by the number of competent professionals.
  • A single CAD designer distributing work to a group of machine operators…
  • Software developers in a disorganised or poorly documented project…
  • That single black shareholder/director upon whom the enterprise depends for its BEE score, now that the government appears to be abandoning its “once empowered, always empowered principle.

That quick list demonstrates how tenuous is the grip SMMEs have on their futures, and it is worrying in the present, but even more so in the future, where business values depend on the sustainability of the enterprise.

So the challenge is to raise your bus number, to account for the systems and redundancies built into your business. It is unlikely that any reasonably sized, privately owned business would have a bus number above 3.

  • The owner or CEO, the financial manager and the factory manager
  • The owner or CEO, the sales director and the factory manager
  • Just, the top three sales people

As we develop Lourens’ concept label, all sorts of derivatives spring to mind:

  • Bus number as a proportion of all employees
  • Bus number per turnover
  • Bus number as a proportion of training budget
  • Bus number critical point of failure!
  • Bus number replacement lead time

And as we reconsider the example of the empowerment score card bus number, it appears that ministerial interference is once again threatening the future values of our businesses, with random brain emissions. Thank you, Minister Zwane.

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.

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.

 


 


 


 

BEE and value

More and more, as we conduct valuations of businesses, we see this line item in the expenses: “Donations”. It has taken on a new meaning in our heavily BBBEE influenced way of doing business; it has become a way of easily buying some points towards becoming socially, politically and economically acceptable.

If a business services or sells to a large corporation, or one which in turn supplies a large corporation, this becomes more and more important. You’ll know if you fit into that group by whether or not someone up the food chain has called to ask about your BBBEE scorecard.

We have effectively changed an entrance fee to heaven, to something which is a charity event with a reward on this planet, now. The reward comes by way of being allowed to do business with “the club”.

So how do we treat this line item in a valuation of a business? In years gone by, a buyer would look at it as a possible addition to his own profitability, and calculate value accordingly. After all, it was almost certain that he was not going to sponsor the same mini league soccer side, or the same church as the seller. It was never anything to do with the furtherance of the business.

Now however, that line item has become more of a cost of doing business, dependant of course on whom one wishes to do business with. It is not a charity item which should be automatically taken as an extra profit item by a buyer. Your eventual buyer is looking for the best deal for himself, and he will test all these items very carefully. He will also want to keep your scorecard in place, and so will not tinker with the way you have made it work for you.

Cynically, the benefits the recipients of BEE hand outs are receiving, are the proceeds of a cruel investment their ancestors contributed to by being subjected to 300 years of brutal treatment. BEE in its various forms has had grotesque benefits for a few, and somewhat more humble benefits for some more. In many respects it has had very little, if any, benefit to the majority, and as suggested by the Institute of Race Relations, may have even damaged the prospects of a better life for us all.

  • One thing which is certain; if it works for you to get more business in, then it is a cost of doing business and adds to the value of your business.
  • Another thing which is probable; if you make donations because you are good guy, and not because you have to, then you will benefit when it comes time to sell your business because a buyer will be prepared to add that back to your bottom line, and therefore to the selling price in some way.

Make it work for you. Make sure you know why.

You will have to prove your numbers, and you cannot expect that a buyer will do you any favours in this respect. Getting things in order now, and getting into the habit of keeping them in order will add a few years’ resources to your retirement fund, at a relatively small investment. Understanding why you contribute those “donations” is part of the process.


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: http://twitter.com/MandyWiener/status/280266396426985474
  2. @carienduplessis: The crowd goes wild. But as Zuma mentions Motlanthe they go lukewarm #ANC2012 #Mangaung. Original Tweet: http://twitter.com/carienduplessis/status/280266416349908992
  3. @KarinLaB: #Mangaung awkward moment as Zuma acknowledges DP Motlanthe here…and absolute silence from delegation @Jacanews KL
    Original Tweet: http://twitter.com/KarinLaB/status/280266564811513857

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!