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

Posts Tagged ‘capital gains tax’

Recouping values

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About ten years ago a bloke took me to tea. He wanted me to sell his business. He intended to cash in and get out. Get out of the country, that is. He had very definite plans, and had everything booked for six months hence. So this wasn’t going to be a long drawn out affair.

As we sat down, he took out a little scrap of paper – one of those sticky Postit things. On it, he had the most basic information from his balance sheet and income statement. It turned out that he did not want to alarm his book keeper, so he avoided making a copy of the audited financials with her around. Instead he just made some notes and left the document back in her tray, or something like that.

Anyway… Over tea he proceeded to tell me that he would be happy to just get his net asset value. As I remember it, that was about R3M. I looked at his key indicators, and agreed to prepare a mandate based on that price. In the meantime, would he please get me copies of the last few years’ audited financials, and his management accounts.

I went away and prepared the mandate. He waited for his book keeper to go home, then quickly made copies for me to take when he signed the mandate. He is a good friend of mine in another country now, and we laugh about the turn of events. We also do things a little differently today, but that night I went and sat with his financials. There was no way the business would get only its NAV, or if we aimed for that, it would be a very quick sale. It had issues about it, which made it far more valuable. And so I went for it. He was a bit worried at first because he did not want any delays, but after a week or so he saw what I was up to, and why.

At one time during the process he went overseas for a week, while I continued to work on the various buyers we had interested. There were many of them. when he came back, I had prepared term sheets for three offers to be negotiated. We spent the next few weeks negotiating with each one in turn, trying not to act like used car salesmen (sorry Jacques!). I think we made quite a good team putting the deal to bed. We finally sold the business for almost twice the NAV. There were foreign exchange issues at the time, and suddenly he had more money available than what he was allowed to take out of the country. What a nice problem to have.

How would my friend have planned his life, if he had an accurate view of what the business was worth, earlier?

It works the other way as well, unfortunately. People believe that their businesses are worth more than what they are. Then when the retirement bus pulls up, they are left floundering and unable to reconcile their lot to reality. It is very sad. A few tweaks a few years earlier, with an accurate valuation and critique, may have made all the difference.

Then there’s the guy who tells me that his accountant says the business “owes him R3M”. The accountant knows full well that his client will never get the money, but this is the easiest way of getting him out of his office without committing to a value. So the poor guy wastes months of energy trying to sell something which will never sell at that price. We see that quite often. We are referred to many accountants’ clients to give them accurate market related valuations. No nonsense stuff. Sometimes it is very difficult. But there is really no point in not knowing where you are, when you are trying to go somewhere in particular.

Yesterday I sat with a seller and a buyer. The buyer is also aiming to sell his business, but has started the process of looking for a replacement business, He likes what he sees. So the seller tells her story, and then comes to the bit which made me sink lower into my seat. “And then Mark did a valuation, and told me I would never get that for my business. I needed someone to be honest with me, because now I’m making real progress”.

“Oh,” says the buyer. “He’s just started doing a valuation on my business”. They laugh uneasily. I try to look professional, squirming only a little bit.

“Good luck to you”, she says with a twinkle in her eye.

He’ll be all right. He has a nice business, and realistic expectations.

 

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.