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

Posts Tagged ‘Sell my business’

Awakening

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This is the first in a long series of posts designed to help business owners to prepare their businesses for sale. It is based on a more intense and personalised service we provide to our clients on a paid basis.

You’ll find with me that I am fairly straight forward in what I have to say; quite a shoot from the hip sort of guy, and if that offends you, I apologise for the offence, but not the message. In the interestS of getting my message across, I’m afraid that’s the way it’s going to be.

You’ll find as well, that there is very little censorship in here, apart from what you want to censor yourself, that is. You’ll do that by simply moving on; and that’s the reality of it. Selling businesses is not for sissies, and as in real life, you’ll have to tough out some situations, and walk away from others. All that I have to say is from the heart, and learned over almost 25 years of exposure to business sales. Much of it is unpleasant, but true.

Hopefully by the end of this series, I’ll have imparted a lot of that learning to you. So stick it out, print out the blogs, bookmark them, link them to whatever aggregation system you use, send them to your mates, reply to them, and engage with me on mark@suitegum.co.za.

There are ten easily definable steps to selling any business:
• The awakening
• Appreciating value
• Demonstrating value
• Compliance
• Documentation
• Presentation
• Negotiations
• Agreements
• Due diligence
• Resolution

As a business person, at some stage in your business life you will sell a business, one way or another, even if it means giving the business to your kids one day, or selling the assets for best fire sale value in a liquidation or closing down sale.

The frightening reality is that all too often businesses need to be sold for reasons beyond those contemplated in the business plan, or considered by the owner; reasons such as owner illness and death, for starters. Beyond that though, sometimes a business needs to be sold because of someone else’s illness. I have been asked to sell a business because the owner’s wife had progressed in her illness to a point where he felt that he wanted to take over the nursing himself.

The awakening I want you to experience is twofold:

An awakening needs to occur with business people in general, who assume that they are immune to problems that afflict everyone else. Illness, heartache, crime, economic changes, infrastructural changes, family changes, new technologies, new opportunities… and the list could go on, but I’m sure you’re getting the gist of it.

The second awakening revolves around the attraction of a product. The facts are simple: A well prepared business sells easier, quicker, and for a better price than a business which is ill prepared. As a business owner you are aware that your product or service competes with other similar offerings on the market. Why then is it so difficult to understand that when you sell your business, it becomes a product itself? It competes for a limited amount of investment money, against all other businesses which are being sold at the same time. So just as you present your products or services based on price, quality and service, you will present your business for sale to the benefit of the transaction, and to the detriment of other businesses competing for the same investment Buck.

So to recap: Remember two things; firstly you will want to sell your business one day, and secondly, when you do, it will compete with other businesses being sold at the time. I will come back to both of these elements several times as this series unfolds. The other steps in the list will be addressed as we progress.

Key value indicators

The value of a business is, to a large extent dependent on its numbers – sales, gross profit, profit, and derivatives of those elements business owners will be aware of.

Most owners know that the real value is related by way of some formulas using those numbers in conjunction with multipliers, discounts and limits. But what are the latter all about? How are they decided?

In the spirit of all things graphic, as one does in the 21st century – apparently:

This short video illustrates very simply why strong businesses and weak businesses have different multipliers.

 
In the near future I will get more specific as to what exactly makes those differences, and the mechanisms behind them.

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.

 


 


 


 

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.

 

 

Shedding some load

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I was asked to attend a meeting of creditors with respect to the Ellerines business rescue in early August. There were hundreds of very grim faced people there, although I don’t know who was an employee and who was a general creditor, and so on. Judging by some of the questions from the floor, there are some small business people creditors, for whom this is their major, and possibly only customer.

The meeting highlighted for me the exposure small businesses tend to have in not spreading their wings to a much wider base of customers, as difficult as it is to do so. Prospective buyers of businesses are likely to be limited to industry investors in such circumstances; competitors with similar problems, looking to grow and spread their own risk through acquisition.

Unfortunately, in such circumstances, selling prices are always low. The alternative to selling is to cling on for as long as possible, and hope you don’t lose that one really big customer.

Anyway, back to Ellerines, which is reportedly shedding 500 branches this month, in order to make itself a viable entity. That is 500 fewer branches through which suppliers can expect their goods to reach the consumer.

Just another reason for you to look carefully at how many different customers you have, and which of them may be vulnerable to either becoming insolvent or moving to another supplier of whatever it is you make or supply.

 

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.

Corporate SMEs

One of the biggest hindrances in selling a business is the ill preparation of documents, often coupled with exorbitant asking prices. This is most often the case at the lower end of the market, or in instances where there simply is no data available because the business has not been around long enough to generate any.

This latter instance is most often the case where someone has started a venture and seen within months that it is not going to work. Instead of liquidating, he tries to pass the bad deal on to someone else to recover some of his investment. He also hopes I suppose, to find a sucker to take over the three year lease which he has signed, and given up a personal surety-ship for! But that’s another story.

I was recently approached to give a valuation opinion on a business being targeted by an old client of mine. I suppose it is unfair to say that it was being actively targeted as such, because the target’s owner had really solicited the suggested sale with my client. After the usual non disclosure niceties were complied with from our side, we were sent a spreadsheet showing last year’s performance, and what I thought looked like an optimistic projection for the next five years.

There is nothing different here from lots of attempted sales we see in the example I mentioned in the first paragraph: Simple spreadsheet, optimistic reassurances for the future, and an asking price based on the future projections. The difference I suppose, apart from the asking price being in the tens of millions, was that the seller happens to be a listed company on the JSE!

At first there were no audited financials available. Reading through the email thread when the financials were eventually sent to me, it is clear that there was a concerted effort made by my client to get the financials out of the seller, which was complied with only on the eve of the deadline for the tender of offers from interested parties.

What did the financials show?

  • The business being sold is technically insolvent.
  • The business has only one customer –  the seller!
  • Key expenses have been left out of the spreadsheet.
  • The sales turnover has been slipping year after year.
  • And a whole lot of other nonsense.

In the SME market, all buyers would head for the hills on this one. In the corporate market we expect better behaviour. Do we get it? You decide.


The accused may be key.

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I don’t know about anybody else, but I am pretty much depressed and saddened by the Oscar Pistorius bail application. Can you imagine how we are going to grind to a halt when the trial proper finally breaks loose? Presumably by then an investigating officer will have had a chance to do some homework, with results that will stand up to cross examination.

As one wag put it on Wednesday, Hilton Botha’s poor performance under cross examination by Oscar’s defence counsel was an “Oscar winning performance”. So much so that Pistorius stopped crying for the first time in days. At least this joke is not at the expense of the runner. I won’t lower the tone with the, at least a dozen of those one liners that started doing the rounds within hours of the killing – I’m sure you’ve seen some of them.

But jokes aside – what about the effect on Pistorius’ “business”?

In another exercise I am involved with in respect to Suitegum Splinter, key man insurance is essential to most businesses with a shallow skill base. You know, if one of the key people in your organisation dies or is incapacitated in some way, the insurer pays an agreed amount of money to the business to use in the replacement of the key person. If not that route, the money is paid to the other shareholders so that they can buy the shares from the surviving spouse.

So that ties up with the current mess Oscar finds himself in. One could argue that he is part of a business that includes himself as the star performer, his agent, his public relation  people, his coaches, nutritionists, sponsors, attorneys, travel agent, liaison people, and possibly others.

Like yours, his is a business entity to a greater or lesser extent. And like yours, it has a key person, a specialist – Oscar. Someone without whom the business is all washed up. What would happen to your business in the event that your key person is accused of a serious crime tonight, and arrested tomorrow morning?

Let’s remember that this nightmare broke for Oscar and Reeva only one week ago. In that time Reeva has been cremated and the memorial service has come and gone. That is the most serious consequence of whatever happened that night. But for her boyfriend, DSTV tore down its Oscar advertising on giant billboards around the country on the same day he was arrested! They cancelled the Oscar month theme at the same time. That was the first lot of income that went down the tubes.

Nike at first said that they would stand behind him, but by the time City Press was finished with him a few days later, they and Oakley had given him up. Clarins followed on Wednesday.

People have jumped to conclusions at the evidence in support of a bail application. At the end of the first day, “experts” were shown on television, and sound bytes abounded of people convinced that he is guilty. This on evidence led by his own affidavit as to his version of events. It all seemed so unlikely. Just a jump to the left…

What chance does Oscar (Pty) Ltd have at this stage?

Soon into the second day of the bail application newspapers around the world were announcing him guilty. Evidence of  the existence of two bottles of testosterone had Tubby Reddy telling EWNsport the fact he even had this in his possession meant that action could be taken. Ken Borland suggested that this was “almost worse than the murder charge“.  This because it destroys everything he has achieved before the killing,  he continued.

Then Advocate Roux got stuck into Botha. By the lunch break a BBC journalist tweeted that he had heard a junior member of the prosecuting team say that they were in deep trouble:

  • The testosterone turns out to not having even been tested yet, but the label on the bottle suggests that it is not a banned substance at all.
  • The investigating team missed a bullet (an actual projectile) left on the scene and found by the defence’s team of investigators in the lavatory. No mention of whether or not it was nestled in the contents of Reeva’s bladder, which will become a central part of the eventual trial.
  • The crime scene was not properly protected – the chief investigating officer himself being the biggest culprit.
  • Reports of Oscar’s property in Europe was just “something he had heard”.
  • Evidence of foreign bank accounts included an account that has been dormant for ten years and has no money in it.
  • And more.

By mid afternoon Oscar was able to stare squarely into the eyes of his investigating officer. Clearly he felt a lot better. The day finished for him, but is by no means over. And a step to the right…

Perhaps there was a light at the end of the tunnel; and the Twitterati experts started believing.

At 17:19 on the second day Reuters tweeted that testosterone had been found in Pistorius’ bedroom. This, despite the fact the evidence had been discredited several hours earlier. Reuters’ associated web site is here. Perhaps it will be down by the time you get to it. Perhaps not; I don’t know how they deal with errors. As I write this it is more than 24 hours later, and the story remains in place. With your hands on your hips…

On the third day the prosecution were embarrassed as the story broke that their investigating officer has himself been charged with attempted murder. In desperation he produced a copy of “Sarie” as evidence, only compounding the derision. Not often that a murder is investigated by a criminal suspect who relies on that bastion of investigative journalism – Sarie – to support his evidence that Pistorius intends to go on the run to Italy.

No matter what, Oscar’s previously enviable reputation is in tatters, no matter what the eventual outcome of the trial and with it, the income stream of Oscar (Pty) Ltd. There is very little chance of a recovery from here.

So that’s all very fascinating, but I’m sure you have read and seen and formed some opinions about all that yourself. Having shown that Oscar’s life is effectively a business, and it is a business that for the foreseeable future is wrecked; what would happen to your business if one of the key players were to be accused of a crime tonight, and arrested tomorrow. Whether guilty or not, what would the effect of the arrest have on your business by next week? You bring your knees in tight.

It is not a fair process. Not in the age of instant social gratification. Not when most of Barry Bateman’s followers instantly retweet every comment, appending their own analysis to the one minute old semi-report. When Roux agrees with Botha, he’s awesome. When he disagrees, Botha is an unreliable witness. And 140 characters are multiplied millions of times over in the most destructive antiponzi scheme yet seen in our age. This is the terror that the accused deals with, the gross unfairness. If he is granted bail, do you think he will be able to work on that project with a clear mind? How would you perform in that ugly place?

How do we protect our businesses from this sort of event? An important employee? The managing director? The chief engineer?

  • What is your strategy?
  • Can we insure against this?
  • What damage control ideas do you have?

It may be an idea to discuss the scenario with your leadership team.

 

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.

 

Jobs, self employment and businesses

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One of the defining issues in the value of a business, is the ability of the owner (shareholder or shareholders) to be able to leave the business for an extended period of time, and come back to one which has gained in value.

Relax. I know that your business is very unlikely to be able to boast this ideal. Why? Because hardly any businesses can. At the other end of the spectrum is the sole operator, for whom the business effectively ceases to operate when he goes golfing. So two extremes, and I know that 99% of my readers fall somewhere in between.

But I’m sure that very few would argue with the assertion that the more freedom the owner has from the day to day operations of the business, the more value the business has to a potential buyer. Generally speaking. There are some exceptions.

At the end which is dictated by the presence of the owner, the “business” is little more than a job, according to Robert Kiyosaki who bands “businesses” into three categories:

  • Jobs
  • Self employment,
  • Businesses.

Not dissimilar to the parable of “Wink”, a book easily available on Kindle, and well worth the hour or so to read.

There are several very difficult value hurdles to overcome, and owner autonomy is certainly one of them. It requires an enormous leap of faith from the small business owner in terms of trust, training and affordability. This is not a simple matter of finding five times as many customers to each spend the same money as your current customer base!

While a major catalyst to change is reading something like this, the biggest kick in the pants comes about by the survival instinct in the midst of a crisis, where an owner finds himself unable to continue without bringing in the necessary skills, trusting his existing staff members and just finding the money from his own holiday budget.

Those crises might be one or several of a very broad range – health, retirement, increased turnover, pedantic customers, loss or gain of contracts, new technology, and many more which you can probably add to to yourself. While most business owners recognise this imperative, the grind of developing the next big project, satisfying the order, ordering more supplies or generally managing staff, credit, cash flow and so on, takes an obvious precedence.

Nestled in there is “the next big project”. It may be time to make this your next big project, rather than wait for an enterprise threatening crisis. It could add millions to your retirement package in years to come.

  • If you are solely responsible for your company’s sales, you have a problem
  • If your customers insist on talking to you only, you have a problem
  • If you are the only person responsible for product development, you have a problem
  • If you answer the calls at night for the burglar alarm, you have a problem
  • If budgets are drawn up with no input from any of your staff, you have a problem
  • If management accounts are for your eyes only, you have a problem
  • If you do not have succession plans in place for staff members who leave, die or get sick, you have a problem
  • If you cannot go away for a week leaving someone else in charge, you have a problem

You will almost certainly not be able to tackle these all this month, or even this year. But perhaps you could deal with one of them. Others will follow as a result. Your business will become more valuable, and you will retire richer… one day.

A year from now, you will wish you had started today.