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

Posts Tagged ‘Xenophobia’

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.