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

Posts Tagged ‘Zuma’

The coming tsunami

The thing with Tsunami warnings is that they appear over and over again following reports of earth quakes, but they seldom manifest in anything discernible to those on the shore. So with time, people, cities, and governments start to ignore the warnings. Frogs in warming water.

When the big event occurs. The unprepared citizens witness first hand entire towns being washed off the face of the coast, nuclear power stations being shut down, or not. And vending machines being left unlooted. This was once a real thing in a first world country.

My South African clients are giving giving vent to any number of local scenarios, ranging between two extremes:

  • Zuma will be out by Christmas, and in jail by the new year (Unlikely)
  • All is lost, the country has been entirely captured. Democracy is a myth in South Africa. Stock up on canned goods and buy Bitcoin. (Also unlikely, although I do find myself attracted by the notion of a finite issue, decentralised, non fiat, digital asset)

We all have our own expectations of the future, and our actions or inactions will be influenced by the current turmoil in the political, social, and economic malaise; but that malaise is the single biggest reason for so many of our clients retaining us in the last year.

As Stephen Grootes says:
“The next five months in our politics could determine the coming decade”.

As luck would have it for those approaching retirement in the near future; there is a growing number of investors looking to expand their own projects into business owners’ horizontals and, or, verticals. They are getting their own acts together for a strong upturn which is quite possible, once the madness is over.

  1. Horizontals – competitors, industry related, and complementary businesses.
    A franchisee in a successful chain of restaurants buys a store of the same franchise which becomes available on the other side of town, and also makes an offer for the new store being contemplated in the new mall.
    A hairdresser buys a nail salon in the same mall so that it can cross sell to both businesses’ customers.
  2. Verticals – in the same supply chain to an end user.
    A large group owning a logistics company, an abattoir, and a coffee bean importer, purchases a national chain of restaurants to enable spare capacity in the abattoir and the logistics businesses to be utilised, while securing a market for its beans.
    The supplier of beauty products buys both the hairdresser and the nail salon so that it can benefit from gross margins on a longer chain.

The potential investment situation is evidenced by the large amount of money sitting unused in large businesses, corporates, and in pension funds. It is the same money which Bell Pottinger might suggest is being held ransom by white monopoly capital (WMC) – an apparent thing – for defined performance by the ruling elite.

Psst… it is money being held back looking for decent investment. Stop being a box!

As a business owner entering the closing years of an exit plan, you have an unprecedented opportunity to tap into that enormous resource; but only if you play your cards right. PrepareYourBusinessForSale™. Get prepaired. The group or company which buys your business is not going to pay over the top. They will pay the value you are able to confidently demonstrate. It’s up to you to demonstrate that value. If you are not adequately prepared, you will leave money on the table.

Think outside the box for a while. Really; give it some serious thought:

  • Who would be interested in buying your business in the coming years?
  • What would they want to buy?
  • Does your business have the capacity to excite, simplify, or add security to a new owner?
  • How do you get things in the right “place” for them?
  • How do you maximise your own value, while enticing the acquiring person / business / group to see the greater future picture?

Those are the current and ongoing challenges for all business owners. Don’t neglect them.

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?}

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.

 

 

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!