Why whine about wine?

I think it was Johan Rupert who famously said that the party making the best return on investment in the wine industry is the waiter. Zero investment, zero purchase, but in theory he receives 10% of the final retail sale value of each bottle he flogs. Does that make waitering a valuable business? Of course not. I suppose some spots might be traded. But they would be jobs changing hands, not businesses.

On the other hand, petrol garages working on gross margins of only 8% are very valuable businesses, despite the fact that a robbery at one of them takes away several weeks’ profits in one fell swoop.

I still have people arguing the huge value of their businesses based on the turnover of the operation, rather than the profit, the assets or the cash flow. To boot, they will base their own valuation theories only on the last three, two or even only one month. The remarkable thing is that at the lower end of the market, people even buy businesses on these principles.

Of course serious buyers with access to serious capital take a much more serious view of what they’re getting themselves into. If you’re that sort of person as well, then you should take the value of your business more seriously as well. You will understand that a business value is based in part on profits (the bottom line), but is influenced by many other things:

  • The momentum of the sales and profit
  • The exposure to small groups of customers
  • The redundancy of suppliers, or otherwise
  • The exposure to staff
  • The threat or opportunities from emerging technologies
  • Shrinking or rising margins
  • Levels of inventory
  • Don’t discount the value of turnover!
  • The intellectual property locked up in the business
  • The “pipeline”
  • The reserves of the business
  • The state of the assets
  • And many, many more besides.

I mention the reserves of the business, as something related to this is being played out in the gold mining industry at present. There is an interesting tussle between the new union AMCU and the guys we have grown to love; NUM. In that powerplay, NUM is demanding a 60% increase, while the employer mines are offering 6%. With all that daylight between the sides, it is not likely to be pretty. In the meantime, AMCU has not yet made its demand.

So why the sudden political bent to my blog? So unlike me!

Well Neil Froneman, the big cheese from one of the employers (Sibanye) told Bloomberg that “we can ride out the storm for a very long time”. That was around the same time as a Sunday Independent report about the four biggest gold miners hoarding cash and making arrangements to borrow more if necessary. Of course they will be saving a bunch of money on unpaid wages for the time as well.

So the point about reserves: If you have them, you can survive more easily in times of trouble. You can even survive several years of losses. I have clients who have done so. Three years of losses. And yet conventional wisdom tells us that their businesses are worthless. Meanwhile around the corner, the business with a R3M profit last year, but a very generous dividend policy is judged to be more valuable. When conducting valuations, one needs to consider the bigger picture, and place less trust on the individual who applies a simple formula to any particular metric, in a few minutes.

Conducting a proper valuation is a serious and momentous exercise upon which people’s lives can be changed.

My thanks to Nic Borain for the idea for this blog.

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