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

Archive for March, 2013

Corporate SMEs

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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.

Suppliers that kill

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Some of the questions we ask when conducting our valuation interview with business owners revolve around the distribution of suppliers. This is why:

  • In the sale of a business, there is no holding guns against people’s heads. Buyers make honest and considered decisions. The purchase of a business has often been compared to the purchase of a home. This is very far from correct. Buying homes is a pressure buy. Usually one very limited sighting on a Sunday afternoon, followed by an agent telling you that there are several other parties about to make offers. The bank may do what appears to be a due diligence by way of a valuation, but really is nothing more than an exercise to determine whether or not it will recover its money in a similar forced sale process. By comparison, depending on the type of business, the supplier situation is key to value.
  • Agency type businesses, for instance may have only one supplier. This is not at all unusual. A business may have been started up for the sole purpose of supplying a particular widget. In a competitive environment that widget gets all their attention, and they end up in a position where they will kill for their widget, because all other competing widgets are rubbish… “Can’t you see?”

A bloke called me a little while back. He had been approached by his only supplier. They wanted to buy his business. “What is it worth?” said he.

He wasn’t very amenable to the possibility that it was worth very little under the current circumstances; nobody else would be able to buy it. He effectively had only one bidder, and that bidder held all the cards. A gave him an idea of what it would be have been worth if supplier had no interest in buying him. And so he went to them with that price.

They turned him down, offered him something substantially less, and he knew he was on a hiding to nothing. So he did not sell.

The supplier honoured its supply agreement with him, but opened up its own shop in South Africa, not far from where he operated. It took two years for them to take all his business away from him, but substantially less time to kill off his business. It was only his determination “to show them”, that caused him to lose everything else as well.

  • A really successful manufacturer of mutis makes a strategic decision to not buy in bulk and save a few Rands buying everything from one supplier. Instead he has a policy of buying the bulk of his material from a single very reliable supplier, and the rest from two others. From time to time he shifts the proportions around, at a cost because he’s not always buying at the best price. But he keeps good relations going with them all, and pays them promptly. None of them are likely to go out of business, but then he never knows when one of them might be hit by a flood, an accident, one of their other customers going into business rescue, a key person being arrested, a shortage… He keeps his options open. A little less profit for much more security.
  • Suppliers are taken over in mergers which their customers have no control over. Recently a flourishing business was notified by its supplier that it had merged with a much bigger competitor. (Actually that’s a takeover, if you think about it) Over the next year things settled down as the cultures mingled. Then a letter from the supplier: “We have decided to rationalise our agency in South Africa”. Three months later, with no alternative product available, he was negotiating with his local competitor for as friendly a takeover as could be mustered in the circumstances.
  • Suppliers go out of business too, you know. There is a drama playing out at present where a big supplier has gone into business rescue. Its own suppliers are not very happy at not being paid, and so it is struggling to get deliveries, to produce enough to satisfy demand. Through the business rescue process, his suppliers are having their supply contracts renegotiated, forcing them to cut into their own margins. Meanwhile our innocent friend is left trying to hustle into his competitors’ suppliers so that he doesn’t go down a similar road. His competitors have also seen the opportunity to start a small price war. Nothing like offering an alternative product at a better price, available now.

Generic products tend to have many suppliers they can choose from. This mitigates the exposure to suppliers, as we say.

Specialist products often struggle with spreading their supplier risk. Specialist agencies are a nightmare, but make up for this weakness through other strengths which their unique offerings add to the bottom line.

How is the value of your business affected by your exposure to suppliers?


Accused of being key

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There was a quite extraordinary response to my blog on Friday last week. By response I mean people responding to what they thought I had written. At times my email inbox looked like the responses time line in a News24 article: An unbelievable amount of abuse from the most benign, casting doubt on the marital status of my late parents, to unnatural acts with keyboards, buckets of acid, Satan and the road to hell. The only thing I wasn’t accused of was racism.

The mind boggles at what these people might scream at taxi drivers who aren’t being dragged down the road behind our peace keepers’ vehicles!

I was accused of using the tragedy, to further my business. Perhaps if any of those people had taken the trouble to actually read what I wrote, they might have seen that no stage at all, did I link through to anything which attempted to sell any of Suitegum’s services. Every link in that blog is in support of my overall claim that the glare of millions of Twitter geniuses and sensationalists selling newspaper and web site advertising space can destroy the reputation of someone loved by almost everyone in South Africa, and many millions more in other countries. I thought I was careful to make the point.

It does not help to disregard the Pistorius debacle. Three weeks ago he had no concept of the problems he would face today. He simply did not know that he would have killed Reeva a few days later, and his income stream would be strangled so abruptly. We all run a similar risk in our businesses if we employ any people at all. It’s probably ok if your secretary, the filing clerk, the tea person or almost any of your clerical staff go missing for a while. Perhaps it is even ok if a machine operator is  absent for some time. But as I said last week: What about those key people:

  • Your design engineer?
  • Your software programmer?
  • Your star salesperson – the rainmaker in the organisation?
  • Your warehouse controller?
  • Your chief of logistics?
  • You?

My follow up then is to ask  what China Dodovu’s employers will do now that their key employee has been arrested and appears to be charged with conspiracy to commit murder. I wonder if that question will elicit as much outrage? Who knows, perhaps he is not key to the organisation; perhaps he does nothing anyway.

But what of Mido Macia? He is probably not key to his organisation, and nor, probably would be Prisoner A. These are all people who have appeared glaringly obvious in the news headlines around the world in the last two weeks; such is the nature of our society.

Stemming from all of these people, are repercussions for businesses and families, both upstream and downstream. Repercussions involving money, quite apart from the obvious heartache.

One thing which is almost (not entirely) absent from all the complaining emails I received was the fact that Reeva Steenkamp is dead. Her boyfriend has admitted in a written sworn statement to killing her. He has lots of money to pay public relations companies to ask people who use the tragedy to highlight a risk we all run (albeit quietly), to not refer to him as an “alleged murderer”. The rest of us are powerless against such requests and fighting them.

But whether it be the poor immigrant taxi driver, the disabled awaiting trial prisoner, the leader of a big organisation or the wealthy young killer with the world at his feet, in the event of an arrest on even a suspicion of wrong doing, there is fall out which has an eventual effect on the value of the organisation.



Post Script: Phil Cooper dropped me a mail last night to say that he had made enquiries in this regard. There is a Lloyds product called “Death and Dishonour” (would you believe). Unfortunately at the time of pressing “Update” no further particulars were available.