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

Archive for Nov, 2013

Retrenchment liability

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So often I speak to sellers of businesses who tell me how concerned they are that the future of their staff will be safe after their businesses have been sold.

While this may be an admirable sentiment, it is rather more self serving than the sellers often realise. The failure of the purchaser to look after the business, keep it afloat, and keep the staff employed is something which should be rather closer to the heart of the seller than one would at first imagine.

For many years the common wisdom is that one only ever sells the assets and goodwill out of a company, and never the shares of the company. This is for reasons of safety. If you have signed any sureties on behalf of the company… and so on. That approach is rapidly changing to one of making darn sure that sureties are dealt with well in advance of a sale, and then selling the shares. The reason is all about capital gains tax and dividends tax. 34% versus 13% from one approach to the other.

Here is another consideration: If you sell the assets and goodwill out of the company, the seller remains liable for any retrenchment liabilities for twelve months after the sale.

So choose your buyer well. If he is undercapitalised and is unable to keep the business afloat, there will be no liquidation assets to pay the staff their retrenchment on liquidation, and you will be chased by them for the money.

If the purchaser decides to retrench to save money in order to avoid retrenchment, you may find yourself dipping into your sales profits.

Level with your staff

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At some stage there comes a time when you will have to tell your staff that you intend to sell, or that you are selling, or even that you have sold.

Over twenty years of doing this, I have seen some widely differing approaches to this thorny problem. The seller may be worried about how his workforce will react: will they start looking for other jobs? Will they get too engrossed in what is an enormous step for the seller (and not so much them) that they will be unable to work?

Several years back I sold a factory to a sporting icon. The seller had been adamant throughout the process that absolutely nobody was to know about the sale, and he placed all sort of restrictions on advertising, telephone calls, meetings and so on. It was a difficult process, but one thing that is of paramount importance in our business is confidentiality. We soldiered on, and found the sporting icon who was very keen and very willing to buy the business at a bit more than the asking price. 

The negotiations were fairly simple and straight forward, and everybody involved to that point was very happy with the way things were progressing.

Let me add here that the seller was 85 years old, and had been a fighter pilot in the war. (The second war, if you’re going to be petty) He was selling because his son was in his 60s and wanted to retire as the chief engineer! And there was the small matter of his wife declaring that if he died and left this thing to her, she would not erect a headstone for him.

Age alone dictated that the workers in the factory must have thought at some stage that he was going to sell. But no… Absolutely nobody was to know.

With everything signed and paid for, the sports icon stood up and announced that he wanted to talk to the staff. He strode into the factory and impatiently called everyone away from their various machines. “Morning everybody. My name is Jock*, and I have just bought this business. I am your new managing director, and I will take no crap from any of you.” The rest of the address was along similar lines.

The response was interesting. I have this abiding memory of the foreman looking at the old man with tears streaming down his face. “I have been working for you for more than twenty years, and you could not tell me or anybody else that you were moving out? This is how you treat us after such a long time?”

On the other hand, I have been involved in sales where the owner has called the staff together on the day he signed the mandate with me. He introduced me to them, told them I would be around quite a bit, and what I would be doing. I then explained to them how their jobs, service, leave and terms of employment are protected under the labour laws, and answered any questions. smiles and greetings every time I went around. I didn’t have to pretend to be an ever visiting insurance assessor.

So two very different approaches. Which will be best for you?

I don’t know. You know about the culture in your organisation.




* Not really

Sudden resignation syndrome

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The subject has been beaten to death in the press, the public forums, on Bigot24, around the braai and in many other discussions. We cannot easily change the labour laws in South Africa; it all goes to elements of the constitution: When it comes to dismissing an employee, employers have their work cut out for them.

So we all know how difficult it is to get rid of that bad apple in your organisation without going to the CCMA for a detailed probe into your business, other employees, the subject employee’s sainthood and finally, your bank account.

How then is it that a bad apple who leaves your business of his own accord can make a life changing difference to your business, its value and your possible retirement, without going anywhere near the CCMA?

A staff member who unexpectedly resigns can have a very detrimental effect on any business, but what happens when that employee teams up with a potential buyer of a business and threatens to resign if a deal is not struck with the potential buyer, on terms not in your favour? It doesn’t have to be as blatant as I have outlined it here.

  • The negotiations progress well
  • The purchaser enquires about the importance of each of your employees
  • He notes that there is a linchpin manager or supervisor, and expresses a desire to meet with the person “to make sure we can work together”
  • First they meet in your office, with you present
  • Some more negotiations
  • At some stage the linchpin and the purchaser get together outside the work environment to work on the business plan
  • An agreement of sale is signed which includes some “conditions precedent” (CPs). (You may know them better as suspensive conditions – if they are not satisfied by an agreed date, the agreement lapses)
  • The conditions usually include things like the ability to raise finance, reaching agreement with the landlord on the lease, the successful outcome of a due diligence, and so on
  • Curiously, the purchaser asks for another CP: Reaching agreement with the linchpin on his employment contract
  • Soon after signing, the linchpin has a slight change of attitude, and things get nervous around your dinner table.

Perhaps you will never know because the threat comes about without you knowing that there is some collusion in the air. Perhaps there is no collusion. Perhaps he simply does not like the purchaser. Perhaps he was looking for a career change anyway.

Whichever way you slice it or dice it, you have a life changing threat on your hands.

And people ask us why we place so much importance on the exposure to staff members when we do our valuations for small and medium size businesses

Exposure to staff

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So often when assessing and reporting on the value of a business we trouble over the reliance a business may have in a single person in the enterprise. This reliance affects the value of the business, obviously. More practically, what happens to the business when something horrible happens to this key person?

Almost all businesses I deal with which have more than one director shareholder, member or whatever, has a key man policy in place for each of the “partners”, so that should something go wrong, an insurance policy will pay out sufficient to compensate the other partner(s) so that they are able to buy their now late partner’s shares from his or her widow.

The obvious trick is to prepare the paperwork properly; use a good broker and establish an accurate value of the business. Cocking it up can cause unwanted problems for all those left behind. That is all fair common sense, and you will read about it all the time.

So what about those key employees who are absolutely essential to the enterprise, but not in the manager, ownership, directorship structure? For instance the software specialist who has been working on that application which should be rolled out in the next year. You know; it’s going to make you all super rich, but which nobody else has the foggiest idea of what he has done to get it to this beta version.

Or what about the chemical engineer who is responsible for designing your biggest customer’s adhesives, the man who has recently designed that new product. Or what about that super salesmen who really understands the industry and cracks all the best deals for you. Every CEO knows that the business cannot do without the sales people. (Please don’t tell them)

Ever wondered why it is called “key man” insurance, and not “fellow director” insurance?

Kiyosaki, Gerber and others have written about one man businesses being self employment. Even businesses with lots of employees can be exposed to a single shareholder not being able to come to work. That exposure affects the value.

Drill down a bit, and think about how the value of a business can be affected by the sudden absence of a single employee. Think about how much money you would need to see you through a crisis in his life, how much it would cost to replace him; and then insure for it.