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

Archive for Feb, 2014

Getting hoofed in the eggs

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“You are to terminate all discussions with other bidders and engage exclusively with us and our funders to enable us to assess the business in more detail”.

So reads a sentence within a paragraph, within a letter of intent, all dressed up to look like an agreement of sale.

To be fair, the business owner does not sell businesses every day, and the unsolicited approach had come at a time when he had once again started to toy with the idea of a retirement away from the traffic, the staff issues, the currency volatility and the elections.

The clear requirement of the purchaser is to have the beach to himself for a while so that he can install his own fishing nets. If the fish don’t bite, he is happy to let everyone else in to cast their lines. In the meantime the biggest fish may have been driven to the adjacent beach where his cousin has sole fishing rights.

Even if your intention is to sell to this single buyer, you owe it to yourself, your spouse and your kids to be a little more circumspect in giving away sole fishing rights to people who are vague about their intentions.

Nothing keeps a business buyer more honest and focused than the possibility of some competition skipping down the sandy dunes with bait, tackle and a cooler box.

Nothing is more at risk than a basket with all your eggs.

Sometimes having too many metaphors in a single blog entry is beyond the pale.

Trust your professionals

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Peter Carruthers wrote about it many years ago in his book Crashproof Your Business: Apart from much of the information he gave about frustrating creditors, he was particular about the wealth of experience a banker has versus that of a business owner when it comes to negotiating a loan. The banker does this every day, the business owner does it from time to time when he is under severe cash flow stress and will agree to a lot of silly things.

Similarly with selling a business. You will only do this a few times in your life.

  • It is probably not wise to ignore your tax professional who knows what tax laws changed yesterday. Some probably did change because they seem to change almost every day. Tax professionals do this work every day.
  • Using a lawyer is probably a good idea if there are any contracts to be signed. There are contracts. It is probably not a good idea to ask a friend who has been exposed to a few M&A deals for a listed giant to look at it for you. He would have had a team of lawyers covering his back.¬†Lawyers deal with contracts.
  • Listening to your accountant and talking to him about stuff is also probably quite high up there. Accountants work with numbers all the time.
  • Using some sort of intermediary to negotiate the deal for you works well if you choose the right guy. They negotiate deals every day.
  • You continuing to run your business is probably the best thing you can do. None of the professionals mentioned above would dare to tell you how to best manufacture your widget. That’s something you do every day. That’s why you have a decent business for sale.

Why do I write this?

  • I am busy dealing with a divorce attorney who believes he can just as easily peruse and redraft (read: “cock up”) a commercial contract. The rules around conditions precedent are beyond him.
  • I am dealing with a book keeper who believes that he knows how to value businesses. He does not have the first clue. His 30 year old text book from varsity is not a lot of help, and nor is Google. Neither of those sources know a lot about what is happening in South Africa this year as regards buying trends, prices being paid, interest rate movements, developing alternatives and much more.
  • Another book keeper believes she is a tax expert. Something about a course she did five years ago. It may mean the difference between her client paying 13% tax and 34%. That difference alone, in this instance will be enough to pay all the best professionals, and still have a lot of money left over for some fun and games.
  • I am dealing with a jaded senior executive who sometimes gets to have another look at an agreement for his friends, when he gets home at night, and certainly after he has had his quota of Scotch for the night. He has negotiated multi hundred million Rand deals before. This little R5M deal is a walk over. Unfortunately for his friends, it is the only R5M they have. They deserve better treatment. The erratic and conflicting changes he keeps making late at night to their agreement means someone else will buy the business before they do. At least his ego is getting a good rub down.

So I suppose that further than listening to your professionals; choose the right professionals.