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

Archive for Aug, 2015

Social valuations continue to frustrate

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In response to last week’s valuation video, I received a very pertinent comment highlighting the issue of the break even point of sale (BEPOS), and how this important little calculation can affect the value of a business.

So again, in lieu of digging deep to write the necessary, I have waved my hands about a bit, metaphorically, in a video.

This is not brain surgery, you’ll agree. However, the number of business people who rest on their laurels when making a profit, even in the face of a single large customer being their slave driver, is frightening.

We agree that you cannot ditch that large guy. You really shouldn’t, but you do need to get more business out of the smaller guys, and look for others. That will mitigate your risk to a great extent. “Yar, great advice”, I hear you saying. And you’re right; it is very easy to point out the obvious. The frustration at reading the obvious should not be used as an emotional tool for handling any inaction.

  • Sell up and cross sell to your existing smaller customers. Apparently it’s easier to sell to them than to new customers.
  • Find ways of getting new customers, anyway. It’s not easy, but it IS possible. If it were easy, everyone would be doing it. But you’re better than “everyone”, right?
  • Speak to Peter Carruthers about finding new clients. Again, it’s not easy, and it costs some money, but there are easy bailout options from his program if you’re unable to cope for any reason.

Work hard on diversifying that customer base now. Sell the entire business for much more later. You’ll see that I’m right!

Robot wars and the future of business

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It is being referred to as the third revolution in warfare – the development of artificial intelligence – after gunpowder and nuclear weapons. Think back to the Terminator movies – You know the way that science fiction has a habit of becoming science fact? That concept is now being warned about, by people vastly more intelligent than you and me. (Apologies to HG Wells)

Scarily, it cannot be far off now that a terrorist organisation or freedom fighter (depending on your leaning) flies a bomb laden drone into an unsuspecting target, controlling the weapon with a mobile smartphone in a luxury apartment on the other side of the world, while being cheered on by bikini clad infidels. Such is the pace of change in the age in which we fight for our crust of bread, cup of water and watt of power.

What seems like just the other day, but what in fact was almost two years back, I suggested that the coming and existing technology storm would make a big difference to business values.

It is laid out so very well in The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee. Read it.

This also presents a great challenge to small business. That’s you and me. The big guys have the funds to enable them to retrench thousands of workers, and resort to smart machines for their labour. We apparently don’t.

For a long time the imperatives of BEE have seen the smaller guys training up competent and outwardly loyal workers to be skilled in their jobs, only to have those workers poached by industry, along with the hard earned BEE points.

As the camera of politics pans across to the other side of the stage, we see big business talking to organised labour, and apparently coming up with workable solutions, for now, for surviving the coming economic storm in an environment of government lead ineptitude.

Left unattended in the wings is disorganised labour and small business – the ugly, shy and nerdy, with nobody to talk to at this dance for existence and survival.

Which brings me to an interesting question… What if the great unemployed were more interested in the dignity of having some sort of employment? What if the weight of the unemployed reached such a mass as to make things change, that this vast body realised that the unions do nothing for them, and do not even have their interests at heart? Why would they? The unemployed don’t finance the lifestyle of the average trade union leader! What if the great unemployed mass was to suddenly understand that the unions HAVE to ensure that they remain unemployed, so as to not dilute the bargaining power of the employed?

And (oh the horror of it all) what if the mass of unemployed were to suddenly understand that the labour laws are there to keep them unemployed and unemployable, in the interests of the luxury goods market, otherwise known as the communist ideals inspired; organised labour?

So, what if disorganised labour and unruly small business business was to have its own indaba…

{ed – wake up. You’re having that dream again}

Anyway, as I was saying…

If you want your business to grow in value, you can find ways of embracing ever more affordable smart technology. If you don’t, your competitor will. And before you reach for that tired old argument about 3d printing not having your material available for what you do in your industry, take a look at this runaway locomotive; 3d printing in glass:


Look, I’m no brain surgeon, rocket scientist or even concrete mixer, but I can see that if we have the ability, only a few years into this technology, to print with glass, then there is a lot more to come, and whatever your medium is, whatever your application, whatever your product – there is an opportunity here for your business.

Unless you want to hang around and wait for your competitor to make it a threat.

You do know that the competitor is still at high school, don’t you? You do know that he is on the internet via his smart phone, plotting your demise, right now?

Robot wars are coming.

Too much trust

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One of the many challenges facing small business owners when they start up, is managing the risk that the new enterprise places on their personal lives – not so much as far as family and time is concerned, as the risk the new enterprise places on their personal assets.

This is usually mitigated by the choice of placing the business into a limited liability company, where it effectively runs as its own legal person. The owner is then limited in his exposure to the value of the capital he has placed into the company to get things started up. His personal assets are generally kept safe from creditors of the business.

For creditors being asked to fund the business by way of lines of credit, overdraft facilities and loans, this is not ideal. The business is a start up with little track record, and they have little recourse to the management of the company if things head south. So for their own benefit, they ask all shareholders and directors to sign personal suretyships on the credit facilities (and often, a great deal besides)

That leaves the company in a position of being little more than a separate tax entity, for some owners, and of course a separate account of what happens in the business, as opposed to what happens in the rest of the owner’s life. (For many small business owners, this is one and the same thing.) With personal sureties in place, of course, the benefits of the limited liability entity fall away as far as protecting personal assets is concerned.

Many people see their own assets going down the drain together with the business as a result. Entrepreneurs being, well – entrepreneurial; and goaded on by Peter Caruthers in his delicious book “Crash Proof Your Business”, employed another strategy to stymie overzealous creditors. It involved keeping assets of the business in one company, which are then rented to the trading company in a tax neutral arrangement equal to the depreciation amount. The shares of both companies are in turn held in separate trust structures. Works brilliantly, as long as no criminal activity is evident in any failure.

But here’s the thing.

It appears that some trust practitioners have been abusing the goodwill of business people, and played on their fears to a stunning degree. I have seen several clients now with quite literally dozens of companies and trusts being set up for a single business. When questioned, they tell me “Sipho* calls every now and again, and tells me the law has changed, and another trust is necessary. Of course he charges handsomely to set up the trust, and then there are annual secretarial fees and independent trustee disbursements”.

I sat with a retired forensic auditor this last week, trying to sort out the affairs of yet another client, prior to him selling his business. He pulled no punches, as he said “Sipho is a crook”. He then showed me what passed for a structure, and showed me exactly how our client is at risk of tax authorities on three different continents.

[Hint: It is not ayoba to simply “change the trust deed” to suit the situation as it changes. When SARS suspects something is dodgy, it will lay waste with enormous penalties. Remember, with SARS you are guilty until you somehow prove your innocence.]

But there is a more immediate problem:

Buyers of businesses generally want an uncomplicated structure to buy into. When faced with a myriad of reporting, legal and accounting associations, any possibility of a tax efficient deal for the seller immediately goes out the door. No buyer in his right mind will want to inherit possible legal problems in the future. No buyer at all (in his right mind or otherwise) will want to take over someone else’s tax problems, particularly when he has no manner of understanding what has happened in the past.

There is a way of rationalising the madness of the past into a much simplified structure, and retain the safety as envisaged by Pete Caruthers.

Prepare Your Business For Sale.

Post Script: Several previously unknown readers called in me in the hours after first publishing this blog, and correctly guessed Sipho’s real name.


*Sipho – not the real name of the trust advisor, but “Bob” is a bit overused as an illustrative name.

Social (mis)Valuations

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I used to refer to this phenomenon as the “braaivleis valuation” in recognition of an event I once witnessed which involved a lot of Rum, Coke and no short supply of Zamalek. In furtherance of our international acclaim, it will now be referred to as the “social valuation”.

In brief, it refers to the habit of people haphazardly staking their future financial well-being on the thumb suck valuation technique involving the simple multiplication of two numbers, “because it worked for Alan”.

This video takes the onus away from the written word in explaining the process, and showing where it goes wrong.

Business values fail in a sort of diluted way in which actual business sales fail. The latter may suffer because of an insurmountable problem discovered in the due diligence, or something surfacing which does not fit in with the plans of the purchaser. The former, because of the probability of these factors causing sales to be compromised.

The business valuation is therefore an early warning system of where things need to be improved before taking the business to market, and a valuation should be conducted for each business on a regular basis – annually, if possible.