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

Archive for Dec, 2015

Source of funds

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Businesses rely on two main “organic” sources of funds to build their capital and grow:

  1. Investor funds
  2. accumulating profit

The first is “dollop” in nature. It arrives in a lump sum, or a series of lump sums, and allows the air to clear, plans to be realised, and sleep to be had.

The second is slow. It requires patience, hard work, and discipline. It also requires good management of resources, based on good decision making.

A third source of funds comes from loan capital and short term creditors. It requires negotiating skills, some ducking and diving, and often, an economy of truth!

There is a delicate balance between several factors which will determine when it is wise and indeed preferable to borrow funds, rather than raise further investment.

Unfortunately, most small business owners have no idea about the science, and resort to borrowing money only, and then usually when they have run out of customer sales and the resulting margins. The banks they apply to are generally able to identify the risks, and ask for the safest collateral. It usually does not exist any longer.

Sometimes the converse occurs, when the customer sales grow too quickly, and the required inventory is just too far away. The knee jerk reaction to this dilemma is usually one of “just give me the sales, and I’ll make a plan afterwards”. The liquidator files will attest to the folly of this thinking. Those that have survived have been lucky, and will often use the experience to become evangelists of good balance sheet management.

This is playing out on a much larger scale right now in South Africa, and some dramatic exchanges of ministerial seats have taken place as a result.

SAA is insolvent, but for the guarantees provided by the government, funded by the tax payers. Former Minister Nene, refused to allow the organisation to take on a third party as a go between on some strange deal. As a result he was taken out of the equation, and I suspect we may find that during his 97 hours and 30 minutes as Minister of Finance, Des van Rooyen signed off the deal.

We are left floundering wondering about whether or not the proposed nuclear arms deal was signed off in the same period, against the wishes of Mr Nene; he who harbours very conservative accounting principles. That quiet time of the year for pushing embarrassing stuff through the process may find us reading, in time to come, about these deals having happened when people were more taken by the smoke screen of #ZumaMustFall, on the eve of the annual morale regeneration in the country’s holiday spots.

When we get back, we will be facing an interesting 2016:

  1. South Africa is on the brink of having its credit rating dropped to junk status.
  2. Interest rates are likely to rise, and rise and rise.
  3. Inflation is likely to rise
  4. There will be much in the way of political posturing – some of it will be racially uncomfortable
  5. There will be municipal elections

The minister in charge of the municipalities is the same one (van Rooyen) who lasted only 97 hours and 30 minutes as minister of finance recently. He is also the one who took Merafong into bankruptcy. Merafong is a small town with about 200,000 inhabitants – the same constituency which in anger, burned down his house and chased him away. That is the guy who His Excellency Jacob Gedleyihlekisa Zuma has put in charge of making sure ALL the municipalities toe the line.

But let’s not denigrate our president, and his impressive list of honorary degrees:

  • Honorary Doctorate in Law from the University of Zambia for his obviously strong adherence to the concept
  • Honorary Doctorate of Literature from the University of Fort Hare for his demonstrably brilliant reading skills
  • Honorary Doctorate of Administration from the University of Zululand for his ability to administer punishment to those who stray
  • Honorary Doctorate of Philosophy from Medical University of Southern Africa because of great ability to outmanoeuvre his opponents
  • Honorary Doctorate in Humane Letters from Texas Southern University because how else does a university confer a doctorate on someone who is so woefully inadequately equipped to wear the “doctorate” badge, other than for political reasons?
  • Honorary Doctorate of leadership from Limkokwing University no doubt because of his bold leadership?
  • Honorary Doctorate in philosophy from the American University of Nigeria
  • Honorary Doctorate by the University of Abomey-Calavi, Cotonou, Republic of Benin

South Africa is precipitously close to being graded as junk, as to make no meaningful difference. In the last year we have had more business owners engaging with us on exit preparation than in any single year in the last six. The foreign entrants into the small business sector has never been so thin. So we are unlikely to see a great “thump” of falling graphs when the announcement eventually comes. The sentiment is probably already priced into the JSE, other than on the top 40.

More likely is a slightly steeper fall in the already downward trending curve.

Our saving grace on the inflation front is the falling oil price which is conveniently balancing out the weakening Rand. Make no mistake, though; the oil price cannot fall for much longer, interest rates are increasing, the Rand will fall further, and inflation will rise.

Your challenges in 2016, as small business operators, will be working with higher inflation and higher interest rates. Business valuations do interesting things in that contextual mix. For many, the next few years are going to be difficult if getting out of business was the plan. It promises to be an interesting year.

Enjoy the break if you’re getting one.

{So you think you have cash flow problems?}

Christmas, Zuma style

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…but I am rebelling against what determines the value of a commodity is the law of supply and demand. I am against this definition. The value of a commodity is the labour time taken in production of that commodity. That’s what determines the value of a commodity.

– His Excellency Jacob Gedleyihlekisa Zuma


Someone blinked at SAA. She must have blinked in a particularly alluring way.

Minister Nene is now just Hon Nene, MP.

That you probably know by now. Last week I suggested that something was going to happen at SAA over the holiday period. Soon after, Nene wrote to the board of SAA and told them that they would be in big trouble if they tried to implement a hair brained scheme involving putting a middle man between SAA and Airbus.

The repercussions of that letter (and it is unlikely that Nene did not know this when he signed the letter) were dire for him. He no longer has his blue light brigade, and the Chairman of the Jacob Zuma Trust has put her red light out for a while.

The silence is deafening. The immediate noise from ANC cadres was mixed. Clayson Monyela, the head of DIRCO tweeted “*Prays in tongues*” and “I need to log off and go to bed. Tweeting right now is probaly not a good idea. #JesusTakeTheWheel”. By the morning those tweets, and others were deleted from his time line. When I pointed this out on Twitter, he responded by blocking me from his time line for the foreseeable future. Probably forever.

The sycophant Mzwanele Manye, he who rabbits on about his leader’s brilliant white teeth, tweeted after the speech Zuma gave immediately after announcing Nene’s demise “wow wow wow, what an inspiring unscripted speech by His Excellency Prez Zuma addressing a business meeting in Jhb.”

There are many theories, conspiratorial and otherwise.

My take is that if the ANC does not “redeploy” Zuma before 2016, we will have him as president of our country for the next ten years.

The ANC will not redeploy Zuma because its members are gutless, and its voters are reliant on its patronage to just feed themselves.

If you want to make a difference, do whatever you can to make the population less reliant on handouts. Do something to uplift the poor.

The prisoner has no key

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Perhaps I am a sucker for punishment. Or perhaps I have read the changed attitude correctly in seeing that people are no longer so upset FOR Pistorius, but are rather upset ABOUT him.

In the days following the murder of Reeva Steenkamp, I asked business owners to consider what the effect on their businesses would be if the most important person in their operations had been arrested the night before, on a murder charge. It garnered an interesting response from people apparently more interested in the fact that I might be trying to use the death of a demi icon as a money spinner.

What I was trying to do was use the sad event to bring thinking people’s attention to what might happen in their own lives if someone beyond their control were to do something terrible, resulting in their immediate absence from the business. Beyond this, I postulated that the person would be so distracted for the ensuing months, that he would be largely ineffective, anyway.

How does a business survive when a key person is taken out of action, for whatever reason?

There will almost certainly follow some time into 2016, during which the State continues to drain Pistorius of the last drops of his financial and emotional resources, while he challenges his conviction in the Constitutional Court. In the meantime we small business owners might once again think about our reliance on single key people, key suppliers, big customers. We might also consider what our backup plan is if that key resource were to become otherwise disposed as of right now.



VAT Returns

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Although not absolutely definitive, as will be shown later, sales turnover is amongst the foremost in many potential buyers’ minds when they first look at your business. Proving that turnover is so simple if you are properly prepared.

The next addition to your Prepare Your Business For Sale file is a collection of your VAT returns. Go back as far as possible, and from now on, you should add a copy of your VAT return every time you submit it to SARS. That’s an easy maintenance effort. Simply make an extra copy of the return, punch it and put into the file. At the same time, scan the return and place a copy in the PYBFS folder on your desktop.
If you are on e-filing, this is a simple exercise as you can print the return to “pdf”, and save it in your folder.

Why the VAT return? If your financials are unaudited, looking at the VAT returns is the simplest way of verifying your turnover. After all, you have to be psychotic to inflate your turnover to the VAT man. So the prospective purchaser has a source document that he can trust.

If your business is big enough to require an audit with the associated audited financial statements, this is still a good exercise because it will help a purchaser to understand turnover trends. Perhaps a difficult purchaser has been prepped to always ask for the VAT returns. Now you won’t have to argue – just hand them over. You may also want to take your purchaser along one step at a time, in which case you prove your turnover to him with VAT returns, before releasing your more information-heavy financials to him once you are more comfortable with him.

Why VAT returns and not VAT receipts? Well yes I know receipts are easier to find because they were sent to you, but they don’t have the turnover of the business registered on them. Always make a copy of the return when you complete it, and file it.
Not registered for VAT? Think that one through very carefully. The sale of your business may very well tip your turnover through the threshold. That will cause your selling price to be subject to VAT at 14%, and not the 0% which would otherwise be levied. If this is the case, you will be forced to sell your shares of the company, or your membership interest of the close corporation, instead of selling the business out of the company as an asset, with all the associated risks if you have not prepared things properly. More about this later.

Christmas in SA

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Dreaming of a rainbow Christmas, or a white Christmas or just a Christmas?

The silly season is almost upon us, and from next weeks the roads in Jozi will start to quieten down, while those in the usually quiet seaside hamlets of Cape Town and Durban will become mayhem.

The ruling party has a habit of using this time to release documents for comment, place the population on notice, and generally make use of the quiet time to turn up the temperature under the pot containing us frogs.

I wonder what it will be this year.

One thing that is coming to a head is the debacle surrounding SAA, an insolvent, state owned entity. It requires annual injections of tax cash to keep it able to compete with private enterprise on an unfair basis.

SAA is running with a dysfunctional skeleton board, from which the best uncompromised players have exited in recent years, and more recently. It is unable to put together a quorum to ratify essential negotiated agreements. It is also having difficulties in raising capital, simply because potential lenders don’t trust the government guarantees!

There are existing performance covenants in place with its lenders and suppliers, which it has breached already – it is insolvent to the extent that the most recent financials have not been signed off. Further to this, there exist clauses in the loan agreements, and in a particularly bothersome agreement with Airbus, that if there is any breach with any creditor, then the other creditors can call in their outstandings.

SAA is financially distressed. It cannot pay its debts that are due. It has been placed on terms by Airbus. It has also got an ex parte court order prohibiting the media from publishing a copy of the legal advice it has received from its legal advisors.

SAA should be in business rescue. Any of its creditors can apply for a court order to put it there.

Of course the minister of finance can help it out again by making funds available, but at the cost of something else.

There is some heavy horse trading happening in the background, and I think that something will give over the Christmas period this year. Something which most of us will not care about as we lol around on the white sands of Clifton and Durban.