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

Archive for August, 2017

Very willing sellers

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Selling too high doesn’t happen often. But hey, if you can get it to happen without lying, cheating, defrauding and incurring financial or liberty liabilities, then why not?

Let’s be clear “selling too high” is not a seller problem. For the most part it is not a buyer problem either. Willing buyer – willing seller, and all that. Nobody buys a business the way one buys a house; you know, half an hour snoop, some estate agent pressure, a clumsy deed of sale, and the deal is done, save for the bond arrangements.

Selling businesses is an entirely different matter. Weeks and even months of investigating the business history and the likely future are condensed into a variety of different business plans and financial forecasts. Through that process, if any undue pressure is suggested by the seller, that bluff is called quite quickly, and usually with devastating consequences.

The best way of speeding the process up is to give the investor what he wants, and in an easily usable format. The investigation and due diligence process is a gruelling one. These guys are often tasked with other people’s money, which demands a return. If it goes wrong, then their round bits are on cubed things.

In a forest of poorly prepared businesses with high asking prices, a well prepared business and owner has a better chance at hitting the jackpot.

I was involved in the sale of a business about ten years ago where a plan came together quite beautifully. It all happened like this:

About a year before the sellers placing their business on the market, they had spoken to me. I’m a “call a spade a spade” kinda guy. They hadn’t liked the message I gave them. So they went off somewhere else for more comfortable sale story. It did not take long to get an offer. Sort of in mid reality check, a mutual friend suggested that they run it by us for another opinion before accepting.

That took some doing, but we all put our big girl panties on, and had a look. Frankly, the deal in offer was such a waste for the sellers. They were selling too low, on lousy terms. I told them as much. Well not exactly.

What happened after that, taught us all some valuable lessons in being prepaired for sale – the gentle art of identifying a bunch of potential future owners of a business, and pre pairing for future benefit to all.

Valuation indicators Type of business (part2)

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In PBFS015 we ruffled a few feathers in the retail industry. I suggested that the value of retail businesses is very volatile. You will remember I said that retailers are at risk and are exposed to the effects of interest rate changes, government policies and global crises.

So what about other sectors – the rest?

Obviously these businesses are also at risk of the external factors pressing down on their full over draft bladders. But I would venture to say that on the whole, the effect on them is much less dire, with some exceptions.

Some consultants and “luxury” suppliers are perhaps almost as volatile as retailers. The so called corporate gifts businesses lose their finger nails on a slippery slope of cut backs by their customers in hard times. Their biggest exposure is often the fact that they are single parent stores with only a few customers. If one large customer pulls back on ordering, the entire net profit of the business may suffer.

The saving grace of the corporate gifts business is that most of them operate from home, and unlike their retail cousins do not have huge rental bills waiting for them at month end. They are more likely to remain in business during tough times; and like retailers, their multipliers fall precipitously.

Wholesalers to the retail industry are perhaps even more volatile. At the first whiff of trouble, their customers, having ridden the crest of a very profitable wave are quick to “destock”, driving their store room volumes down. Not only will a wholesaler’s customers purchase less, but they will actively actually not buy at all and cancel orders, leaving the wholesaler with an over stocked business, and all the risks that entails. In tough times they tend to shed customers while surviving customers purchase less. It seems though that their biggest customers survive the tough times, and a boom happens as the retail sector wakes up in the upturn. There is a big shift in multipliers in the wholesale sector, from boom to bust times, although not as remarkable as in the retail sector.

Factories are much less reliant on the position of their premises than are retailers, and are able to move routinely, with the exception of a few for whom their buildings are purpose designed. Most factories though, have to relocate as they grow, in order to survive anyway. Moving premises is used as a marketing opportunity, rather than being regarded as a marketing catastrophe. Tough times for factories usually result in lower utilization of capacities, less money spent on overtime payments, lower raw materials costs and a sharpening of the pencils of salary negotiators. The biggest impediment to factory values in tough times is the access to credit for prospective purchasers, and there are therefore fewer of them. This naturally drives prices down, but not nearly as badly as for the retail sector.

Franchises are generally retail businesses, but not always. Somehow they are less volatile in their value than other retail operations, for reason only of the perception being that they are part of a stable operation, and have huge marketing budgets behind them. In difficult times their undercapitalised competitors go to the wall, reducing the number of slices the pie needs to be cut up into, even if it is a smaller pie.

There is another albatross following franchisees, viz. the franchisor and his debtors department. This is a sting in the tail of franchisees’ income statements, particularly where the franchisors do not reciprocate the royalty and marketing fund contributions with a strong brand, and even stronger marketing effort. The effect of this comes to the fore in tough times. When strong stand alone businesses are able to net less than 5% of their sales, outlets of weak franchise systems are contributing all of this to their overlords. So where strong franchise systems command good multiples, their weak counterparts do not.

We will unpack this some more, later in the series, but for now, I hope I have illustrated how foolhardy it is to compare notes with friends in other industries, using the multiples they achieved in the sale of their businesses which may have been in an entirely different industry, different geography, different economic cycle, different … etc.

The paradigm of trust

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When a potential buyer of a business first looks at his intended target, he fits somewhere in the spectrum ranging from deep distrust of everything which will be presented – even before it is shown, to wilfull acceptance of anything presented.

  • The former because the buyer is either very conservative or very experienced;
  • The latter because the purchaser is intent on acquiring that business, come what may, and perceives himself to have very few alternatives.

As a potential seller of a business, it is in the seller’s ambit of control to be able to still the fears and mistrust of the former by having all the facts at hand in an accessible and accurate format.

It is helpful to be able to deal with the latter by impressing him even further (and dissuade him from looking for alternatives) with the good records you have. This is in the realms of PrepareYourBusinessForSale™.

How’s about we indulge in a little bit of prepare your mind for sale.

Selling a business can be very quick, which yields poor results; or it can be slow and mellow, to yield far greater satisfaction. As an outsider to the emotion which fills the minds of business owners, who invariably become business sellers, I have the luxury of being able to stare them in the eye, knowingly, at times. With a knowing smile, sometimes.

“I don’t ever want to have partners EVER again”, says the scared and previously bitten engineering shop owner. He went into business many years back with his brother in law. Now there is a split in the family, and a missing million Rands. They could never agree on the marketing budget, nor on the terms of tying down that large order from Malawi.

“Sure I can sell some equity now, and the rest in a few years. How else will we hand over this lot?”

  • The mind of a man who understands that having a bus number of 1 has always been a problem for the business, his wife, and himself.
  • The mind of the child who never go to grow up, and who is having too much time to see her happiness destroyed by the search for cash flow from the 20th of the month to the 15th of the following month because her passion is causing the business to grow and grow and grow.
  • The mind of the a woman who has run out of talent in the workshop, and know she will burn out without better machinery; expensive machinery.
  • The mind of the guy who is running out of BEE points. And cash. And time. And who just has no more figs to give!

Pre planning, beating a drum to slightly different rhythm, and getting one’s A into G, will set you up to

  • trust a new shareholder, and
  • be trusted as a fellow shareholder

The paradigm of trust. Good feelings.