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

Archive for March, 2019

Occam’s Razor

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An investment conference and workshop in the Winelands last week asked a question. “Where are all the deals?”
The deals, we know, are waiting to happen. The problem investors have is in the information they receive.
Investors know that deals are “there”. Their frustration is in the quality of information. Too little information. The wrong information.

Information is often so voluminous. That is as much a problem as a lack of information. It is a lack of the right information. It provides too many variables to consider at a high level.


Occam’s Razor
Simpler solutions are more likely to be correct than complex ones.
The more uncertainties and assumptions, the greater the risk of getting it wrong.


When a potential purchaser first looks at your business, she knows nothing about it. Heck, I know that many purchasers still know very little after their due diligence study! But that’s another story.

So in knowing nothing about the business, she has to make lots of assumptions. This is where your pitch deck comes in. Remove all the uncertainties. Prove your facts. Be succinct. But above all else be informative and accurate as can be.
But more than that… Give her relevant stuff.
It is all in the preparation and presentation.

People are quick to offer income statement summaries with a fast write up and an afternoon Q&A.
The very next step is too great a hurdle for unprepared businesses.

Sometimes the sellers and their brokers hand out mountains of information. Too often, it is the wrong information.

These guys have expensive specialists working for them. They should have the capacity to wade through your audit notes and adjustment accounts. But that is not where their capacity goes. Sure they will need that stuff for later due diligence. But for now, they want some high-level information.

This is what happens behind the scenes. Yours is not the only business the investor is looking at. She can only look at one business at a time. So they all go into a box. The first one to confuse her goes to the bottom of the box. And then the next one. Anything with too much work to get to the meat moves down the pile.

The business with all the information summarised and decipherable in an investment industry format… THAT one will stay open on her desk. Now you just need to make sure it is a compelling investment. But hey! You’re invested in the business, so that should not be a problem.

Recognise your Rs

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Recognise – Regroup – Refocus

  • When you started your business…
  • When you bought your business…
  • When you gravitated into your business…

Your business got to where it is today, for the most part, because you worked at it.

Nazier Ebrahim’s success is a product of planning and hard work. He knew he would sell his business one day. He needed to do so because if he didn’t, then his heirs would. He joked that he would prefer to enjoy the sale proceeds. “Rather I get myself a fast car, than this lot do”. He gestured towards an array of piercings and tattoos on his crotch fruit with their doting faces sitting at the table.

But the sale of a business is seldom as easy or as quick as selling a home. A business is a living thing. It is moody; varying between brooding depression and excitable growth.

Nazier’s business had been through ups and downs through its years. His success was the product of the tenacity with which he had directed the business.

“Direction” is what it says. The director recognises a problem. (You do it all the time.) And then by drawing on his own experience, he regroups and refocuses. Then he moves on to the next opportunity, threat, or just daily grind. Rinse and repeat.

“Rinse and repeat” is automated as standard operating procedures evolve. It takes time to create workable automation.

Successful automation makes up growing value in businesses because they become more stable. But successful automation also makes the business more profitable because stuff just happens. When the stability and profitability come together, value accelerates; driven by the complementary forces. (Which is why we avoid using simple multipliers to set prices for businesses.)

Nazier recognised that there is no point to reinventing existing automation. This is particularly the case where the system can be rented off the shelf.

So Nazier joined CSuite to make sure that his exit from his business would be smooth and cost-effective.

He recognised the problem and the solution. He has left the regrouping and the refocusing to a system which already works.

Business as usual

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Imagine your business is, or becomes, black-owned as defined in the BEE codes. You go for that big tender, but you still don’t win it, despite your favourable empowerment credentials. Your big non-compliant competitor wins it instead.


This post is also available on audio


In the disappointment which follows you assume corruption. It is our default position in so many industries. Rampant corruption is the one segment of our daily lives which knows no colour. It is the one real equal opportunity activity in South Africa.

But not all tenders fall to corruption. There are businesses of all hues, tones, and grey scales which do not win tenders. Are all winning competitors corrupt? Probably not. What if they have other strengths with which to bargain?

This is where vanilla black ownership fails in the BEE race for sales. For instance, many tenders go the way of the supplier who is able to offer very favourable payment terms. “Look you have a very poor scorecard, but we’ll give you the business if you agree to no deposit and 90 days payment. From statement.” It is the pain that some non-compliant businesses take.

Poor BEE level businesses have to win contracts with other strengths. If the business has big reserves. Or if it can back the terms off on its own suppliers. Or if it is in its own exclusive and strong niche. These are all gaps for contract winning strategies.

BEE imperatives aside, financing customers with long payment terms remains risky. And risk reduces value multiples.

The contract is value-defeating if it loads the customer exposure index, or if margins suffer. Value decreases if higher operational costs cannot be reduced after the contract and the inevitable project losses.

If the exposure the business has to a single contract is outside sound parameters, then key valuation indicators suffer. Valuation multiples fall. Discount rates rise. That’s ok if the profits rise in proportion to risk. Then values rise. Which is why winning tenders are often more costly to the end user. But then tender reviews become the risk. These short term gains can be very dangerous if there is no plan for life after the tender.

So the winning bidder may have financial reserves to fund the tender. He may have enough swing with his own suppliers so that they help him fund the transaction. He may be able to gain some margin in the tender.

Turnover is vanity. Profit is sanity. Cashflow is reality.

Ultimately the cash flow from the deal will work through to value. In the meantime, that promise of value will be tempered by an assessment of risks taken to gain the cash flow.