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.

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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.

A market valuation is an expression of the expected offer price in a business sale. It assumes the current prevailing economic conditions and political sentiment. It also assumes an adequate demand from prospective buyers with access to capital.

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The market valuation is also a product of strengths and weaknesses in the business. We call them key valuation indicators. Compare the KVIs to the financial statements to justify the valuation. They must align. Information must be accurate, and available in a standard format. The format is very often not standard. That does not diminish the value.

The valuer must draw on experience, exposure to deals, and insight of negotiations. This skill will inform the calculations and their variables.

The market valuation result is what one can expect the Business to sell for, as it is, where it is. It is neither definitive nor prescriptive. It does not take into account the vagaries of negotiation, greed, fear, and force of character. By definition of the balance sheet at the end of a financial period, valuation is also time-dependent.

The market valuation puts a stick in the ground. Use it to plan your next step. It is key to building wealth in your business. Don’t be the pig around the stick which rests above the coals of business transfer.

Pierre Sussex was as stealthy as a Highveld thunderstorm. He walked his factory several times a day. He liked to keep his machine minders on their toes.

Each one had a schedule to work to. Pierre had worked out the best number of parts each machine could produce per day. “Local-efficiency” was his watchword.
Clipboards hung from the corner of each operator’s workstation. He designed reports so that he could run his finger down the last column at any time of the day, and pass comment.
Pierre regarded himself as scrupulously fair on his staff. As long as they agreed with him. Prayer time took place during tea time, Every day. “It keeps everyone focussed on not cheating me out of the time I pay them for”.
He limped down the aisle between machines lined up in the factory.
Every machine with its own local efficiency. “Keeping machinery and operators on the move maximises my return on investment.
“But now it is time. I am 82 next month, and I have put this place in the right frame for a sale. My son agrees with me. And neither of us want to share the business with a black partner. He only holds 12% of the shares, and if we have another partner move in with us, then he will be a minor shareholder. With a boss who is not his dad.”
We walked into the warehouse. “Take a look at all this stock,” he said.
“Efficient machine use and output justify their cost. My people must work. The stock must build up. We will always be able to sell the finished goods.
“We have a part for the battery of every single car which exists on the continent, right now. Nobody else has that. And our customers don’t like to hold stock, so we hold it for them. I will have to build on to the warehouse next year because we will soon fill this one. I put all my profits into stock. If we have a prolonged strike, we will be the only people on the continent with the right parts.”

On a wing and a prayer

We trundled off to the boardroom. And a prayer. Pierre was big on his prayer sessions.
“We make specific parts for the internal part of a battery. They are very specific to each battery size. But our market is opening up now. The new batteries required for the new electric vehicles will all require our parts.
“No, I don’t have any fitted beyond the prototypes right now. But this technological wave is moving fast in our direction. I think we have enough finished parts in the warehouse to supply for a year without having to turn a machine. You know we are in for big political and social upheaval in this country. It is not the same wonderful place I grew up in. I worry for my grandchildren.
“Anyway, here are the financial statements. I want 200M for the business, and then we can talk about the property as well.”
I put my head into the accountant’s office. “Any chance you can get these to me on email?” I asked. We stopped using paper in our office five years back. It had become a nightmare of control issues over clients’ private papers. The risk of fire, and the sheer storage space required, notwithstanding. We prefer electronic storage.
But back to Pierre and his business.
He was a new client. He was 82. He was also an old client. He thought it was a good time to find another owner. He wanted us to manage the process. We had done so for a family member of his two years before.
He was also stuck on the 200M. And that was a problem. Our job is to manage these merger, acquisition, and disposal processes. We have been doing so since 1991. That is a long time in which to learn what works. The stuff which does not work fails for business sellers almost daily.
So there I sat with a hopeful business owner. He had a target upon which he had based his entire retirement planning. He was secure in the knowledge which closeted his own perception of value.
But he was wrong. And that is devastating to a person who wants to get back in the saddle on a farm in the Western Cape. He was tired of the staff, and the sirens, and the stock control, and the late payers, and the approaching social upheaval which he believes is coming.
He was wrong in as much as his business is not worth anything close to 200M. It is not even within striking range of that number. But he has believed for the last decade that this is exactly where he would step off the tram. He has not once, asked for a proper opinion of the value of the business.
Had he done so, he would have been able to adjust his expectations and those of his family. But more likely, he would have been able to address the weaknesses in his business. He may have been able to turn the weaknesses to the benefit of his future.

Here’s a game I don’t play:

• “look I need to have as high a value placed on my business as possible, for purposes of
  • taking my partner for as much as possible
  • to prove to my bank that my balance sheet is really strong
  • to show my employees that the long term investment plan is worth them getting no increase this year”
• “I need you to keep the value as low as possible so that
  • my ex-wife gets nothing
  • I can offer this guy almost nothing for his shares
  • to make a stupid offer for the business”

If Suitegum conducts a valuation on your business, you should understand that under the conditions mentioned in the report, you are going to be able to get that value for your business in the open market.

I have a simple test for the veracity of business valuations which leave my office:

• If this valuation is too high, to what extent am I exposing us to a damages claim from the owner of the business being valued when he is unable to realise the value, and exposes himself unnecessarily?
• If the valuation is too low, to what extent would a commission based broker lose out on potential income if he sells it at that value?
• If I am hauled in front of a bunch of geniuses (auditors, attorneys, judges, magistrates) will I be able to defend each and every finding in the valuation report?

So far that has worked out well.

So when I received a phone call last week suggesting that our valuation had been cast aside in favour of two other valuations conducted by auditors, both of which came in at more than twice the Suitegum value; I sat up straight and asked a few questions.

The circumstances are that the client has had his business valued by us several times over a six year period. The results have been consistent with time and performance. He found himself in the divorce courts in recent times. It wasn’t pretty. A liquidator was appointed to give judgement as to the value of a minority interest.

He kicked the Suitegum valuation into touch, and appointed two audit firms to conduct their own investigation.

In the final analysis, the liquidator was working for a proportion of the valued figure as his remuneration. We have a valuation competitor in the market who charges on that basis. Somewhat compromising, I believe, and in violation of the USPAP (Uniform Standards of Professional Appraisal Practice). With time, someone will test those valuations. Perhaps there will be some explaining to do. Probably not.

Auditors are not covering themselves in glorious integrity at the moment. A profession becomes a business when it chases money at the cost of principle. Why do we expect professional bodies to hold them to account?

Hashtag: 6 CAs on the board of Steinhoff.

The owner of a business has a reality of value based on his real experience of the benefits which flow to him on a consistent basis. He knows 100% that “the business” makes money for him. He knows that it is more valuable to hold on to it, than to sell it below that value reality.

If a perceived premium offer is made – one which tips the scales of value from worthwhile holding, to worthwhile disposal; the run of play changes. In other words, if the offer received “makes sense” in that the owner will be happier as a former owner than as the current owner, then he will sell.

A buyer of a business can only act on imagined reality. Sure, that imagined reality is based upon thorough investigation; but until it is actually lived, the reality can only be imagined. That imagination is unique to the human race, and I suggest is bound up in the fear and greed dichotomy which grips us all, in all the decisions which we make.

For a business owner to dispose of his business, it is incumbent on him to translate his reality of value into perception of value – imagined reality – in someone else’s hands. Again, in other words; he needs to convince the purchaser of the value. Essentially, he needs to sell the darn thing, just as he would sell anything else.

That is what we strive to achieve with our clients – in helping them through the “PrepareYourBusinessForSale™” program to make them “Prepaired” with their eventual new masters. “Prepaired” is not a spelling mistake. It is what shareholders do in advance of selling their equity: They identify the market, and they make what they’re selling, attractive to that market. They pair their offering with the anticipated requirements of the future owners. They get “prepaired” through PrepareYourBusinessForSale™.

Where realised value meets imagined reality – made incarnate through the transfer of retirement funds. That’s a good thing!