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

Archive for the ‘PYBFS Series’ Category

Valuation Myths: Valuation is always based on profit

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PYBFS022

A while back I suggested that business owners should spend less time worrying about their sales turnover, and consider the importance of net profit when apportioning value to their businesses. While that certainly puts us on the right track, it may also lead down a trail of misrepresentation.

The basis for the earlier assertion is that buyers of businesses are looking for a return on investment, and similar businesses with similar sales figures will be differentiated in their value by the bottom line. Nothing wrong with that assertion until we introduce some other variables.

You may recall that both businesses we previously spoke of were in different cities, manufacturing the same goods with the same turnover and similar expenses, but one had a lower cost of sales because it is closer to its principal suppliers. It had an immediate advantage with stronger cash flows, and after paying the same expenses as its counterpart, ended up with more profit. We concluded therefore that the more profitable business would be more valuable, and we are probably correct.

So for the purposes of this discussion, let’s assume that all those variables are equal; the two businesses are very close together and now have the same suppliers at the same prices, and therefore the bottom line is the same for each.

Fixed Asset Value

The variable we will introduce now is in the fixed asset value of the business. One business invested heavily in equipment twenty years ago. At the time the owner was lucky enough to be granted a loan to get up and running, and he bought his equipment very wisely. He concentrated on good German technology, perhaps spending a bit more than he could really afford at the time. But heck, it has been worth it. He has hardly had a breakdown.

Every year he takes his wife to Europe for two weeks where they spend two days justifying the trip by “visiting the factory parts division” where they purchase the dies for the next year, even if last year’s dies were only installed six months ago previously. Having placed the order (which may as well have been done online) they continue on for their annual ski holiday.

A business like this will typically have written off in their books all the machinery except the new delivery vehicle for which they paid cash. So the equipment has very little carrying value and would probably not fetch a very high price on the open market given the new computer controlled wizardry that is available today – the same electronics that makes the replacement value sky high.

On the other hand, Darrel

This business’s neighbour with the similar profit has done things differently: He was never able to get a loan because the government had introduced some social engineering into the mix at the time he got into business, and money was less easy to get hold of for him. So he relied on supplier rental finance to start with, scraping and battling along until things started to happen. With growth he invested wisely in new equipment, replacing and modernizing, and then as the whole factory hit its sales and production straps, he was able to really go to town on the latest and greatest.

He does not have the old workhorse machinery that will never break, but he does not really need to worry about that because he has a good replacement and modernising policy. The machinery is taken apart every year at the annual shut down when agent trained technicians move in, replace, lubricate and provide a new warranty for the next twelve months.

So which business is more valuable? Answers on the back of a R200 note and send to….

This situation immediately takes the “multiplar-bar-twenty” crowd out of the equation as far as providing a reliable valuation is concerned. The first owner would perhaps be grateful, but the second one would be leaving cash on the table, without a doubt.

This is a very simple example, and of course, there are other variables which come into play as well which we will deal with later. When they are all taken together, some interesting dynamics mean that valuing a business is best left to professionals who know what businesses really sell for at the current time, in the current circumstances.

Rental agreements

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The sale of a business requires a rental agreement. The sooner you ensure that you have yours in your PYBFS file, the better. Why do I say this? Many business owners do not have this very important document because they have never received a copy.

Mad rush

Think back to the time you signed your first lease. There was a mad rush as you prepared to get the whole show on the road. Then there was a rush into the rental agent or landlord, some last minute reading, and queries. Then you rushed out the door to get the next step in place. You know you signed the document. Somehow the landlord always signs last. They called you later, or more likely you had to make several calls yourself. They told you the agreement had been countersigned. In the excitement of moving in, you never received a copy of the agreement. This holds true for a great many business owners I see. Whatever the circumstances, make sure you have a copy of the lease agreement, and place it in your file. Make a scanned copy and save it to your PYBFS desktop folder.

Lease reductions = higher value

While we’re on the subject of lease agreements: You should take any opportunity to lower your rental. You would be well advised to do so in the tough economic conditions we’re currently wading through. You can renegotiate at the end of a lease term. If you’re a very persuasive character, you may be able to negotiate a lower rental cost midterm.
Every Rand lower your rental, your profit will rise by the same amount. This much is obvious. The value of your business will rise by some multiple of each Rand saved. That extra value will go to your pension fund for its own growth, and so on.

So, how can you persuade your landlord to drop your rent to last year’s amount? Or can you persuade him to forego the annual increase this year? Keep in mind the effect on valuations, and you may find yourself negotiating with a bit more vigour!

Depending on your industry, you may think about negotiating a new lease in advance of selling the business. For instance, a retail store without a lease is no longer a business worth selling. Retail landlords know the value of the lease to their tenants. The landlord must commit to the new owner with a lease on the same terms and conditions as those currently enjoyed by the owner.

Most factories can be moved, albeit with some difficulty, and the move shouldn’t trouble the customers too much. Of course in boom times, suitable factory space can be difficult to find. But then again; are we in boom times?

Pitch Deck 03 Products and services

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When a potential business investor looks at what he’s buying, he wants to know exactly how the business derives its income.

What do you do?

Businesses receive money in exchange for one of two things; the sale of goods or the delivery of a service. Perhaps there is a combination of the two. Sellers are often complacent in describing the activity or product. It is easy for this to happen because they are au fait with what they do. Their conversations run away with details of plans and opportunities.
Slow it down a bit. Describe from first principles the background need for your product or service. Where does your business fit into the supply chain of an end product? Where does the final product benefit the end consumer?
It is important to give your prospect a bit of a background to the products or services. If you place the story in context he will find his bearings sooner. He is less likely to shift his interest to an easier to understand business.

Pressure in the minority

You will do well to remember that yours is not the only business on the market. So make it as easy as possible for the buyer to understand things. You want lots of interest. The negotiating power of the seller goes up with the number of interested buyers.

Vaguelly specific

Do not create problems for yourself in the supply chain, or in the market. Avoid using brand names unless you have sole or proprietary rights to a product. If you have a clear competitive edge in a very full market, then the exposure may help the sale. But be careful about letting suppliers know that you ever intend to sell. Suppliers pulling back credit limits can damage your sale prospects.

Non-disclosure agreements are a good start, but they are not foolproof. A drunken braai saturated yob, who looks like the kingpin Monday to Friday, can do you a lot of unintended damage on a Saturday afternoon with his like-minded friends.

Shareholder register

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Who owns your business?

Who are the owners of your business? I ask this because a surprising number of business owners do not know. Many have forgotten the history of the enterprise. It was once a very convenient relationship. Now it is a muddle. It is easier to get confused about this, and many people do. Here is a scenario:

Some of our clients started out in difficult circumstances. Today’s successful business was not always so calm. He may have founded the business from a position of desperation. A retrenched former employee needed to put food on his table, and clothe his kids.
Having been an employee for years, he ventured out into the small-business world. To call him naive would be accurate. (Yip; it wasn’t only you. And if you weren’t naive, I’m sure you know somebody) The business ran into trouble. Creditors liquidated it. Then his bank sequestrated him. He was not a disciple of Peter Carruthers.

Wiser, and desperate to survive, he started out again. Only this time, he did so from home, without the expense of a landlord. But the second time around there was a small complication in that he had several judgments to his name. We can be so unforgiving of those brave souls who step to the fore. They give effect to the politicians’ platitudes. You know; about small businesses being the cornerstone of our economies.

Our less naive, and now more resourceful entrepreneur, had to make a plan. He approached a friend to stand as a silent partner. That friend would also be the legal frontman of the business.
People do this.

White people fronted for entrepreneurial black people under the old corrupt mob. You know, before the current corrupt mob. Brave or greedy, these white people saw an opportunity. It was an economic reality. Race-based fronting is not new. It was illegal then too.

Some businesses which thrive today, still have the original owners on paper. The friends of the actual businessmen. Owners who never go near the businesses. Owners who have no idea that they own businesses.
This can get tricky at the time of selling the business. And you know, all businesses get sold if they can keep their heads above water long enough. Have I mentioned before that businesses are very valuable retirement assets? Your business might be gold.

Divorce

  • There are many reasons for, and examples of, legacy shareholders still owning businesses.
  • Husband and wife start out in business together and then get divorced.
  • Siblings take over the business from their parents, without defining duties and expectations.
  • Seed capital partners who themselves have diluted or merged.

This is not an issue for most readers. But you do not know until you look at your share register. Your eventual new owner of the business will want to see it.

Go get it out. And give it some thought.

Consider this

It once was preferable to sell your business out of the company or cc. The asset deal was the safest option for the seller and the buyer. For a developing set of circumstances, it is now better to sell your shares. The equity deal could save about 60% of the tax bill on the transaction in the entrepreneur’s hands. Tax calculations have changed to benefit the shareholder as an individual.

Shareholder agreements may have participation and preemptive requirements. The memorandum of incorporation of your business will define these requirements. If your fellow shareholders are not who you assume them to be, then this could get interesting.

It is better to deal with this stuff now than when you are staring down the boardroom table of a due diligence. Do so before you are dead, dismembered, or comatose. Your heirs will thank you for taking action on this advice. They will write songs about you.

Restraint agreements

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PYBFS018

Sometimes you need to look at the end effect of what you’re trying to achieve, at the start of, rather than during the process. So, let’s jump ahead to a time when you actually sell your business, or (as I like to remind you) have it sold for you.

He said, she said

There will be an agreement of sale, which should be in writing. Even though verbal agreements are binding, my experience is that verbal agreements are worth the paper they are written on. There is too much of the “he said, I said” for verbal agreements to make sense.

At the time of reaching that agreement, the question of restraints will be raised twice.

In the first instance, and most obviously, you will be restrained from competing against the purchaser and your old business for a period, in a region. Give some thought to the consequences and start planning accordingly. Think about what you are or not prepared to accept, and if there are a whole lot of reasonable conditions you are not prepared to accept, ask yourself why you are selling this business in the first place.

It is reasonable for a purchaser of a business to expect to not have to compete with the guy who knows all his customers really well. Allowing the seller to market himself to these same customers could put any new owner out of business really quickly.

What have you been up to?

The second, less obvious instance of restraints, refers to the restraints that your business itself may be subject to. Many buyers’ attorneys ignore this very important element for some reason, I suppose because it is not so obvious.

But can you imagine the problems which would precipitate out of this situation: A buyer, makes a careful study of the target business and is satisfied with the cash flow issues discussed with a seller, and decides to buy. He then satisfies himself that together with his plan to acquire the rights to several other lines, the value of this investment warrants him taking out a second bond on his home, and borrowing some money from his elderly parents. Six months after the deal has been consummated, his biggest and most important supplier pulls the plug because the seller never told the buyer that this major supplier had only agreed to supply him on condition that he did not represent the supplier’s biggest competitor, which the buyer now does, albeit without being aware that he has breached an agreement.

When Suitegum is involved in the transfer of a business it does so, generally on behalf of the seller, but in good faith for the purchaser as well. One of the elements which we interrogate through our valuation process is the integrity of, and the exposure to suppliers.

So…

Think about what restraints you will be prepared to subject yourself to, once the business is sold, and have another think about what promises you have made to suppliers with respect to giving them special prominence in your business. The latter should be listed in your PYBFS files, both electronic and hardcopy.

Valuation indicators: Shareholder agreement

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If there are more than just you as a shareholder in your business, chances are that you have not put in place one of the most fundamental building blocks for the creation of value in your business:

The shareholders’ agreement

Let me explain. (Oh, and even if you are the sole shareholder in your business, you should pay heed.)

The shareholder’s agreement is more than a document governing the number of shares or percentage of shares held by each person (or entity). It helps deal with the other shareholders’ family in a time of crisis. It provides you all with a negotiated plan of action in the event you are incapacitated on a Sunday evening. It is something which can possibly stop your bank accounts being put under stress by the wife, girlfriend or children of your now dead partner.

The shareholders agreement will dictate how shares, or even the whole business will be sold or otherwise dealt with in the case of a fallout of shareholders. When you guys got together you never considered that one day there would be a divorce. The state forces us to contract for this eventuality in our personal lives, or face the whim of the courts. But in our business lives, which usually get started some time after our marriages, we are reluctant to take the same steps.

The shareholder’s agreement will help to protect minority shareholders in the case of a sale of the business. If you own less than a portion of the total equity, you are at risk of arriving at work tomorrow morning to find that in place of your shares, you have a cheque for the proceeds of the sale, which you knew nothing about.

A shareholder’s agreement can insure that all shareholders have a preemptive right of first refusal on the sale of any of the other shareholders’ shares. That can be very valuable in five years time when Big Larry wants to take off with his mistress.

A shareholder’s agreement can regulate the manner in which new shares are issued, and give you some say in the manner in which new issues are taken up, and by whom.

What happens if one of the other shareholders is a company, and that shareholder’s shareholding changes? Concentrate here. The control of your biggest shareholder changes to that of your competitor, or your ex wife’s new boyfriend… You don’t want to find that your electronic key no longer works on the first of next month.

What have you agreed to in the event one of your shareholders is sequestrated or liquidated?

How, or on what basis will you value the shares of the company in the event one of the shareholders wants to sell his shares to the other shareholders?

How will the shareholders’ loan accounts be handled in any of the above circumstances? And how will funding be sourced and repaid?

What is your agreed dividend policy; or do you simply have an argument at the end of each year? Wouldn’t you prefer to have left some of that money in the account after the last financial year end?

Many businesses actually fail because this very important document is not in place to regulate the way shareholders direct the directors, who (let’s face it) in our realm, are usually the same people. Such a failure leads to all the shareholders losing all the value built up in the business from the start to the time of the failure.

But most important, one day when you decide to sell the business, and all has gone well, how will you agree on the method of sale, and the distribution of the proceeds?

If you are a one man shareholder, read the above again, and give it a think. What will you do when someone offers to buy a portion of your business one day. I know what you should do. Visit an attorney with all these questions, and a bunch of others I have not brought up.

But there is more…

The memorandum of incorporation (MOI). The government put this into place for us a few years ago. Of course we were given an opportunity to make it agree with what we intended in the shareholder agreement, but most of us didn’t bother. The problem is that if there is conflict between the MOI and the shareholder agreement, then the MOI will hold.

Really. It may really be time to spend some money with an attorney.

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.

Valuation indicators Type of business (part1)

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PYBFS015

For many years, the obvious question we would ask all our prospective buyers of businesses, is what business each would like to buy; that is, if they didn’t open the dialogue with a statement like “Hi, I’m looking for a small restaurant / coffee shop / factory / workshop” – the standard greeting from buyers in our industry!

Everyone has his favourite, and equally everyone has his pet hate:

  • Factory owners hate the idea of retail food outlets.
  • Retail food franchisees don’t see why they should have to work as hard as a factory owner. (Their perception, not mine)
  • Retailers tell me how they don’t want to call on their customers – “They must come to me”
  • Agents are happy to rent small offices, employ a few people, and move boxes. Preferably from home.

And it is this difference in favourites, coupled to an ever-changing macro-economic environment which contributes to the differences in values from one sector to another, from one time to another.

The old maxim of “if you have no shop, you have no business” is true for retailers, more so than it is for factories, for instance. Retailers in the small and medium size stratum are notoriously short sighted, in the opinion of almost everybody else. Most retailers are at the mercy of their landlords to start with, and are more often that not, abused by these wily foxes.

The big retailers can swing enough clout to turn the tables and have the landlords at their beck and call, while the small guy must simply take everything that is thrown at him from enforced opening and closing times to arbitrary rule changes, usually at the insistence of a much bigger retailer.

Of course, becoming a small retailer has enough of its own hurdles to overcome, that it’s a wonder that there are any of them in the bigger centres at all. Personal suretyships as well as bank guarantees often accompany the inflated rentals which subsidise the much lower rentals paid by their bigger colleagues in the anchor positions.

In difficult economic times, the small retailers are taken out quickly, and we were inundated with requests to sell “for almost anything” over night. So, retail values plummeted. As times improve though, the buyers of retail operations flood into the market to purchase the very few available businesses still operating after the squeeze. Demand drives prices up in a market being held dear by now cash flush owners.

Demand for retail businesses in good times is high, because most small operations are easy to run, and usually don’t require any specialist training. Entry level buyers from the ranks of the recently retired, retrenched or stressed are the fuel that feeds this machine.

During 2006 we saw a major shift in value from the factory environment to retail because of BBBEE initiatives being brought to bear on factory and wholesale businesses. White people unable to stomach the idea of sharing their businesses sold up and moved to retail where the same pressures did not exist. With the nexy round of codes of practice being released in 2007, this trend reversed with the perceived diminished BEE risk, and retailers suffered as the move to manufacture strengthened.

The fall in retail value was cushioned by the rise in consumer spending with the credit largess of that year and 2008. Big spending led to high profits, which attracted high rentals from more and more shopping centres and strip malls opening.

Came the end of 2008 and the so called “credit crisis”: many, many small and medium size retailers fell off the wagon and placed themselves on the market. A flood of supply of businesses attracting few buyers. None of those sellers had pre-approved credit facilities. The combination led to a general plummet in retail value.

So the first to feel the heat as the global credit crunch took hold were the retailers, with many of the buyers of 2007 and early 2008 now closing shop, unable to sell. That was first true for luxury item stores and fast food centres. One trendy night spot franchise in  particular, had as many as 38 of its franchisee operations for sale in 2009.

With a rise in supply and a fall in demand of any income producing entity, comes an associated fall in any of the multipliers which indicate its value. With a fall in profits, there is a magnified effect on the fall in values.

From all this it is easy to understand the high amplitude and frequency of value change in retail operations from extremely low profit multiples in poor times to frankly stupid multiples in good times. “Stupid”, because it is these new owners who will be taken out in the next downturn.

Pitch Deck 02 Suppliers

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Risky business The ultimate sale of your business is a risky thing for that business. Sellers either realise this and react accordingly, or they give it no thought at all and blunder into a mass dissemination of previously guarded intellectual property – a course which will damage the business in the future, for whoever owns it.

You need to be wary of how you present the information given to potential buyers, some of whom are not as honest as we would like them to be. Consider two different businesses:

  • The owner of a small supermarket on the one hand, with his very wide range of suppliers, all well known in the market place; and on the other hand
  • A niche manufacturer of specialized components to the mine drilling fraternity who purchases wear components to fit to his patented head.

The sensitivity of the latter is much higher. In a meeting with the former, and the owner of another supermarket who is looking to invest in other ventures, the conversation might sound like this: “Do you buy direct from Liger Brands, or do you go through the DC? When you deal with Liger, you should ask to speak to the new guy Louis – much more helpful than Joe.”

The niche manufacturer will be far more guarded in even telling the prospect that he imports his components from China, let alone the name of the supplier. These details are more likely to come out through a due diligence process after the deal is signed.

Open up and die

An example: We were involved in the sale of a motorcycle parts wholesaler which had run into cash flow problems associated with rapid growth and a depreciating currency. (At one time they were selling older inventory at the same price as the new replacement goods were costing them – how’s that for a business model? But that’s another story.) The business had sole agencies for a number of lines, and general agencies for others. They had prepared tables of information on gross margins, sales trends and flow through profits. The prospective purchasers were appreciative, and through the process there was a short tussle between two buyers to become the new shareholder of the business. Eventually it was sold to the higher bidder.

But midway through the process a very well established motorcycle wholesaler entered the fray. The so called “ideal purchaser”. This was very exciting for our client. Then I calmed the waters by asking if it would be usual to supply this information to other competitors. Would it be okay for us to tell Biglad Biker Bloke (BBB) what the margins were on a product we supplied to them; but more than that, to tell them what our sales on that product had been for the past three years? Well of course not. Imagine how upset would another prospect be once the sale had gone through, and he discovers that BBB has had access to the same data he had, and is now using it to force prices down.

Would you normally supply market sensitive data to a competitor?

The situation resolved itself when BBB told us that they were only interested in some of the brands (the most profitable, no doubt) and would be retrenching all the staff in the transfer.  That was the end of that negotiation. More on this in a later instalment.

Non disclosure agreement (NDA)

An important question: If the prospective purchaser picks up the telephone and calls your supplier; how much damage will be done when the supplier discovers your business is for sale? This is an issue which needs to be dealt with by the M&A practitioner guiding you in the sale of your business, and should be dealt with in the non disclosure agreement signed by prospective purchasers prior to even the name of your business being supplied.

In the meantime, the advice here is to limit your output of supplier information in your Pitch Deck to fairly innocuous generic information to start with. Wait until you have a better idea of who you are dealing with, and what their intentions are. A lot of this information can be provided in subsequent handouts, and even as a generic “promise” to be proven with the due diligence.

Failing to plan? Planning to fail?

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PYBFS013

Brian Tracy said “ Failing to plan means planning to fail”
In the mad rush to increase turnover in the run up to a sale, the very essence of the business is often ignored – its raison d’etre: The bottom line and the sustainability thereof.

The formula seems simple: Raise the sales, cut the expenses any way you can, show a magnificent profit; sell to some greedy purchaser.
Unfortunately it is not this simple for a number of reasons.

  • Good quality business buyers and investors always make their agreements of sale subject to a suspensive condition of sale (or condition precedent) in which they require to be satisfied as to the state of the financials as well as satisfactory answers to a lengthy due diligence questionnaire which they will have formulated over several years. During this process they will look for sustainability.
  • Businesses do not always sell quickly. In fact very often they take a long time to be sold, and during that period they will need to be sustained themselves, for themselves. There is no clause which allows a business to deteriorate during the due diligence and financing phases but which still locks in the purchaser. (Well I suppose there is, but you’ll struggle to get a buyer to sign it.)
  • Businesses need to grow, but at the same time remain sustainable and fundable. Uncontrolled growth sucks up cash flow better than any super sopper mopper you have ever seen. With an impending sale looming, quick last minute growth will sound the death knell for most sellers.

As with so many things of any value in life, businesses need to grow in value in a well structured and planned way which takes time and patience, and they need to have the following elements in place:

  • Sales, margins and profits
  • Infrastructure
  • Intellectual property
  • Sustainability
  • Balance sheet

Sacrificing margin to grow sales helps nobody but the psychologists. Raising sales through good marketing efforts while maintaining margin is great. Great that is, as long as your infrastructure is in place to sustain the delivery to customers. But very often, the infrastructure spend bites into the profit line. Worse than that, spending on more staff and the delegation of responsibilities can also bite into the intellectual property of a business, and where the barrier to entry is very low, even bigger problems can arise.

Strangling a business through ensuring sustainability without pushing the risks a bit will ensure that you have a boring stagnating venture that you wish to sell, if only to stop the boredom.

Planning makes the difference.

Just as planning for the sale of a business will make an enormous difference to your life when the sale happens, so planning the growth of the business beyond just adding sales to the top line will allow the business to grow in a controlled manner rather than in fits and starts of feast followed by cash flow crisis. Your added sales may bolster your cash flow initially, but where will your inventory come from, and who will finance it, pack it and ship it? Who will provide the extra after sales service and explain to the greater number of customers how the widgets work? How will you collect the money, account for it and bank it? And how will you survive in the meantime?

Working through bottle necks in advance will not only save you a lot of grey hair, but will also add value to the business long before you have to, or want to sell it. Of course the added benefit is that you get to enjoy stronger cash flows while you still own the business.