One of the biggest hindrances in selling a business is the ill preparation of documents, often coupled with exorbitant asking prices. This is most often the case at the lower end of the market, or in instances where there simply is no data available because the business has not been around long enough to generate any.
This latter instance is most often the case where someone has started a venture and seen within months that it is not going to work. Instead of liquidating, he tries to pass the bad deal on to someone else to recover some of his investment. He also hopes I suppose, to find a sucker to take over the three year lease which he has signed, and given up a personal surety-ship for! But that’s another story.
I was recently approached to give a valuation opinion on a business being targeted by an old client of mine. I suppose it is unfair to say that it was being actively targeted as such, because the target’s owner had really solicited the suggested sale with my client. After the usual non disclosure niceties were complied with from our side, we were sent a spreadsheet showing last year’s performance, and what I thought looked like an optimistic projection for the next five years.
There is nothing different here from lots of attempted sales we see in the example I mentioned in the first paragraph: Simple spreadsheet, optimistic reassurances for the future, and an asking price based on the future projections. The difference I suppose, apart from the asking price being in the tens of millions, was that the seller happens to be a listed company on the JSE!
At first there were no audited financials available. Reading through the email thread when the financials were eventually sent to me, it is clear that there was a concerted effort made by my client to get the financials out of the seller, which was complied with only on the eve of the deadline for the tender of offers from interested parties.
What did the financials show?
- The business being sold is technically insolvent.
- The business has only one customer – the seller!
- Key expenses have been left out of the spreadsheet.
- The sales turnover has been slipping year after year.
- And a whole lot of other nonsense.
In the SME market, all buyers would head for the hills on this one. In the corporate market we expect better behaviour. Do we get it? You decide.