Thinking ahead

We are all in the midst of the 'great recession' which hit us hard late last year and looks set to continue for some time to come. Although a very tough time for most businesses, it can also be a good time to focus one's attention on the key drivers within a business to ensure sustainability - although business owners have different goals for their businesses, most of them will probably agree that increasing the value of the operation over time is vital.

Some areas of the business to consider could be :



1) Revisit your business model - what are you offering your clients, how are you connecting with your clients, what are the revenue streams & associated costs etc ?

2) Is your business plan current or if you do not have one, set aside the time to put one together - it is a worthwhile exercise to focus on each aspect of the business.

3) How certain are you about where future business is going to come from - look closely at your existing clients, talk to them & try and establish what their plans are for the next 6-12 months. At the same time, how will you secure new clients ?

4) Should something unforeseen happen to you tomorrow, could the business survive without you ? Without getting to bogged down with paper, make sure you have the necessary systems, controls & processes in place so that your staff know how everything is interconnected. Do not assume that they know what 's going on in other areas of the business.

5) Following on from the above point, make sure that you have financial systems in place to produce management accounts very soon after the previous month end - make sure that you get the right information relating to the income statement, balance sheet & cashflow to monitor performance

6) Take time to think about what a buyer of your business would focus on & make sure you these are assessed regularly.


We spend so much time and effort on our businesses - it will pay dividends
to critically evaluate all the key aspects of your business on a regular basis so that we it comes to selling, you can derive the maximum return.

Put your best foot forward

We have had enquiries from four totally different businesses over the past 1-2 weeks regarding access to potential investors - unfortunately, all four gave the impression they had left things to the last minute ie. the potential for expansion was there but they were running out of cash.



Finding a suitable investor today is a lengthy process & given the current global recession, expect higher returns for taking on risk. Investors are of course inundated with approaches by business owners to invest in their businesses - to really attract their attention right upfront, you have to put 'your best foot forward'. By this I mean taking the time to put together a professional business proposal in which you tell a compelling story as to why they should put money in your business. They will look for the following :



1) A business that is unique in some way - does not have to be the latest, most advanced product on the market, it could mean having expertise that very few other businesses have

2) Management - who is running the business, how experienced are they & can they achieve the future targets they have set ?

3) Financial projections & return on investment - are the figures realistic & are they backed up with sound assumptions ?
4) An exit in 3-4 years time - an investor will look to 'cash in' their original investment some time in the future. This could be a sale back to the other shareholders or to an outside party.

There is definitely no substitute to a well prepared & professional business proposal - if necessary, get help from someone who has experience in this area to ensure you 'put your best foot forward'.

Working on your business

Determining a value for a business is not an easy exercise and is commonly described as the most inexact science around ! When it comes to valuing a small private business, the task can become even more difficult - why is this the case ? To a large extent, it is a subjective exercise where the opinion of the valuer regarding the future of the business is expressed.

There are various methods used today to value a privately owned business - from earnings multiples, discounted cash flows, net asset value, return on investment etc. Without getting into the technicalities of this exercise, thought I would mention a few aspects of a business that could affect it's value either positively or negatively (again, they are subjective) viz.

1) The industry in which it operates - is it growing or mature, what recent or current developments could have an impact ?
2) Up to date, reliable & verifiable financial information - outdated and disorganised financial records create doubt in a potential buyer's mind
3) Is past profitability sustainable - it is always difficult to justify future projections if past trading has been below par (unless of course you have secured tangible new contracts)
4) Reliance on the owner of the business - how did he create his success and are his existing client relationships very dependent on him?. Creating a management structure with clear roles & responsibilities covering key aspects of the business becomes critical as the business grows. He may also have certain key skills that no one else in the business has - once he goes, a lot of value could go with him.
5) What is the extent & diversibility of the client base - having one or two big clients is a major risk should you lose one together with having a large exposure to one industry sector
6) What are the barriers to entering the industry in which the business operates ? - if they are low, it makes it very easy for a competitor to enter the industry
7) How many competitors are they - a large number of competitors can place pressure on your margins
8) How unique is the business in terms of the products or services it provides ? If they are easy to replicate, you could lose any competitive edge you may have.

There is a great saying that applies to all business owners - ' Are you working in you business or on your business ?' As business owners, we should be continually working on our businesses to ensure that we improve
the way we do things & how we present ourselves to the market - our goal must be to ensure the long term sustainability of a business so that ultimately, it is very attractive to investors or buyers.

Plan the sale of a business well in advance

Building a successful business takes a lot of time, energy & money - so when one decides to sell, ideally it should be planned well in advance to ensure you are rewarded accordingly.


Over the past few years, we have dealt with various business owners who have decided to sell but unfortunately have not planned well in advance of their expected exit - they normally fit one of these profiles :

1) They are owner managed - the owner 'is' the business and once he has left, a substantial portion of the business's value goes with him. With a clear organisational structure and succession planning in place, this can be overcome. Ideally, the incoming buyer wants to know that the business can function without him.
2) Unreliable and outdated financial information - buyers expect up to date information to substantiate the purchase price. If a business operates as a close corporation, it is worth considering audited financial statements for the most recent year end - it adds credibility to the figures
3) Lack of management systems - particularly operating manuals for the key areas of the business. If everyone in the business knows exactly what they have to do (roles & responsibilities), the business becomes far easier to manage
4) Lack of a medium term vision for the business - where is the business going & how is it going to get there ?
5) A hesitancy to provide detailed information on every aspect of the business - there is no substitute for having the right information when making a decision. Buyers expect a professionally prepared disclosure document right upfront so it is worth spending the time in preparing one.

For most business owners, selling a business normally only happens once - creating the right first impression in the mind of a buyer is critical. It starts the process off on the right foot & should reduce the time and effort in concluding a sale.

Would be great to hear from business owners on their thoughts / experiences regarding this critical aspect of owning a business.

Think Win / Win when buying or selling a business

Last week we finalised the sale of a small chemical manufacturing business - the buying and selling of a business can be a complex exercise that can take months to conclude. With this business though, it was a real pleasure dealing with the seller and buyer and the deal was signed (from start to finish) within 3 months of commencing discussions.

I firmly believe that the main reasons for finalising this deal in a relatively short period of time were :

• The seller was serious about selling and had a good reason to sell
• The buyer was clear about the type of business he wanted to own and was prepared to invest his own money in the business ie. he was not totally reliant on raising debt for the business purchase
• Both parties were accommodating
• The seller was prepared to provide any information about the business to the buyer during the initial discussions
• The asking price was fair
• The seller was prepared to make himself available to the buyer for a period of at least 6 months after the effective date to provide any input / advice

Thinking win / win as a seller or buyer of a business goes a long way in ensuring that an acceptable deal is concluded within a relatively short period of time.

Ensure viability first

I met with the members of a newly formed CC last week - their plan is to start a business that manufactures toilet paper, detergents & soaps. They had completed a business plan but unfortunately it had very little research information on the market environment (particularly competition) and the production process.

My suggestion to them was to undertake a thorough viability exercise on their proposed business & if it still made sense, proceed with putting together a comprehensive business plan - they had estimated they would need to raise +/- R 1.2m to get the business going. With this sort of commitment, rather spend some money upfront to satisfy yourself it is a viable undertaking.

One can always approach a SEDA (Small Enterprise Development Agency) in your area who may assist with subsidising the cost of a viability study and business plan should your application be approved.

One of the most enjoyable aspects of what I do, is having the opportunity to meet with potential new business owners from all walks of life to discuss their new business venture - it is really encouraging to see more and more people entering the SME market to follow their dream to create something special.The type and size of the new business opportunities that one sees are diverse, spanning a wide range of industry sectors.

The reason I meet with them is because most of them need to raise finance or possibly to secure an investor but are not sure how to go about it. I thought that this blogsite would be the right forum to share my experiences with prospective SME owners (no names mentioned of course) & how we tried to assist them in this regard.

Every week I will post an experience I have had in the previous week - what the proposed new venture entailed, what they had done so far, what they still needed etc. In addition, I will include any success stories & learning experiences that the SME owner has encountered.