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2) Up to date, reliable & verifiable financial information - outdated and disorganised financial records create doubt in a potential buyer's mind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.

Having spent many years in the corporate environment, it is exciting to be involved in the SME world (the 'real' world many would say) assisting business owners achieve their goals & dreams. There are of course various challenges facing the SME owner today, not least of which are raising finance, securing additional capital & increasing the net worth of their business.

Ideally, the purpose of this blog is to create a forum for small business owners to discuss these & other challenges but at the same time, finding possible solutions to their needs & wants.

There was an exciting development on the SME front earlier this year - an Act was promulgated in January 2009 (Revenue Laws Amendment Act) incentivising individuals & listed companies to invest in small businesses. Investment funds from both of these will be pooled into vehicles known as Venture Capital Companies (VCC) - parties investing into a VCC will be eligible for a 100% tax deduction subject to certain conditions & criteria. In turn, in order to qualify for this deductible investment status, the VCC must invest in a portfolio of small businesses. The minimum VCC size must be R 30m with the bulk (80%) of the investments directed at companies with a book value not exceeding R10m after the investment. The tax deduction comes into effect on the 1 July 2009.

It will be interesting to see what response there is in the market from existing & new venture capital players - capital is of course scarce at the moment & investors are extra cautious. However, the tax break high net worth individuals would receive (albeit a tax delay until the investment is realised) should prove very attractive. The benefits to SME owners would be significant ie. :

• Capital can make a difference between an average & great company - there are many solid businesses that lack the capital to grow & expand
• A well capitalised business has a greater ability to borrow & invest in capital equipment - how often have you heard of your bank mention that your business is undercapitalised & your company's borrowing limit has been reached ?
• The introduction of the right investor could provide much needed support both operationally & strategically

There has been a delay in the release of the application form required to register a VCC & is now expected towards the end of June 2009 - as a result, one could expect approaches by new VCCs to targeted small businesses late this year.

This of course leads to the question - as a small business owner, are you prepared for an approach by a VCC who could be interested in buying a share in your business ?