Tuesday, September 14, 2010

Who will buy your business ?

Any thriving economy needs a broad range of viable and sustainable businesses across a wide range of industries - I believe it is more difficult to start, grow and sustain a profitable business than it is to buy an existing one.

It has been a tough 18-24 months to be in business and to a large extent, the playing fields have changed - buyers of businesses are more critical, take longer to make decisions, battle to raising funding and are of course still fairly uncertain about the future of the local and international economy. I have focused on this aspect before but really believe that sellers of businesses, now more than ever before, need to think like the potential buyers of their businesses.

This entails 'putting your best foot forward' and presenting the best possible picture of your business - this will take some time and may require attention to various aspects of the business. There are of course many factors that buyers consider when assessing a particular business and in some cases, will vary from sector to sector - at the end of the day though, the numbers have to make sense and will be the most important factor in determining a price for the business.

For a great deal of business owners, selling their business may be a 'once off' experience - having spent many years building the business and increasing it's value, it is vital that they plan well ahead to ensure they realise an optimal price.

To do this, one needs to think like a buyer

Monday, March 1, 2010

Fulfilling a business need

The original purpose of this blogsite was to share my experiences of interactions / interventions with small to medium business owners across a wide range of industries - I consider myself very fortunate to be in a position where I can try and fulfill the needs of business owners in my field of expertise and passion.

With any initial interaction with a potential client, we first sit down with them and establish exactly where they are and what they need - this provides a 'status quo' on the business and what will be required to satisfy their need. If we believe we can be of assistance, we provide an indicative fee quote to the client & if acceptable, we start working together.

Every week I will share an experience(s) with a business owner in terms of their needs / challenges and how we plan to assist them.

There are 3 core services we focus on :

1) Help business owners raise finance (R3m or more) for capital expenditure - this would entail assisting with putting together a business plan / funding proposal for submission to a suitable financial insitution and facilitating the process to it's conclusion

2) Provide business development services - this would include viability studies on new businesses / projects, due diligence on a business they intend buying etc

3) Assist business owners in sourcing & securing investors or selling their businesses - this would include a valuation of the business, putting together a comprehensive document for interested investors / buyers and facilitating the process to conclusion. Our focus area is those businesses generating annual before tax profits exceeding R3m.

Tuesday, November 17, 2009

Equity Finance for SMEs in SA

My first article on this blogsite was about the new Venture Capital Tax Incentive SARS was about to launch in July this year - now that the incentive is effective, here is a brief overview together with how it could benefit SME owners planning to expand their businesses.

Access to equity finance by SMEs is one of the main challenges to the growth of this sector of the SA economy – potential growth opportunities often do not easily outweigh the risks and SME owners often lack the expertise and network to reach potential investors. In addition, the typical characteristics of SME companies and entities in SA would be as follows:

· They are forced to grow organically
· Are undercapitalised – often attractive businesses in terms of product, future potential and sustainability, but unable to grow / expand (this in turn can lead to missed opportunities and cashflow pressure)
· Succession planning is not a priority – often, the owner ‘is the business’ and little value remains upon his exit (which results in making the business less attractive for buyers / investors)
· Are generally owner managed – business owners sell their business at retirement
· Do not have middle management
· Generally lack solid financial systems and controls
· Are sceptical towards relinquishing a share in their business (fear of loss of control, future direction of business, reduced profit share)
· Given the current economic climate, access to funding from financial institutions has become even more difficult

Venture Capital Tax Incentive

There was a very exciting development on the SME front earlier this year.

To assist SMEs in raising equity finance, SARS has legislated a tax incentive (Revenue Laws Amendment Act 60 of 2008) for investors in SMEs – the incentive came into effect on 1 July 2009 & will run until 30 June 2021. Very broadly, this development entails the following :

· A Venture Capital Company (VCC) fund would be established & approved by SARS (subject to certain conditions)
· Investors would invest in the VCC which would in turn invest in small businesses
· The minimum size VCC fund must be R 30m
· Investors can be individuals & listed entities & would be allowed tax deductions against their taxable income subject to certain criteria
· Individuals would be allowed a R 750 000 deduction per tax year with a life time limit of R 2.25m eg. if an individual invested say R 1.5m into a VCC, they would be allowed to deduct R 750 000 from their taxable income over 2 years
· Listed companies (& their 70% held / controlled subsidiaries) would be allowed a 100% deduction provided they do not own more than 40% of the VCC.
· The VCC must invest not less than 80% of the fund (R24m in this instance) in SMEs where the book value of the assets after the investment does not exceed R 10m
· The VCC can only invest in qualifying companies viz. SA registered & owned, privately owned (cannot be listed). Non qualifying companies include those involved in financial / professional services, property developments, casinos, liquor, tobacco or arms. Importantly, VCCs may invest in companies involved as hotel-keepers ie. hotels, bed & breakfast / guest house establishments, lodges.
· The VCC would normally invest in certain preferred industry sectors and would have strict investment criteria – these would of course vary from fund to fund.

Please note that the VCC Tax Incentive also applies to investments in junior mining companies – although the investment criteria are similar, the VCC fund sizes & target company asset requirements are different.

What would VCCs focus on ?

A recent survey conducted by the South African Venture Capital Association (SAVCA) on it’s members highlighted the following as the key considerations (in descending order) for investing in a particular business :

· Management – the entrepreneur must be honest with integrity together with a great desire for success, excellent management skills, hardworking & reliable combined with good leadership ability ie. Does the entrepreneur and his team have the capacity to grow the business to it’s full potential ?
· Product / Service – a solid market acceptance for the product / service with a competitive advantage
· Financial – the business can provide a high internal rate of return, solid potential for earnings growth and could be worth substantially more in 4-5 years time
· Market – strong market need for the product / service and potential for market growth

Investor readiness

As an SME owner with plans to expand your business over the next 2-3 years, it is vital that you are constantly ready for an approach by an investor / VCC that is looking to secure investment opportunities with solid potential. So what is required and what can you expect should such an approach be made ? – here are some thoughts & suggestions :

The process of raising venture capital can be time consuming (3-6 months) – make sure you prepare thoroughly to save time
Ensure your disclosure document is clear, balanced & up to date & covers at least the following : background, current position, products, markets, management, strategy, financials & the employment of funds received
In an uncertain world, investors like facts & figures (rather than guesses & speculation)
VCC teams back teams rather than individuals – show that you have a spread of skills
Be prepared to answer very detailed questions about your projections (sales & cost drivers)
Be prepared to devote sufficient time & effort to the process

What to look for in a VCC

By acquiring a share in your business, the VCC would of course have a vested interest in the future of the company. At the same time, it would essential that as the owner of the business, you are clear about your expectations regarding the involvement of the VCC team in your operation ie. what would they bring to the table ? A suitable VCC team should be able to offer :

· Mentoring & advice to the SME owner – together with acting as a ‘sounding board’
· Access to new networks
· Strategic & succession planning input
· Various business development services eg. business planning
· Specific expertise relating to various facets of the business

At the same time, a very important consideration would be to ascertain as soon as possible whether you could see yourself working closely with the new investor on a regular basis.

The advantages & disadvantages of equity finance

1) Advantages

· Funding is committed to a business when you dispose of a portion of the shareholding – the investor will only realise his investment if the business does well
· Right investor can bring skills, expertise & experience
· An adequately capitalised business improves it’s ability to borrow (the banks are placing increased emphasis on the strength of a company’s balance sheet)


2) Disadvantages

· Raising equity finance can be demanding, expensive & time consuming – however, even if you are not successful in raising equity finance, it could be a worthwhile exercise
· You will lose total control of your business – however, a reduced share may be worth a lot more in time
· Business owners would have to invest additional management time in providing information to investors
· There would be various legal & regulatory issues to comply with

Going forward

The advent of the global recession late last year impacted heavily on potential investors appetite for risk. Although a recovery is expected to be slow, there will no doubt be opportunities for investors to take advantage of the growth in certain SMEs - as such, one could possibly see the formation of various VCCs during the course of 2010 across SA.

Capital can make the difference between an average company & a great company – there are many solid SMEs that lack the capital to grow / expand. Although they can be high risk, they have the potential to generate high returns provided they receive the right support / input from the incoming investors.

SA needs a strong, healthy & vibrant SME sector – they are substantial contributors to GDP & have the ability to reduce unemployment.

Friday, September 18, 2009

Rules for Buying a Business

I came across an article recently written by Richard Parker of the Trump University Entrepreneurship Faculty entitled 'The 10 Golden Rules of Buying a Business' - it made a lot of sense so thought I would share it with you :

Rule 1 - make sure the business is right for you ie. your strongest skills must align with the driving factor of sales & profits (in other words, focus on your strengths & don't pretend you are something you're not)

Rule 2 - Never buy a business without Seller financing (ever)

Rule 3 - this is a Buying process, not a Looking process ie. if you are serious about buying a business, set yourself a timeframe in which to secure one

Rule 4 - Every business has secrets ie. make sure you do your homework, prepare properly & do a thorough due diligence
Bold

Rule 5 - There's no such thing as a 'perfect ' business (it does not exist) ie. determine whether existing issues are incidents or catastrophes; adopt an open-ended, but not reckless, attitude

Rule 6 - It's OK to overpay for the right business (& the wrong business is never cheap enough)

Rule 7 - There are more bad owners than bad businesses ie. there are many good businesses being run by the wrong people - these businesses can prove to be gems if you know how to uncover the drivers of revenue, how to improve & grow it

Rule 8 - Fall in love with the business AFTER you own it - remain objective at all times so that you can formulate an opinion based on factual data & logical thinking

Rule 9 - No one cares about your money or future like you do - validate absolutely everything the seller or agent tells you. It is always better to err on the side of conservatism when your money & future is at stake

Rule 10 - Buying a business is one thing; then you must run it ie. ask yourself the question ' am I going to enjoy running this business everyday ?' You must derive tremendous satisfaction from the business itself if you are planning to build it into something great.

Good luck & enjoy the ride !

Friday, August 7, 2009

Do your homework

I have discussed how important doing the right amount of research is, particularly today, in an earlier blog - I believe it is worth emphasising again.
Whether one is starting a new business, growing or expanding an existent one or even 'keeping one's head above water', one needs to manage and make use of the available information. The current economic crisis has taught us that things can change very quickly and dramatically without too much warning - the ripple effect from the credit crunch / sub-prime fiasco was felt throughout the world within a very short space of time - 18 months ago, not too many people had an inkling of what was to come.
Hopefully (& it is very unlikely) we will not experience a similar crisis for some time to come - but it should serve to constantly remind us that we cannot be complacent, should not assume anything and always consider the worst case scenario.
When doing your planning & research for any undertaking, try and get as much independent input as possible from people you trust & whose contribution you would value.

Friday, July 10, 2009

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.

Monday, June 29, 2009

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'.