You Cannot Afford to Jeopardize the Successful Sale of Your Business
As a business owner, what is your most valuable asset? Chances are that your business is where a bulk of your wealth is tied up.
At some stage, it would be wise to de-risk from your business and take some value off the table by selling a part of it or even by selling it in full. And when you do, you’ll obviously want to maximise the value you extract.
With a significant portion of your capital invested in your business, achieving an optimal deal in the sale of your most valuable asset is critical. You cannot afford to get this wrong.
The problem is that the conventional process through which a business is sold is not designed to serve you, the business owner. Instead, it places the power in the hands of the acquirer, enabling them to control the process and leaving you on the back foot, often with little choice but to comply or lose the deal. With their deep pockets, acquirers can call the shots and drag a transaction on for as long as they like, often leaving you, the seller, with little choice to comply or lose the deal.
For acquirers, buying a business is largely a financial transaction, and they approach it as such. For sellers, on the other hand, there is far more of an emotional investment. Almost every week we hear stories in which a seller sold for far less than they expected, or they accepted a deal structure that put all the risk on them, or even where the deal didn’t even materialize. These situations can be very onerous and incredibly stressful for a seller.
If you don’t follow a thorough process to the letter, you can jeopardize your hard-earned wealth and put a massive strain on your long-term financial freedom. On the other hand, if you adhere unwaveringly to a guided and structured methodology, you can conclude a profitable deal and maximise value for yourself. You’ll then have greater scope for diversification with which to achieve the goal of financial freedom for you and your family.
So how do you make sure you get the best deal?
Firstly, you need to be in control.
How do you achieve this? By approaching and attracting offers from a large number of between 50 and 80 serious potential buyers. Subsequent to this, you need to have a process that both drives completion of the deal and simultaneously allows you to maintain your control.
The truth is that you can never time the market to sell a business. It’s pretty much like trying to time the market when trading equities. However, if your business is on a growth trajectory, it’s a good time to go to market. Good businesses sell. It’s that simple. Conversely, it’s difficult to sell a business when it’s on the decline.
The investment principle of time in the market also applies to selling a business. The world of mergers and acquisitions can be messy and unpredictable with many variables and unknowns. The perfect buyer for your business may have just concluded a transaction, leaving them in the position that they are unable to make any further acquisitions for the foreseeable future. With proper planning, a thorough process, and time on your side, you will be set up for a successful sale.
Where business owners go wrong is that they delay the decision to sell for too long, and their profits decline primarily due to a lack of energy, a lack of funding or a lack of innovation. We often see the classic scenario of clients falling prey to the old adage, “who moved my cheese?”
If most of your capital is tied up in a business in South Africa, your wealth concentration is clustered in one asset class, in one currency and in one country meaning you’re exposed to less than 1% of the world’s investment landscape. This is the classic definition of concentration risk.
Most business owners religiously invest their profits back into their businesses and rarely take dividends or bonuses for themselves. The capital they do decide to invest outside of their business in an investment portfolio may appear to be well-diversified across a number of asset classes. However, when one looks at their total portfolio, in which their business remains their biggest asset, they’re still over-exposed to one asset class leaving them with a high degree of concentration risk.
If you find yourself in such a situation, why not de-risk by selling apart of your business? In so doing you can take significant value off the table for yourself and lock some of your wealth in. This money can then be moved offshore to give you exposure to investment opportunities across the globe. The incoming strategic growth partner will bring capital and access to new markets, assisting your business to grow exponentially. This could be your first step towards your ultimate exit. Yes, you’re likely to end up with a slice rather than the whole pie, but in the end, it’s far better to have a substantial piece of a huge pie than the entirety of a small one.
We often see business owners who have just lost their mojo. They don’t have the same energy they did when they started their business. And their lack of energy can massively impact the growth of their business. Business owners who have run their operations for many years confess that they don’t have what it takes to push their business to the next level. They know what needs to be done; they just don’t have the energy to do what is required. This is something to be mindful of.
When you sell a business well, you sell into growth. Whether you decide to sell your business in full, or partially, the ultimate goal is to find a buyer who will grow your business exponentially. Perhaps it’s time for you to go to market and find an acquirer who could do better with your business than you can. There are good reasons for this. The acquiring business brings with it capital for expansion, access to new markets and customers, innovations as well as fresh energy and ideas.
You also deserve freedom; the financial freedom and time that allows you to do whatever you’ve always wanted to do.
What succession plan do you have in place for your business? Who is going to take over when you decide it’s time to get out?
There’s a charming notion that as a successful business owner you’ll one day pass the torch to your children. We are finding fewer and fewer business owners whose children actually want to be involved in the business. They either don’t have an interest in their parents’ business operations, or they’ve emigrated. On the other hand, there are business owners who don’t want to leave their business to their family as they don’t want to subject their children to what they went through, hopeful that there are better ways for them to make money.
When planning to extricate yourself from your business, entrepreneurs often appoint a managing director to continue the running of their business on their behalf. We’ve seen this fail many times as entrepreneurs often don’t have the skills to manage such an appointee. It turns out that founders are good at managing their businesses but not great at managing someone to replace them. Choosing a managing director as an exit plan poses a serious risk to the business owner for obvious reasons. Business owners also never truly “let go” and are consequently never free of the business responsibilities they so desperately want to escape.
Selling your business is a succession plan in itself and if managed and executed properly, can yield life-changing outcomes for you and your staff. Business owners need to be mindful that it takes two to three years – if not more – to sell a business, after which they can be truly free of it. You need to plan ahead of time and make sure you don’t leave this vital process too late.
South Africa is experiencing a wave of emigration at the moment and if you have a business that you are intending to sell as part of your emigration plan, timing plays a major factor. Business owners often underestimate the time involved in selling a business well. If you want to do this properly and achieve the best outcome in the sale of your business, you need to set aside at least nine to twelve months for the deal to be concluded. Buyers often want the owner to remain in the business for a period of one to two years after a hand-over. This period of time needs to be factored into the bigger decision regarding emigration.
One of our clients, who owns a robotics business, is currently in the market to sell. The acquirer showing the most interest has put a good offer on the table but wants them to stay in the business for at least two years. They, however, want to emigrate much sooner than that and this is putting a lot of pressure on the deal.
Another client who is in the process of selling indicated that he would have to move to Australia within the next 18 months or his visa would expire. In doing so, he has virtually halved the value of his business in order to expedite his exit.
The best advice we can give you is that starting the process of leaving your business is not actually a decision to exit – it’s a decision to get prepared for it. There is a three to four-month lead time to get the process going while you’re making up your mind. And if emigration is on the cards, even more lead time may be required.
Bringing in a growth partner can be an excellent way to grow a business, often without losing control and enabling a business owner to use another party’s funds to deliver growth. We know of many cases where owners initially intended to exit their businesses completely and later realized that they were still passionate about their company while recognizing the need to de-risk from it. This gave these business owners the opportunity to take some wealth out of their businesses in order to secure the financial well-being of their family while they still got to be involved in growing the company. A minority partner can sometimes be the perfect option as they bring the necessary corporate skills to assist the business owner in taking their business to the next level.
Although this can be a brilliant way to grow a business, like a marriage, any equity deal needs to be carefully thought through and the right partner, not just one with money, needs to be selected. A business owner needs to be confident they can work with the prospective partner and needs to see a future where the value of a smaller portion of the business is worth more than the whole business prior to the deal.
The need for an empowerment component in South African businesses is as much a strategic decision as it is an opportunity to unlock wealth. The goal here is to make the new business significantly more valuable than the original business in that the opportunities and skills afforded by the new partner add value to the business as a whole.
One of the areas in which business owners go wrong here is that they think that they are looking for an individual as a growth partner. However, it is seldom the case that an individual can deliver all the synergies, skills and funds that a good business requires. We never seek out an individual to become a partner. Rather, we always look for a company and usually a private equity fund with a proven track record and access to funds that they control.
It is critical that you recognise the opportunity of finding a great strategic partner, particularly in the BEE space, as opposed to ticking a BEE box. The other advantage of bringing a good partner in – at let’s say 40% – is that it can also be a first step in your ultimate exit strategy; either exiting in part or consciously building and structuring the business for an ultimate full exit. Private equity partners are very skilled at this and can assist in ensuring a lucrative exit.
In our model, we flip control into your hands – away from the buyer – and we do this by bringing multiple buyers to the table. Control and choice are two key drivers in fetching premium value in your transaction.
Everything we do in our business is geared towards getting the best deal for you. We appreciate that your business is your biggest asset. We understand that this is your life’s work and we realise that it represents a huge investment of sweat equity.
You’ve got one shot to do this properly, to sell your business well, and we’d like to help you achieve this.