Your Client’s Business May Be Your Biggest Risk… or Your Biggest Opportunity.
Rick Grantham is an executive director and shareholder at Deal Leaders Africa. He started a sell-side advisory business in 2012 through which he developed significant insights and experience into how to successfully sell businesses, working exclusively for the business owner. Prior to 2012, he owned businesses in the media, broadcasting and consulting space. He has also spent a number of years running large production operations for various corporates and worked in banking before commencing his entrepreneurial journey. He is a qualified Mechanical Engineer with an MBA.
Caren Rennie heads up New Business for Deal Leaders Africa. She worked in the financial services industry for 18 years supporting Wealth Advisors to grow their pipeline of leads. Her key focus was largely tapping into the female market and changing the way the industry approaches women and their wealth. This strategy, together with select others, unlocked R1bn of new assets under management. In her role at Deal Leaders Africa, she also works closely with Wealth Advisors to help them help their clients carefully manage their hard earned wealth out of their business through a full sale or part sale of their company.
For most business owners, their company is their most valuable asset in which the bulk of their wealth is tied up. As a trusted advisor to these business owners, this can pose a potential risk to or create significant opportunity for you.Every business owner needs an exit strategy. At some stage they’ll need to de-risk from their business by taking some value off the table or selling in full. And when they do, they’ll want to maximise their value. The problem is that the traditional way of selling businesses is not designed to serve the seller, the business owner. Instead, it places the power in the hands of the acquirer, enabling them to control the process and leaving your client on the back foot, often with little choice but to comply or lose the deal.As the custodian of your client’s financial well-being you have a responsibility to ensure that they don’t run out of money before they run out of time. With a significant portion of their capital invested in their business, achieving an optimal deal in the sale of this asset is critical. They cannot afford to get this wrong.
In the world of buying and selling businesses, it’s almost always the case that the buyer holds all the cards in the transaction. They’ve got the deep pockets, they’re calling the shots and can drag a transaction on for as long as they like, often leaving your client, the seller, with little choice to comply or lose the deal. For acquirers, buying a business is largely a financial transaction for them, and they approach it as such. For sellers, it’s more an emotional matter. Almost every week we hear stories where a seller sold for way less than they expected; where the deal structure put all the risk on them; or where a deal just didn’t materialize. Such situations can be very onerous and incredibly stressful for a seller.
If your client doesn’t follow a thorough process to the letter, they can jeopardize their hard-earned wealth and put a massive strain on their long-term financial freedom. On the other hand, if they adhere unwaveringly to a guided and structured methodology, they can conclude a profitable deal, maximise value for themselves and their families and leave you, the advisor, with a much bigger asset base to manage. This gives you greater scope for diversification with which to achieve the goal of financial freedom for them and their family.
So how do you make sure your client gets the best deal? Firstly, they need to be in control. How do they achieve this? They do this by approaching and attracting offers from a large number of between 50 and 80 potential buyers. Subsequent to this, they need to have a process that both drives completion of the deal and simultaneously maintains their control. Instead of waiting for your client to trigger a conversation with you, why not broach this subject with them. Of course, it will be a sensitive topic as selling their business will probably be one of the biggest and most important decisions they’ll make during their lifetime and certainly during the life of their company. But it’s the responsible conversation that you should be having with them.
Lack of Succession Planning
As their wealth advisor, you might ask your client what succession plan they have in place for their business. Who is going to take over when they decide it’s time to get out? There’s a charming notion that as a successful business owner they’ll one day pass the torch to their 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 themselves from a 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 is 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 their business is a succession plan in itself and if managed and executed properly, can yield life-changing outcomes for them and their 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. Talk to your clients about planning ahead of time and make sure they don’t leave this vital process too late.
Leaving South Africa
South Africa is experiencing a wave of emigration at the moment and your clients may look to you for advice and expertise around emigrating as they will be relying on you for the structures and wealth management needed to support their decision. And if they have a business that also needs to be sold as part of their 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 see your client achieve the best outcome for the sale of their business, you need to set aside at least nine to twelve months for the deal to be concluded. Often buyers 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 and with a good offer on the table 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 major 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.Communicating and guiding your clients to plan well in advance when they’re thinking of emigrating is vital.The best advice we can give you is that you communicate to your client that starting the process of leaving their 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 they’re making up their minds. And if emigration is on the cards, even more lead time may be required.
Scaling up with a Growth Partner – and dealing with BEE at the same time
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 such 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. 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, as an adviser, you help your client to see the difference between ticking a box and finding a great strategic partner – particularly in the BEE space. 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 client’s 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.
Time and Energy – or Lack Thereof
We often see business owners who have just lost their mojo. They don’t have the same energy they did when they started the business. And their lack of energy can massively impact the growth of the business. Business owners who have run their operations for many years confess that they don’t have what it takes to push the 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 very mindful of.When you sell a business well, you sell into growth. Whether your client decides to sell their business in full, or partially, the ultimate goal is to find a buyer who will grow their business exponentially. Perhaps it’s time for your client to go to market and find an acquirer who could be doing better with their business than they 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 new energy and ideas.Your clients also deserve freedom; the financial freedom and time that allows them to do whatever they’ve always wanted to do.As a financial advisor, how about starting the conversation with your client about either taking some value off the table by selling a part of their business, or selling their business in full? You can rest assured that we will carefully manage the extraction of their hard-earned wealth from their business on their behalf so that they can diversify their risk and have the financial freedom they deserve.
It’s Time to Diversify
As a wealth advisor, you know better than most that if 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 re-invest profits back into their businesses, rarely taking dividends or bonuses for themselves. The capital they do decide to invest outside of the business in an investment portfolio may appear to be well-diversified across a number of asset classes. However, when you look 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.Why not advise your clients to sell a part of their business? In doing so they can take significant value off the table for themselves and lock in some of their wealth. This money can then be moved offshore to give them exposure to investment opportunities across the globe. The incoming strategic growth partner will bring capital and access to new markets, assisting the business to grow exponentially. This could be their first step towards their ultimate exit. Yes, they’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.As their wealth manager, how about laying the cards on the table for them at your next portfolio review. It may be just the important eye-opener they need.
When is a Good Time to Sell a Business?
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 client’s business is on a growth trajectory, it’s a good time to go to market. Good businesses sell. 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 client’s business may have just concluded a transaction, leaving them in the position where they are unable to make any further acquisitions for the foreseeable future. With proper planning, a thorough process, and time on their side, they are set up for a successful transaction.Where business owners go wrong is that they delay the decision to sell for too long, and their profits decline due to lack of energy, funding, innovation as well as other factors. We often see the classic scenario of clients falling prey to the old adage, “who moved my cheese?” Make sure you talk to your client before any of this happens to their business.
How to extract the best deal out of the sale of your client’s business
In our model, we flip control of your client’s transaction into their hands, and we do this by bringing multiple buyers to the table. Control and choice are two key drivers in fetching premium value in their transaction.Everything we do in our business is geared towards getting the best deal for them. We get their business is their biggest asset, we get this is their life’s work. It represents lots of sweat equity.They’ve got one shot to do this properly and sell their business well, and we’d like to help you to help them.