Despite the fact that SMEs make up approximately 50% of the gross domestic product in South Africa, have a higher production output than large companies, greater capacity to innovate, a more direct impact on cultural and social issues, and a greater role to play in the future growth of an economy, many of them also have a high rate of failure. Although figures available vary, it is commonly thought that 50% to 75% of SMEs fail after five years.
In a study conducted by Grofin founder and MD, Jurie Willemse, these high failure rates are due to a poor quality of management and decision-making, lack of access to finance, and inadequate planning.
Sirdar South Africa’s Carl Bates explains in his book, The Laws of Extreme Business Success, that SME business owners simply fail to treat their business as they would if it were a large corporate.
Perhaps the future improved success of the SME sector requires the application of the same governance principles that are the cornerstone of the corporate environment. A 2008 study by the Rotman School of Business indicated that governance practices in Canadian SMEs lag five years behind larger companies.
Following big business lessons
With South Africa’s progressive King Code guiding governance in large corporates, there are important lessons to be learnt from these principles as SME business owners seek to ensure they do not become another failure statistic.
Corporate governance is a set of rules, practices and structures which aim to drive an organisation to achieve its goals, build sustainable growth and fulfil the investment objectives of its shareholders, while playing a positive role in the greater community.
According to the King Code of Governance Principles (King III), good governance requires leadership that focuses on ethics, responsibility, accountability, fairness, sustainability, and the moral duties found in the spirit of Ubuntu. You can begin to implement concepts of King III by focusing on the following areas:
1. Implement a formal board process
This means a lot more than your monthly management meeting. Get independent directors not involved in the business to challenge your thinking on a regular basis with accountability and formal reporting. If your vision is exciting, you will find directors who are willing to support you with their time and experience. Be creative in how you compensate them, especially for the liability carried for being a director on your board. Avoid using family members on your board as independent directors.
2. Keep your roles separated
Recognise that there are differences between your roles as shareholder, director and manager and, as such, they require different decision-making processes.
Bates describes this principle in The Laws of Extreme Business Success as the Law of Three Hats – a shareholder focuses on their investment return, a director focuses on setting strategy and ensuring performance, and a manager ensures the job gets done.
Most SME owners get stuck in working in their businesses and forget their strategic responsibilities as a director and their investment goals as a shareholder.
3. Be prepared to be performance managed
As a business owner running your business, there is often no-one to hold you accountable for your actions. Who is watching that your personal expenses are not paid from cash in the till, or that you do not take Fridays off?
Good governance requires that even though you are the owner, manager or director of the company, you are willing to be performance managed just as you would expect of any other member of staff. That includes the risk of being fired should your conduct warrant it. Your board makes the decision whether you are capable of fulfilling your role as managing director or
4. Keep your eye on sustainability
While many SMEs struggle to lift their view out of survival mode, King III requires that a business focuses on its long-term sustainability. This includes profitability, solvency, returns to shareholders, business practices that ensure the business endures in the long term, and that the business can run without you. If your business only pays its bills and your salary, then it is in no way geared for future sustainability.
Use the strategic focus and long-term view of your board to keep the business geared towards delivering the results required, and take action where necessary. This may include rethinking your business model, getting tougher with yourself and your team, cutting personal expenses out of the business’s overheads, setting clear targets and getting realistic about
5. Get on top of your financials
The Achilles’ heel of the SME is the availability of accurate and timely financial accounts. This fundamental business practice is essential in staying on top of where you are and enabling you to make good decisions when you need to.
If this is not your strength, outsourcing this function may be the best decision you could ever make. If you are a (Pty) Ltd, then your fiduciary duties as a director are to understand your financials and make good decisions with accurate information.
While running two sets of books may seem like a good idea to put money into your own pocket, it does not create real and sustainable value in your business or promote trust for investors.
6. Manage your risk
Risk management plays a key part in good governance, and large companies have teams dedicated to it. Having a realistic view of the risks your business faces and their potential impact is essential. This allows you to plan accordingly and mitigate risks before they cripple you.
With the amended Companies Act coming into effect, directors carry a heavier responsibility for not taking action on risks that threaten a business’s solvency, legal status and operational ability. In order for SMEs to increase their positive impact on economies, business owners need to think differently about what ‘business as usual’ means. To create long-term growth and sustainability, applying the principles of governance is essential business practice.
If there is only one action step you take, it should be the recognition that a board of directors operating under the principles of governance, and including at least as many independents as there are executive directors, will take your mindset and your business to a new level of strategic thought, challenging debate, and improved decision-making.
How Schindlers Attorneys Became Involved In The Landmark Cannabis Case
Everything you accomplish accumulates and eventually comes back to assist you further along in your career. This is how a final year LLB assignment became the basis for a Constitutional Court case.
Schindlers Attorneys are the law firm that were involved in the landmark Constitutional Court judgement on cannabis use within a private space. Paul-Michael Keichel, Partner at Schindlers Attorneys shares how they came to be the foremost legal experts on cannabis and how they became involved in the Constitutional Court case:
How the journey began
“In 2005, my first year at Rhodes University, whilst studying for Intro to Law, it occurred to me that there were strong constitutional points that could be raised to objectively justify the decriminalisation of cannabis in South Africa,” explains Paul-Michael Keichel.
“In my final year LLB, 2009, I took Constitutional Litigation as an elective (largely motivated by the creation of a timetable clash, which meant that I’d not have to sit another semester of lectures for a module that I had failed the previous year). This provided me with the opportunity to write an assignment titled “A Critical Analysis of Prince and an Objective Justification for the Decriminalisation of Marijuana in South Africa”, in which I composed my argument (based on the right to equality in our Constitution).”
The start of the partnership
“Fast forward to 2013 and the Dagga Couple find themselves at Schindlers (where I am a first-year associate) to register their NPC, “Fields of Green for All”. The attorney handling the registration (who I’d also bored with my argument) suggests to the Dagga Couple that they speak to me. It turns out that they already knew of me, because my assignment had (unbeknownst to me) done the rounds on the underground cannabis networks. We get chatting and I rope-in my brother, Maurice Crespi, the managing partner of Schindlers,” explains Keichel.
“We are the only firm out of many approached by the Couple who are willing to take on their trial action against 7 state departments and Doctors for Life to push for a declaration of constitutional invalidity of the laws prohibiting cannabis use/possession/dealing in South Africa. We decide to run the challenge for them pro bono.”
The Cape ruling that started it all
“Prince and Acton et al have their matter heard in the Cape, which resulted in the 2017 Judgment. We run a portion of our trial (including expert evidence from international scientists and doctors – the best in field), but it is rendered part-heard. We then heard that Prince and Acton et al’s matter will be heard by the Constitutional Court in November 2017 and we decide, with the Dagga Couple, to intervene in that matter, upon which it is confirmed that my 2009 assignment forms the on-record basis of a major chunk of Prince and Acton et al’s arguments in support of legalisation.”
“Our involvement in the Constitutional Court was such that we provided clear legal argument and authority to support and expand upon what Prince and Acton et al were trying to say to the Court. Ultimately, much of what we submitted has found its way into the judgment of the Constitutional Court.”
How a final assignment became the foundation for a Constitutional Court case
“So, an idea (bolstered by wanting to create a timetable clash) resulted in an assignment, which provided certain credibility and impetus to cannabis activists. Two of these activists ended up being our clients, which, despite being handled pro bono, has brought Schindlers immeasurable positive publicity, and which, ultimately, contributed to the decriminalisation (and potential future legalisation and commercialisation) of cannabis in our country.”
“Schindlers now has a dedicated “Medicinal and Recreational Cannabis Law” department, through which we will continue to make submissions to parliament, apply for licenses on behalf of our clients, support those who have been arrested and charged.”
6 Ways To Win A Better Deal
Be proactive not reactive by working through these six critical elements of your strategy.
By far, the majority of our clients start the journey of selling their business by working on a very reactive basis. Most business owners going to market say they just want to ‘see what happens’. But this means you are starting the process on the back foot.
This approach automatically takes the control of the business sale out of your hands and puts it into the hands of the market. Keeping control is a critical element in selling your business for maximum value.
Letting the market tell you what they think about your business and what they want from you means that straight away the acquirers set the hoops that you need to jump through.
They tell you what they want. Any engagement is on their terms.
You have not defined terms or standards to use as a yardstick for what the market is saying. So you are much more likely to find yourself boxed into a corner, forced into the role of price taker rather than price maker.
Taking the time to define your ‘go to market’ strategy is a critical factor in achieving success for yourself, what you want for your business and how the market aligns to this.
Be proactive not reactive by working through these six critical elements of your strategy:
1. Define your non-negotiables
We all have certain non-negotiables in our lives and you must think through those that you want to apply to the sale of your business.
Spend quality time working out what your personal and business non-negotiables are. Then make sure that they feature prominently in your deal strategy. Examples could be:
- I am prepared to stay on for only 18 months after the sale conclusion.
- My staff need to be looked after as they have been with me for 20 years and are like family.
- I want to sell 100% of my shareholding on Day 1.
- I am not prepared to warrant future profits.
When you start out on the selling journey, this list will probably be a lot longer. Usually, it will reduce as you travel further and further down this road but you may even add new non-negotiables once you climb into the trenches and take control of the process.
Don’t be shy about presenting your list of non-negotiables to prospective buyers. They will certainly be putting forward their own list as well.
Related: Savvy Business Sale Spells New Life
2. How ready and committed are you to sell your business?
Selling your business is one of the biggest decisions that you will take in your life. It is an emotional rollercoaster. You will face more questions than answers as you progress down this road. Nobody can ever be 100% ready but you can help yourself prepare as much as possible by asking yourself the following questions:
- Do I know what my business is worth?
- Is my business ready for acquirers to see?
- Am I ready to let go of my business?
- Can my business run without me?
- What makes my business attractive and enticing to an acquirer?
- Do I have the time and skills to embark on selling my business myself?
As you work through these questions, a whole host of other questions will probably occur to you. Be decisive, objective and critical in asking and answering all these questions.
3. Put a plan together
Like any other business or strategy implementation, selling your business is a project. All projects need a plan of the objectives, timing, resources and risks required to succeed.
Selling your business is by far one of the most important projects that you will ever drive and also one with the least room for error. Your planning cannot control the biggest variable of all – how the market will react to your business. But being as well prepared as possible will help you cope with this.
4. The market wants a serious seller
The way that your business and personal brands show up in the exit process is critical. Buying or selling a business is a very time-consuming process, with both seller and acquirer committing quantities of effort, energy and resources.
The market therefore wants to deal with a committed and serious seller. Any business owner just dipping his/her toe into the water to see what happens will frustrate them and potentially damage future transactions if that toe is removed from that water.
5. Be ready for the experts
You are brilliant at running your own business, which is why you are considering selling it for maximum value. The acquirers on the other side of the table are, of course, also experts at what they do and how they do it.
Expect them to speak a different corporate language, exude negotiation and transaction skills and have mastered the ability to control the transaction. If you do not have a strategy or blueprint to default to when the heat gets too high, you will lose your way and could be blindsided into the wrong transaction.
6. Bring it all together
Work through the various steps identified above and craft your deal strategy. Let this framework be your compass during the transaction.
Always lean on it when there are too many variables being thrown at you. Having your strategy is the first step. Sticking to it will be your biggest test when the pressure is on.
Hooked On Ethics
The business that puts ethics at the forefront of its culture is the one that will shine in a landscape littered with dishonest behaviour.
There is significant research into how the work environment influences ethical behaviour. Study after study has shown how the ethical values upheld by management filter down to all employees, affecting behaviour and business practice. The biggest influence on a person’s ethics is their environment. In South Africa, the after effects of the recent political regime continue to shake both country and citizen. Corruption has seeped into almost every part of the government and in some of the country’s most prominent private organisations.
The old saying that the ‘fish rots from the head’ has never been truer, nor more obvious.
The ethical dilemma
The reality is that the government’s flagrant disregard for ethics saw corruption become a part of everyday life. This makes almost everyone ask themselves questions like – why should I pay X utility bill? Why should I pay my TV license? The money is being clearly used fraudulently. Sure, it is the law, but leadership has proven that ethical behaviour isn’t rewarded or recognised.
But it is. The value of building an ethical business and upholding a culture that promotes honesty and integrity cannot be understated.
Here are five reasons why…
- Those who skirt the edges of ethics almost always get caught. There has been a steady shift in the country’s moral compass as leadership has taken a far stronger stance on rooting out corruption and already some of the country’s biggest names have been found guilty. KPMG, McKinsey, Bell Pottinger and SAP have all had their names tarnished by the scandals that have rocked the country.
- Employees are more engaged and better behaved. A weak ethical culture filters down from the top, influencing behaviour and attitudes. If employees feel that they can get away with bad behaviour that benefits them, or if they feel that their environment encourages this, then they will.
- A strong ethical influence will dictate how employees treat customers and one another. If your company enforces and rewards honesty and integrity, then these will be the qualities that clients will perceive. Their lack may also see you lose market share and your reputation.
- Like attracts like. If you create a culture that rewards employees that work all hours, deliver the goods and commit themselves then you will attract more people with these qualities. The same applies in reverse – reward bad behaviour and the results will rapidly speak for themselves.
- Your business reputation. Trust can’t be bought. It is hard won and easily lost. If you lose your reputation then it is very unlikely you will win it back and it will follow you for the rest of your life. The same applies to your staff. If their behaviour is questionable it could damage your company. Make sure you set the rules of what is or is not tolerated by your company culture and consider investing into ethics courses that allow your teams to stay ahead of the curve.
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