An article in the June 11th edition of The Economist opened with the suggestion that Brazil, the last country to fall into a recession, may be the first to grow out of it. As proof for the hypothesis, the magazine’s Sao Paulo correspondent cited the fact that Brazilian interest rates had just dropped below ten percent for the first time since the 1960s, that its stock market and credit creation system were back to pre-September 2008 levels, and that the economy had performed better than expected in the first quarter of 2009. “I published a piece a few weeks ago called ‘Zuma should learn from Lula’,” he said. “You may want to read it.”
A few reasons were put forward as an explanation. “Brazil was overheating in the early part of , and the Central Bank raised interest rates. Now looser monetary and fiscal policy is speeding recovery. The financial system is sound, and domestic demand has remained robust. Brazil’s changing trade patterns have also helped to shield it.”
But what really got Brazil into this enviable position, some have argued, is the underlying health of its economy. Characterised by large and well developed agricultural, manufacturing, mining and resource sectors, South America’s wealthiest country ran record trade surpluses from 2003 to 2007. According to the CIA World Factbook, “Productivity gains coupled with high commodity prices contributed to [its] surge in exports.”
What, then, is the historical track record that enabled the country to arrive here?
Throughout Portugal’s colonisation of Brazil, which lasted from 1500 until 1822, the country’s economy was based on the export of primary products – chiefly sugar, gold and coffee. Initially dependent on African slave labour, after abolition of the slave trade in the late nineteenth century these sectors were able to rely on relatively cheap wage labour, aided in the main by mass immigration.
A period of huge economic expansion followed, lasting from 1875 to 1975. By 1885, Brazil was producing more than half of the world’s coffee, and a decade later, when production began to surpass consumption, the country controlled prices in the global market by storing a percentage of produce. But the coffee economy collapsed in the 1930s, a result of the Great Depression and a fall in demand, and Brazil’s terms of trade deteriorated rapidly. To offset this, the government suspended part of the country’s debt repayments and imposed exchange controls.
The most important consequence of this protectionist philosophy was a leap in industrial growth. In the late 1930s, when it became apparent that the coffee economy was not going to make a comeback, Brazilian bureaucrats actively encouraged economic diversification, an effort that paved the way for mass industrialisation in the second half of the twentieth century. Another core strategy that would lead to Brazil’s future economic success was the development of small industry, specifically in the manufacturing sector.
Post World War II, despite regular boom-and-bust cycles, economic output grew steadily. The hyperinflation that was a feature of successive military regimes was finally dealt with in 1994, when the Brazilian currency, the real, was pegged to the US dollar. Overnight, tens of millions of citizens turned into consumers. In 2002, though, with Brazil unexpectedly on the verge of another financial crisis – partly due to fears that it would default on its debt and move towards the populist left – former trade union leader Luis Inacio Lula da Silva won the general election.
Lula promptly confounded his critics, achieving what most South Africans would dearly love to see Jacob Zuma emulate. “In Brazil a labor-union leader has presided over an amazing period of social and economic progress,” said Newsweek recently of the Brazilian leader. “It is also one of the few countries that have successfully managed to reduce economic inequality at a time when everywhere else inequities are deepening. Successive Brazilian governments, of rival political parties, have succeeded in improving education, health and the living standards of millions of impoverished citizens who have now joined a growing middle class.”
The economic situation in Brazil is so sound, in fact, that a June 2009 article in BusinessWeek wondered whether the country might not be the next China. As BusinessWeek editor Spencer Ante wrote: “Investors are planning to increase their exposure to emerging markets, and Brazil is becoming a more attractive place for investments, according to an April 6th survey by Coller Capital, a secondary investment firm that buys stakes in venture capital. Brazil ranked as the second-most-attractive choice for private equity investments, behind China but ahead of India. Last year, Brazil ranked fourth.”
Some of the reasons put forward for this scenario reflect the features cited above: a large and growing economy; a modern financial system that has effectively dealt with the crisis; a legal system that respects property rights; and robust capital markets. South Africa, although on a much smaller scale, can arguably place a tick in all four boxes – our economy may
officially be in recession, but the Reserve Bank seems to be making all the right moves and the JSE is holding up relatively well. On the final point, though, robust capital markets, we appear to be lagging.
While Johannesburg and Cape Town house a respectable spread of private equity firms, venture capital concerns and investment banks – many of which are committed to growing local industry – the de facto attitude of the South African government to small enterprise is an economic liability.
An article published in this magazine in July this year argued that the two major governmental organisations established to support entrepreneurial initiatives in South Africa have so far failed. The Umsobomvu Youth Fund (now the National Youth Development Agency) has been fraught with problems such as nepotism and inadequate resources, and the Small Enterprise Development Agency, although recently placed under new management, has little to show for itself as of this writing.
To reiterate, it’s not as if South African small enterprise can do without governmental assistance. According to the latest Global Entrepreneurship Monitor (GEM) survey, which measures entrepreneurial indicators in countries throughout the world, we fare quite poorly. In the “new firms” category, for example, where countries are compared on the basis of the percentage of businesses that are older than three months, we are 38 out of 43. And in the established business category – older than 3½ years – we are even worse: 41 out of 43.
Brazil, on the other hand, places in the GEM’s top ten in the world for total entrepreneurial activity (TEA). At ninth position in the TEA rankings, Brazil has the equivalent of 15-million enterprises, a number that has very much to do with the fact that small local industry has been encouraged in the country since the 1930s, when the coffee economy went bust. And although the level of red tape in the country appears to be a lot closer to the developing world than to the United States or Scandinavia – it still takes 17 steps to register a business in Brazil, according to Fortune magazine – the World Bank applauds new online registering initiatives in some states.
Red tape, of course, is something that South African entrepreneurs know a lot about. There are other negative similarities between the two countries, all of which make the discrepancies in investor potential even more noteworthy. “Brazil has its share of challenges that may make some investors think twice about putting money into Latin America’s largest nation,” observed Ante in the aforementioned BusinessWeek article.
“Compared with the US, taxes are high and labor laws inflexible. Brazilian taxes can account for nearly forty percent of an employer’s payroll expenses. And under Brazil’s extensive labor laws, workers are entitled to long paid vacations, mandatory bonuses, and free transportation, food, and health insurance.”
Sound familiar? Brazil, it seems, is a lot like home on a number of fronts; except it has numerous times the land mass and four times the population. Like us, it has vast natural resources, a young-ish citizenry, and frightening income inequalities. Unlike us, though, under Lula it is improving its Gini coefficient (the measurement the United Nations uses to measure inequality). Also, Brazil shook off its colonial shackles almost 180 years ago, versus an effective fifteen years in our case. This means it’s had a whole lot longer to come to terms with itself.
A final comparison is worth mentioning. In the 2009 Forbes Global 2000 – which uses an equal weighting of sales, profits, assets and market value to rank the world’s major companies according to size – Brazil has 31 entries on the list. The country’s top-ranked company, oil and petroleum giant Petrobras, comes in at number 25, with assets of $121 billion and a market value of $111 billion. Second largest is mining company Vale, in 74th place, with assets of $79 billion and a market cap of $66 billion. Of all Brazil’s companies on the list, it has six in the materials sector, six in utilities, five in banking, and three in oil and gas. Amongst others, its remaining companies are drawn from telecommunications, aerospace, transportation, financial services, and food retail.
South Africa, meanwhile, counts 17 companies on the Forbes 2009 list. Our largest, the Standard Bank Group, with assets of $161 billion and a market cap of just under $10 billion, comes in at 223rd place. Five of our companies are placed under the category “materials”, meaning entities involved in mining – Impala Platinum (772nd place), Gold Fields (1 097), AngloGold Ashanti (1 408), African Rainbow Minerals (1 664) and Harmony Gold Mining (1 958). We have two companies on the list from the banking sector, two from telecommunications, and two categorised as “conglomerates” (Bidvest and Remgro). The remaining entries are all standalones.
It is safe to say, then, that while the South African economy still appears to be relatively heavy on natural resources, Brazil has diversified to the extent that it’s far from reliant on any one sector. The implosion of its coffee economy eighty years ago saw to that. South Africa is unlikely to have the luxury of a similar lesson – the best we can do, perhaps, is visit Rio de Janeiro and Sao Paulo regularly. And take meticulous notes. n
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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