“How did I get here?”
On the list of questions a business owner asks himself when the sheriff arrives to shut down his premises, this has got to be number one.
It’s a question that’s usually asked head in hands, heart rate up near 170 beats per minute, mouth bone dry. It echoes in the brain, mocking and taunting, until it splinters off into the next set of questions.
What will I tell my wife? How will I pay the kids’ school fees? Who’ll help me start again?
Thing is, loaded as it is with so much emotional weight, “How did I get here?” is a question that’s impossible to answer with any real clarity until at least six months after a business has been liquidated. When the truth finally reveals itself, it’s often a combination of inefficient management, difficult market conditions and under-trained staff that’s identified as the source of the bankruptcy. Sometimes a poor choice of business partner is the reason; sometimes it’s just plain bad luck. But if six months down the line the only legitimate explanation for the business going bust is that too many clients decided they could get away without paying…well, that’s a particularly bitter pill to swallow.
Unfortunately, an increasing number of bankrupt South Africans seem to be arriving at just this realisation. Because if you were (or still are) a local business owner, chances are the following scenario is frighteningly familiar:
Your services are supplied to a customer, who’s apparently satisfied. He receives your invoice and no complaints are lodged. Thirty days come and go. At 45 days you put in a gentle phone call, reminding him that the account needs to be settled. He reports a cash flow problem, says he’s waiting for a major payment himself. He asks if he can make the deposit at the end of the month. You understand his dilemma all too well, so you agree. But sixty days come and he starts avoiding your calls. You leave messages, resend invoices. Nothing. Off goes the letter of demand. At 180 days you accept that the guy just isn’t going to pay.
Your next step is to call the lawyers. The case is postponed twice, and then the clerk in the magistrate’s court says that the file has gone missing. You settle the lawyers and cut your losses. You’re a bit nervous about calling in a debt collector, but you do it anyway. Still, as rough and intimidating as he is, the debt collector can’t help. It’s now 18 months later, and your customer’s gone under. That week is the first time in your business career that you extend payment to one of your own suppliers beyond ninety days.
The domino effect of non-payment, as described above, is as inevitable as it is disastrous. Peter doesn’t pay Paul so Paul doesn’t pay Patrick; businesses start shutting down and the economic growth rate slows. Ideally, it’s the function of government to prevent such an outcome – heavy fines for breach of company law and the incarceration of repeat offenders are typical measures a government may take. But what happens when the government itself appears to be short-changing suppliers?
Earlier this year, the John Robbie show on Talk Radio 702 exposed the fact that a number of suppliers to certain Gauteng public enterprises were not being paid for services rendered. It was alleged on the show that the Gauteng Shared Services Centre (GSSC), the department that handles accounts for the province, has a payment backlog running into the hundreds of millions. The GSSC, given the right of reply, refuted the allegations – they accused suppliers of trying to defraud the department by delivering more goods than the provincial government had ordered. In an attempt to unravel the confusion, Entrepreneur magazine managed to persuade one of the callers on Robbie’s show to go on record again.
The caller, Reg Jagger, is a director at Viking Medical, a company that supplies medical goods to three Gauteng hospitals – Joburg Gen, Pretoria Academic and Garankuwa. In this capacity, Jagger tells Entrepreneur, he has been dealing with the three public hospitals for twenty years. It was only when the province’s payment system became centralised, he alleges, that his difficulties arose. “For the last five to six years their accounts have been falling further and further into arrears. It’s a constant situation of two or three payments being missed and then falling off the edge.”
He provides an example. If he invoices for R500 000 per month, he says, the most he can expect to receive is R450 000 over three months. The remaining R50 000 becomes a “query” that’s never dealt with.“I have a credit lady who’s on their backs every two weeks. They keep on asking us to supply proof of delivery and invoicing, and when we do they keep on losing it and asking for it again. So now we leave it all in a central file where we can just photocopy and redeliver.”
Asked if the staff at the GSSC seems keen on helping, Jagger chuckles. “They say they’ll do everything they can, and I think the will is there. But the people in that office are way out of their depth. There’s not nearly enough training.”
In total, Jagger says, according to a survey conducted by SAMED – the body that represents the South African medical device industry – companies like his are out about R100 million. As for Viking Medical itself, the outstanding amount is R3,5 million. “We are fairly fortunate that it doesn’t affect us badly. We’re a very conservative company and we’ve reinvested in ourselves. But I think for small players it’s catastrophic. We’ve had one or two companies fold on us because of this.”
Whatever the merits of the GSSC’s counter-allegations, it’s apparent that on a national level the South African government doesn’t view non-payment in an exceptionally harsh light. A recent edition of Entrepreneur magazine sought the advice of Lindie Engelbrecht, CEO of the Institute of Directors, on certain clauses in the New Companies Act, which was signed into law on 8 April 2009. Asked what the Act says about bad payers, Engelbrecht responded that “once a company is in business rescue, [its] creditors have to continue supplying the company as long as it is on better terms than before business rescue [was] implemented.” Meaning that if you’re an existing supplier to a company, you have to continue doing business with that company regardless of non-payment.
It could be termed “supplier loyalty”, and the point is to give a customer in financial straits enough time to recover. But many local business owners are not fans of what they consider an overly liberal – and, on the grassroots levels, downright dysfunctional – set of legal parameters. One such person is the managing director of a medium-sized media company based in Johannesburg, who agreed to be interviewed for this article on condition of anonymity – let’s call him Burt Baker, and his company Playa Media. Baker has written off R500 000 to bad debt in the current financial year, he says, and in the previous year his write-off was R425 000. He explains the situation in an incredulous tone.
“Logic tells you that if company X owes, say, R900 000, what you do is you sue them and you get your money back. But it doesn’t work like that. What happens is something else entirely. If you’re lucky, you’ll get some money back only 50% of the time.”
Baker’s operational manager, a young woman with a solid background in legal and administrative affairs says that they’ve recouped around R60 000 only of the R925 000 through the legal system but that lawyers’ fees have amounted to over R80 000, a net loss of R20 000. The key issue, it appears, is with the magistrate’s court. “Files go missing,” she says, echoing the hypothetical scenario above. “There are postponements and more postponements.” Of course the condition of the magistrate’s court in South Africa is a matter of public record.
Trainee reporters from the Investigative Journalism Workshop at Wits University, for example, discovered that at the new premises of the Randburg Magistrates’ Court, which was opened in 2005 at a cost of R53 million, courts 11 and 18 were filled to the brim with boxes containing files from prior to 2000. Clerks told the journalists that there’s no archiving system to speak of, that anyone can come in and rifle through the documents, and that hundreds of files are impossible to find.
For Baker, the equation is simple. “If you don’t get your money immediately, the people who owe you will disappear.” What he’s suggesting is that it’s likely the debtors will eventually go into liquidation, which is when you can kiss all hope goodbye. And while on a certain level this is an inevitable fact of business life, it’s only recently that Baker – who’s been at the helm of his company for almost two decades – has noticed things deteriorating. “It seems that in the last two years the amount of defaulting has rocketed beyond previous levels. It preceded the global downturn, which means it’s a specifically South African problem.”
Baker terms the problem our “local culture of non-payment”. It’s a culture endorsed by government, he avers, because there is no system in place for punishing offenders. “In Sweden, it’s illegal to stretch payment beyond thirty days. Here you have big businesses, some of the country’s top brands, putting immense pressure on small to medium-sized enterprises that simply don’t have the cash flow to sustain terms of sixty or 120 days. You also have small to medium-sized companies who stretch their own payment terms to suppliers past 180 and even 240 days, and then go under.”
It’s got to the stage that Baker now ignores any debt under R10 000. His ops manager spends at least three hours of her working day on the matter, he says, time that could be better spent driving new projects and streamlining internal processes. “But she’s gotten so good at overseeing the debtor’s list,” Baker adds, “that she’s reduced the bad debt by around R800 000.”
As for the R500 000 in current debt still on the books, a number that represents 12,5% of a specific industry’s spend with his company, Baker is not optimistic that much of it can be recovered through the courts. To go the debt collector route now would be to prejudice his company’s position – the respondents would be able to convince magistrates that they’d been bullied. Nevertheless, in January this year Baker decided that the time had come to retain the services of a debt collection agency on all debts that hadn’t yet been referred to the lawyers.
It’s not a decision he took lightly. “The problem is the aggression levels,” he says. “In a place like Gauteng, physical harm invites retaliation. You should see the size of these guys. We’ve asked them to please not lay a hand on anyone.”
Ultimately, it seems that South African entrepreneurs have to work out for themselves how to navigate these contradictions. There are challenges in the local business environment that are very tough to comprehend, unanswerable questions abound. Chief amongst the latter: If government genuinely believes that the success of small enterprise is central to the growth of the economy, why have they allowed a system to develop that facilitates such a high rate of non-payment?
Why is there no national register of perpetual defaulters? Why does new legislation appear to make it easier for bad payers instead of more difficult? Why shouldn’t Burt Baker have more faith in the magistrate’s court? Why must Reg Jagger resign himself to the fact that a fixed percentage of his invoices to provincial government will never get paid? Perhaps the only answer is not to ask; to concentrate rather on the things within the business that can be done to reduce debt. “If six months down the line the only legitimate explanation for the business going bust is that too many clients decided they could get away without paying… well, that’s a particularly bitter pill to swallow.”
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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