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Finding The Right Buyer For Your Business

You’ve decided you’d like to sell your business, but have no idea where to start, or how to find a buyer. Here are ten places to get you started.

Chris Staines

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One of the most asked questions when considering the sale of a business is how to find a suitable buyer. Naturally you want to consider all of your options to make sure that you maximise the sale price.

You’ll also most likely be concerned about going to the more obvious candidates straight away, as this can often provide market information to competitors that can be damaging.

You’ll also be wary of alerting customers, suppliers and employees of an impending sale, and hence confidentiality whilst sounding out the market is paramount.

Related: 10 Questions to Ask Before Selling Your Business

Included below are some of the options that you can consider, usually through an M&A advisor to add another layer of confidentiality, and some comments on the merits or otherwise of each.

1. Competitors looking to expand product/market/team/profits

Often the most obvious candidate to buy your business is the one that can cause you the most problems in the market.

Competitors will understand your business and the market you operate in, and also appreciate the value of your company – especially where such an acquisition delivers synergies that can boost combined profits.

Approaching competitors can also have its downside – especially when a sale transaction does not proceed.

Armed with the knowledge that your company is for sale, the competitor could use the information to their advantage, and without necessarily breaching a confidentiality agreement. This must be considered before going down this route.

looking-for-opportunities

2. Companies looking to vertically integrate – up or down

Companies looking to vertically integrate might include your suppliers looking to enhance the value of their product offering, or your customers looking to include the profit margin from their own suppliers. Although not as common as a competitive buyer, if such a buyer can be found they are generally favoured over a pure competitor. Confidentiality is less likely to be an issue as such buyers would not want to damage an existing relationship.

Related: 3 Ways Emerging Entrepreneurs Run Financially Sound Businesses

3. Companies looking to enter a foreign market or get a national presence

Finding a buyer that is looking to enter your market can be extremely attractive, but you may need the services of an M&A advisor with a good international network to unearth such a company.

Confidentiality is likely to be less of an issue, and a much higher multiple may be applied to profits from, say, either a European or US buyer.

On average, listed PEs are some 40% higher than South African PEs in these markets, and this disparity remains even when PEs are discounted down to private company multiples.

team-work

4. High net worth individuals or teams

Another interesting group of buyers are high net worth individuals or teams that have either their own money, or significant backing, and a desire to enter an industry such as yours. This often includes individuals with considerable business experience that is relevant to your industry.

On the upside, confidentiality is much less likely to be an issue. On the downside, you may not be able to negotiate the same exit value for your business as you might from a competitor desperate to get a strategic advantage or an international company applying a higher multiple.

Related: ‘Business As Usual’ Could Ruin You

5. Management buy-in (MBI) teams

MBI teams are similar to the above, although they will generally have specific experience in your industry and the support of either a VC or private equity (or occasionally private backer) rather than their own cash. Their valuations are likely to be similar to the high net worth buyer.

6. Management buy-out (MBO) teams

Another favoured candidate in any sale are the company’s management. Although unlikely to offer the best price for your business, the owner is often very keen to give management the option to buy the business they have been working in for a number of years.

If this route is considered, the owner will probably need to provide some assistance to management to get an MBO done, either by guiding them to a private equity firm that can provide some finance (and package the remainder from debt or other mezzanine or equity providers), or by providing vendor finance to make up any shortfall (that is, leaving some of the consideration in the business to be paid out when cash flows allow).

7. Companies looking to do a roll-up (with PE backing)

Individuals or companies looking to do a roll-up are not common, and probably will only be introduced to you through an M&A advisor.

A roll-up is where an individual or company attempts to buy a number of similar or complementary businesses in an industry, and then combine them to extract operating synergies, usually ahead of a listing at a higher multiple.

Prices here can be quite favourable, especially where the industry exhibits a good listed multiple, but these transactions can come with the added complications of the vendor being part of a larger group prior to ultimate exit.

Related: 7 Flaws In Your Business Plan You Need to Fix

conglomerate-chain

8. Companies forming related conglomerates

Similar to a roll-up are companies looking to buy more loosely related businesses — often with vertical integration as one of the aims. Such buyers are generally listed companies looking to achieve arbitrage between the private multiple they can offer, and the listed multiple that will then apply to the target’s profits.

Synergies between operations can also extract additional profits to which the listed multiple can be applied. Valuation can be as good as in a roll-up, and there is the advantage of some of the consideration being available in listed shares with growth potential.

9. Private equity firms (not always 100%)

Private equity firms are always in the market to buy profitable, established private companies — often with the promise of bringing capital and their network to the table to greatly enhance value if an earn-out is part of the transaction.

Whilst up-front consideration may not be as high as from other buyers, if the PE firm is as good as their word, the ultimate consideration that the owner receives can easily meet or exceed his expectations.

10. Other options

Apart from the potential buyers that can be found above, there are other options available, such as:

  1. Take in investment capital, grow the business and then exit at a later date (trade sale or listing)
  2. Sell part of the business that buyers want, and retain the rest.
  3. Go for a listing yourself.

As an owner considering the sale of your business, there are often many more options than you might initially consider — and each with a different set of outcomes as regards value, confidentiality, and structure. It’s important to match the right set of buyers with your aspirations to ensure the best result.

Far too often, buyers approach M&A advisers when they have been approached by a single buyer (often a competitor), and become committed to a deal before considering all other options.

It’s far better to plan for an exit months or years before a sale transaction, and define the non-negotiables required from any deal. This way, you can make sure that you only speak to buyers likely to deliver these non-negotiables, and pro-actively approach them when the time is right.

Needless to say, multiple suitors for your business will undoubtedly lead to a better price than one candidate, but to manage such a process takes considerable skill.

Chris Staines has more than 25 years’ experience in company divestments, partial divestments, joint ventures, mergers and acquisitions. He has sold more than 60 private companies in the $1 million to $100 million range, and has worked across three continents. Chris is currently Head of Corporate Finance at Grant Thornton in Cape Town.

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SAB Transforms Supply Chains

Supplier Development Programmes grow black-owned suppliers and create jobs.

South African Breweries (SAB)

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The South African Breweries (SAB) has invested more than R200 million into creating an inclusive supply chain that incorporates black-owned and black women-owned SMEs through its supplier development programmes, SAB Accelerator and SAB Thrive. In addition, more than 100 jobs have been created through these efforts.

SAB Accelerator and SAB Thrive aim to create a diversified and inclusive supply chain by supporting the growth of black-owned suppliers through business development support and funding. The programmes are two of four entrepreneurship development programmes run by SAB to help create 10 000 jobs in South Africa by 2022 — SAB KickStart, SAB Foundation, SAB Accelerator and SAB Thrive.

SAB’s agriculture programmes also contribute towards the aim to create jobs by growing emerging farmers.     

Related: SAB-Commissioned Research Shows SA Poised To Reap Entrepreneurship Rewards

“From rural entrepreneurs to big business, SAB has laid the foundation to support entrepreneurs and to contribute towards government’s efforts to grow the economy and reduce unemployment in the country,” says Ricardo Tadeu, Zone President, SAB and AB InBev Africa.

“We recognise that one of the major hurdles for SMEs in South Africa is the ability to gain entry into big business and form part of their supply chains. This requires a symbiotic relationship with big business working alongside smaller suppliers.”

SAB Accelerator and SAB Thrive cohesively solve the challenges of creating a healthy pipeline of suppliers that represent the demographics of the country. SAB Accelerator has piloted ten businesses that have created 29 permanent and 79 part-time jobs in a period of just six months, and is currently incubating 24 businesses as part of the official post-pilot intake. SAB Thrive has invested R100 million in seven businesses, which have created 46 new jobs. In addition, the programme has contributed R140 million in new B-BBEE preferential spend.

The SAB Accelerator is an in-house programme dedicated to developing black-owned and black women-owned suppliers. Geared towards fast-tracking participants’ growth, the programme employs ten highly experienced business coaches and ten engineers, offering both tailored business and deep technical coaching to the participants.

It has a three-phased approach consisting of:

  1. Diagnostic: Screening the business’s current situation and systematically identifying gaps and opportunities for growth.
  2. Catalyst: Proposing an intensive three-month coaching intervention addressing key business functional and technical areas of improvement or growth.
  3. Amplify: Providing additional business development to support graduates of the Catalyst Programme.

The SAB Accelerator strongly focuses on enhancing market visibility and access of its participants.

Eligibility criteria:

  • Existing black-owned or black woman-owned suppliers currently servicing SAB’s supply chain at the time of application.
  • Existing black-owned or black women-owned businesses that have potential to join the SAB supply chain based on their product or service.

The SAB Thrive fund is an enterprise and supplier development (E&SD) fund set up to transform the company’s supplier base. The fund was established in partnership with the Awethu Project, a black private equity fund manager and SME investment company. The aim is to invest in and transform SAB suppliers to represent our country’s demographics. SAB Thrive investees benefit from 100% black equity capital and business support.

Related: 6 SAB Entreprenurship Programmes That Provide Business Management And Support

The fund invests growth equity capital into SAB’s existing high-growth black-owned suppliers, furthering their profitable expansion into the SAB supply chain without diluting the black-ownership of these businesses.

Existing white-owned suppliers are provided equity capital to support the enhancement of their black ownership, while facilitating the introduction of black entrepreneurs to their business. The intention is to apprentice the individual to take over the business in the near future.

Eligibility criteria:

  • Black-owned suppliers in the SAB supply chain that want to grow their business through access to black-owned growth equity capital.
  • Existing white-owned suppliers in the SAB supply chain that want to transform their B-BBEE ownership.

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How to Guides

6 Money Management Tips For First-Time Entrepreneurs

That R25 coffee every morning isn’t taking you to the next level any faster than brewing a pot at the office.

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How many times have you been told that saving money is a good thing? Financial specialists recommend that you save a bit of money every month, but that’s easier said than done. After all, it’s not uncommon for people to live paycheck to pay cheque.

However, if you want to start a company, you’ll need to break away from this cycle and start budgeting and saving. At times, this will be a trying task, but it must be done if you want to invest in your future as an entrepreneur.

If you want to start managing your money more effectively and set yourself up to become an entrepreneur, follow the six tips below. With these techniques in your arsenal, you’ll start so see immediate changes, and you’ll set good behaviours in motion that’ll serve you throughout your career as an entrepreneur.

1. Prioritise organisation

When you are organised, you can track every facet of your finances. Record all of your financial information in one place so you can refer to it and keep track of your progress.

When you chronicle all of your financial information, you may want to try and organise it by category. For example, when you are recording your current costs, you can categorise them as “urgent” and “future.”

Not only will this system help you stay on top of your personal finances, but it’ll prepare you for entrepreneurial success because it’s a directly transferable skill.

Related: Smart Money For Small Businesses

2. Check your credit

According to a recent MoneyTips survey, nearly 30 percent of people don’t know their credit score. If you are among this group, it’s time to request a free credit report. Once you know your number, assuming money’s tight, feel free to use a few do-it-yourself credit repair techniques to quickly improve your score.

Understanding your credit score and improving it to the best of your ability is paramount when it comes to money management. A little-known fact among aspiring entrepreneurs is that the funding a new business receives is often dependent on the founder’s credit score.

3. Save where you can

People often cringe when they think about cutting back. Fortunately, there are several painless ways to save. Look at your daily habits and see if you have any spending trends. For example, if you spend $5 every day on lattes, you might consider cutting back and only having the expensive latte every other day. Slowly, you’ll get used to this new habit, and your bank account will reap the rewards.

Related: Time Is Money: Tips To Help You Use Yours Well

4. Search for additional information

The Penny Hoarder

Have you heard of The Penny Hoarder or Dough Roller? These are just two personal finance blogs that can help you better manage your money, but there’s a whole lot more out there.

Subscribe to websites and follow podcasts that offer advice on money management. Also, keep your eyes peeled for informative outlets that speak directly about entrepreneurial finances and follow them, too.

5. Set long- and short-term goals

Have you ever noticed that people want to reach their goals in as little time as possible? If you pick up almost any given health magazine, it’ll claim that it can help you achieve extreme results in little to no time.

Unfortunately, crash diets are often ineffective, and “get rich quick” money management techniques often lack substance.

It’s hard to accept that your goals will take time to accomplish, which is why you create short- and long-term goals. In either case, aim to make goals that are specific, measurable, attainable, relevant and time-based. Ideally, accomplishing your short-term goals will give you the positive feedback that you need to continue striving for your long-term goals.

Related: If You’re Trying To Raise Money, Doing Any Of These 9 Things May Scare Off Investors

6. Find a mentor

If you manage your personal finances and entrepreneurial finances, one thing is certain – at times, it will feel like you can’t keep up with everything. Financial planning can be difficult, and it’s not uncommon for it to feel overwhelming.

As an individual, you can seek out mentors that can help you with personal finances. As an entrepreneur, you can continue to work with these people or seek out more established financial consultants that provide you with guidance you need to run your business.

Managing your finances is a trying and rewarding experience. It will feel messy at times, but the more you practice, the more you’ll improve your personal finances and set yourself up for entrepreneurial money management success.

This article was originally posted here on Entrepreneur.com.

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How to Guides

How To Raise Working Capital Finance

There are more than 150 working capital funds available for SMEs in South Africa. Here’s what you need to know to access them.

Darlene Menzies

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A healthy cash flow is the life blood of a business. The reality is that most businesses experience cash flow problems from time to time, which could be caused by a structural problem in your supply chain, inadequate debtor controls, poor pricing structures, bad planning, too much capital being tied up in stock or possibly the impact of unplanned growth on your existing resources.

Whatever the reason, the good news is that there are more than 150 different working capital funds available for SMEs in South Africa. Working capital loans are short-term loans that are designed to provide financial bridging to address cash flow needs.

The more you understand about how these funds work, the better you will be able to identify the most appropriate option for your specific needs.

What’s available

Overdrafts and credit cards

Overdrafts and credit card facilities are a good option for relatively small, short-term cash flow problems. Most banks are willing to provide profitable businesses with overdrafts and credit facilities and you will only be charged interest on the money you use. Some banks charge a small monthly fee for these facilities even if you don’t use them, but this is a small price to pay for the convenience of being able to meet financial obligations.

Related: Equity Crowdfunding In SA Explained

Contract finance

Also known as getting upfront cash to fund the work for an approved contract. If the reason for the cash flow problem is high sales volumes that result in a temporary cash flow issue, contract finance can be a good option. Contract financiers want to know that your client is reputable and has a good payment history. They’ll also want assurance that you have the knowledge and experience to fulfil the terms of the contract.

First prize is contract finance that enables you to control both the finance and the contract work although in some cases the lender will insist on controlling the finance and may even want involvement in managing the project. Most contract financiers charge an interest rate linked to prime and you will also be charged for drawing up cession documents if this is relevant.

Debtor finance or invoice financing

Also known as getting cash while waiting for customers to pay invoices. If the cash crunch is caused by customers who will take a long time to pay you, debtor finance can be useful. In this case, unlike contract finance where the finance is provided prior to the work being completed, debtor finance requires that the work has already been done and that the customer has been invoiced. As with contract finance, the credibility and credit history of the client is key to lenders as they rely on their ability to pay your invoice.

On average you can raise between 75% and 80% of the value of the invoice within a day or two of sending the invoice to your customer. There is usually an administrative fee to be paid plus interest on the loan — it can be an expensive way of getting finance but it is better than waiting 90 or 120 days for your customer to pay you if you have cash flow constraints. Debtor financiers offer two options — invoice discounting and factoring. Factoring is when your client pays the lender who then returns the outstanding portion of the invoice to you (less their fees).

Invoice discounting is where the customer pays you and you pay the lender i.e. the client does not know that you have borrowed against their invoice. There are usually big penalty costs for late payments. Be aware that if the client does not pay by the specified date agreed with the lender, you will incur additional penalty costs.

Retail Finance

For businesses that operate in the retail sector and generate their revenue from debit or credit cards or EFTs there are lenders who provide loans that are repaid by deducting a small percentage of daily sales. You will need to generate a regular income of at least R30 000 monthly to qualify for this type of finance. The useful aspect is that repayments vary according to income generated. During busier months, you’ll pay more, and less during quiet periods.

Terms Loans

Term loans are another popular way of raising finance to cover cash flow gaps. The money is loaned for a fixed period and you agree to repay at regular intervals. Interest charges are usually linked to prime and the rate is linked to your risk profile. The duration of term loans varies according to the business’s needs and lender’s terms.

You will be expected to provide collateral to raise a term loan. Lenders will also check your credit rating and financial statements, business plan and possibly the order book before they agree to lend you money.

Related: The Truth About Venture Capital Funding

What working capital funders expect

What working capital funders expect

The key to obtaining working capital funding is understanding the lenders’ risk. To minimise their risks, lenders will require security for the loan. Providing collateral is often difficult for entrepreneurs who do not own property or have assets or investments that can be ceded to the lender for the duration of the loan.

Lenders will ask you for a list of personal assets and liabilities and based on this information, they may ask you to sign personal surety for the loan. If you do not own sufficient assets, you’ll need to find someone who does who is willing to stand surety for your loan. This means that if the business fails to repay the loan, the lender will approach the person who signed surety, to settle the debt.

For terms loans, retail finance, overdrafts and credit cards, the lender will focus on the financial strength of your business and its trading history. They usually only consider companies that have been in operation for at least a year and can show that the business is profitable, has a regular income and achieves good credit scores. For contract finance and debtor finance, lenders focus on the quality of your client and may fund working capital advances to businesses that are not yet profitable.

Working Capital Loans

Working capital loans are short-term loans that are designed to provide financial bridging to address cash flow needs. The more you understand about how these funds work, the better you will be able to identify the most appropriate option for your specific needs.


Resource

Finfind is SA’s leading access to finance solutions for SMEs. This revolutionary online platform links finance seekers with matching lenders, providing easy access to over 200 lenders and over 350 loan options. Finfind is supported by USAID and sponsored by the Department of Small Business Development.

Go to www.finfindeasy.co.za to find the business finance you need. It’s free and easy to use.

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