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How To Get The Most From The Sale Of Your Business

Your business is your asset of value. This has been your life’s work, and you certainly don’t want to cash out too cheaply. Here are 5 key tips for getting the most from your sale.

Chris Staines

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If you’re thinking about selling your business, there are a number of different buyers you can approach, from equity investors to competitors. No matter who the buyer is, consider these five points as you approach the large and important task of selling your business.

1. Choose the right time of year

What we are talking about here is the right time in your Financial Year. Most businesses we sell are valued on a multiple of after-tax earnings — but the question always comes up, “To which earnings will the multiple be applied?”

If, for example, your year-end is February (2018 financial year), and you consider selling your business anytime in the six months after that, then there can be little dispute that a buyer will apply a multiple to your 2018 after-tax earnings to arrive at a value.

But what if it’s now, say, October 2018 (2019 financial year)? And you are having a markedly better year than 2018? Even though you have not completed your 2019 year, there is definitely a case to be made that the value should be based on the results you expect for 2019 rather than those you achieved in 2018.

Given that it generally takes anywhere from four to six months to sell a company, by the time you are getting close to completion chances are that you will have 90% certainty on what your 2019 result will be anyway.

Related: Selling Your Business To Your Business Partner

So, our advice is always to try and ensure that the multiple agreed is applied to future earnings where you can make a case for their being achieved (usually within the last six months of a financial year), and then to provide for an adjustment (either up or down) where the actual 2019 result comes in slightly different to your forecast.

2. Normalise your profits

profitsWhen we sell private companies, we generally find that multiples fall within the range of five to seven times after-tax earnings. Clearly this is a generalisation, and many companies are also valued using a multiple of pre-tax profits, EBITDA or even a multiple of revenue.

The point is in valuing a company, and where a multiple is applied to ‘profits’ rather than revenue, for each and every rand you can add back to ‘profits’ you will receive multiple times that in sale consideration.

Adding back certain costs to your profits is called ‘normalising’ your earnings. In most private companies, there are numerous expenses that go through the books that frankly the business could do without. Some are once-off expenses, and some could relate to the employment of a family member who really does very little in the business.

Before you present your after-tax earnings to any prospective buyer, it is vital that you go through all the costs in your business and review whether these could in fact be excluded. Ask yourself — are these a ‘normal’ recurring business expense? If you can make a case for their exclusion, then remove them from your profit calculation and note down the reasons why. When the time comes to apply the multiple you both agree is appropriate for a business such as yours (and which is a science in itself) you will be sure you are then extracting maximum value.

3. Opt for an earn-out

When you sell your business, many buyers might be nervous about simply paying the full asking price up-front. They know little about your company, they don’t have the relationships with your suppliers or customers — let alone your staff.

By the same token, many sellers might be disappointed by the price they can achieve for their business when sold for a once-off consideration. The risks the buyer perceives as outlined above can often translate into a lower multiple being applied — below what you would consider as fair.

The answer to the above conundrum is to consider an earn-out — a solution that can work equally well for both parties. Essentially an earn-out requires the buyer and seller to agree on an up-front value for the company, and then for the buyer to agree to only pay a percentage of this immediately. The balance of the consideration can then be paid over a one or two-year period (or longer depending on what is agreed), and will be calculated by applying a multiple to the actual profits earned in those years.

Needless to say, there is no vanilla way for an earn-out to be calculated, and many refinements can be made to the calculation of the future consideration. For example, we often see buyers prepared to offer increasing multiples for future years, or even increasing multiples where profits exceed certain agreed bands. There are also often caps and collars applied to the consideration — the collar to ensure that the consideration never falls below a certain agreed amount, regardless of actual profits earned (to protect the vendor) — the cap to ensure that the consideration payable is never greater than a certain agreed amount (to protect the buyer).

There is no doubt that an earn-out is the best way to extract maximum value for your business — but beware the complications of such mechanisms. There has been many a fall-out between buyer and seller particularly over the calculation of profits during the earn-out period — thus impacting the consideration that both parties feel should be paid. The ‘rules’ of how the business should be run during the earn-out period, and who gets to decide on levels of expenditure need to be written extremely carefully into the purchase and sale agreement.

Related: 20 South African Side-Hustles You Can Start This Weekend

4. Sell your company not your business

When buyers are considering making an offer for your company, what they actually mean is that they like your business — but don’t necessarily want to purchase the actual company in which it is housed.

Many companies that come up for sale have been trading for many years, and it’s possible that there are certain ‘gremlins’ (such as hidden actual or contingent liabilities) within the company that the buyer might not be aware of — despite the warranties and representations that the company owner will be required to give at the time of sale.

We often find that buyers prefer to make an offer to buy the business out of your company, rather than take on the company itself. Whereas this might at first sight seem to make no difference to the vendor, the reality is that they could end up paying considerably more tax than if they simply sold their company.

At the time of writing, where an individual simply sells his company, he will suffer capital gains tax of 18% on the gain. If, however, he sells his business out of his company, then the proceeds of the sale will not go directly to him, but rather to this company instead. The proceeds of the sale will thus attract corporate tax within the company (say at 28%) and the vendor still has not got the cash into his own hands. To do this the company will now need to declare a dividend for the proceeds of the sale, and this in turn will be taxed at 15%. The result of the above is that the vendor might only see just over 60% of the gross consideration from the sale compared to over 80% had he simply sold the company.

Obviously, tax positions vary for companies and individuals (and also trusts), but there is no doubt that the prospective vendor should seek advice before accepting any offer to make sure he nets the most out of the sale he can.

5. Remove excess cash

This might seem like a fairly obvious one, but it’s surprising the number of company owners who potentially leave too much cash in their business on sale.

When a buyer makes an offer for a business, their expectation is that the vendor is leaving sufficient working capital in the business to earn the future profits for which the buyer is paying. So, one of the key calculations that must be done prior to sale is a review of historical working capital to see what this ‘sufficient’ level actually is.

What we often find is that the cautious company owner runs his business with a good deal of cash sitting in the bank — mostly to help him sleep at night and so not to have to worry about the peaks and troughs of day to day cashflow.

The danger is that the buyer comes to view this level of cash in the business as ‘normal’ — and hence their expectation is that this level of cash will also be sold with the business. The reality, however, might be that the company could actually run on much less working capital, and any troughs in the cashflow could be covered through a small overdraft (without threatening the value of the business or adding to its risk).

Before considering the sale of your company, it is therefore worthwhile having a look at your working capital position, seeing whether you could apply for a small overdraft, and then removing as much excess cash as possible prior to the sale by way of dividend. As long as you can make a case for the business having sufficient access to working capital to deliver the future profits that you have promised, then this step should not be an impediment to the sale. And the excess cash you withdraw is of course more cash in your pocket when you come to add up the total value you extracted from the sale.

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.

Techniques

Why Does Good Client Service Matter For E-commerce?

Remember, bad service is remembered for much longer than any products that have been purchased. And if you provide a positive experience, you will have a loyal customer base and can use the insights gathered from interactions.

Clarissa Fleischer

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You might be scratching your head a little at the notion of an e-commerce store (yes, an online store) worrying too much about client service. After all, customers are using your website to purchase goods and avoid interacting with salespeople, right? But client service, or customer support as it is also known, is vital to running a successful e-commerce business. This is because consumers still expect the same level of care as they would from a brick-and-mortar store.

You will need to devise an e-commerce digital marketing strategy that can enhance your client service offerings. For example, you’ll need to put together an e-commerce email marketing customer base so that you can easily send out promotional emails, newsletters and reply to complaints. Your e-commerce website design should focus on the needs of the customer, so be sure to invest in a design that caters for them. Read on to find out why good client service is vital for e-commerce.

You can sell hundreds of products…

but bad service will always be remembered. For e-commerce in South Africa and around the world, client service is one of the major touchpoints that you have with your clients, meaning that you need to provide the best experience possible.

Online shoppers will likely have no physical contact with your brand, making client service the best chance to show customers that you truly care about them. Remember that customers want more than just a place to shop. They want an e-commerce business that is going to provide them with information that is relevant and help that truly solves a problem. You need a dedicated email address, Twitter handle, Facebook page or a live chat option where clients can contact you easily and efficiently.

Trust builds client relationships

By providing good customer support, you will be building trust between your customers and your brand. For example, if you provide personalised emails with product recommendations to loyal customers, they will see that you are taking note of their preferences and value their input.

As an e-commerce brand, you need to do more than brick-and-mortar stores to generate trust, which is where client service comes into play. You should look into building a customer support strategy that allows you to meet consumers at every touchpoint of their journey. This will show customers that you are a brand that is taking note of what they need. The reason for building trust is that, in the online shopping world, customers do not have to go very far (just a few clicks, in reality) to find another store with another shopping cart to fill. Focusing on what your client needs is a sure-fire way to improve consumer trust in your brand.

You will gain valuable insight

Client service is not only good for the customer, but can be good for your business too. You can gain valuable insight into the wants and needs of your customers as well as issues that you might not have known existed in your business.

Feedback that is constructive can help you to make changes in your business to improve client service and will allow you to introduce new systems for dealing with complaints and queries. If customers are repeatedly asking you if you will be offering new or different products or if they are asking about specific products that your competitors offer, you can use this information to meet their needs and keep your site up-to-date with trends and products. Even transactional emails can be helpful, as these will allow you to improve or enhance your checkout process.

It can make (or break) your brand reputation

Reputation is important, whether you are a physical store or an online one. And in the age of social media, can you really afford to offer bad client service? Today, people take to Facebook, Twitter and even Instagram to share their experiences with brands, whether their experience was positive or negative.

If your customer support is bad or inconsistent, customers will likely head to your Facebook business page or write something on their own profile for the world to see. And how you deal with this is also a part of your customer support. Be sure to always strive to provide customers with a positive interaction no matter the situation. Even if the customer is not always right, they should never have negative connotations with your brand.

Clients come first

Client service is one of the most important aspects of any e-commerce business. While you might think that all your consumers want is a place to shop without having to deal with crowds (an introvert’s dream), they expect the same level of client service they would receive in an actual store.

Remember, bad service is remembered for much longer than any products that have been purchased. And if you provide a positive experience, you will have a loyal customer base and can use the insights gathered from interactions.

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3 Ecommerce Trends You Must Prepare For In 2019

The ecommerce explosion continues, but there’s also an element of evolution. To take your ecommerce presence to the next level, take advantage of these emerging trends.

Tiffany Delmore

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Retail ecommerce sales continue trending upward, and consumer confidence has reached an 18-year high. Conditions are ripe for brands with an established ecommerce presence, but that doesn’t mean business as usual will always suffice. Instead, the organisations that excel will be those with a forward-thinking approach to ecommerce.

Ecommerce is thriving because enough companies have kept up with changing technology and consumer expectations. For example, as mobile purchases increased in popularity, ecommerce retailers began specifically catering to this shopping avenue. Mobile purchases constituted the majority of ecommerce sales in 2016, and eMarketer estimates that 72.9 percent of online purchases will be made on a mobile device by 2021.

Device preferences aren’t the only thing in transition – search methods are also quickly evolving as technology becomes more sophisticated. According to predictions from ComScore, 50 percent of all search queries will be made via voice by 2020. And it’s likely that more people will be audio searching for buyable goods soon: Devices such as Google Home Hub and Amazon Echo Show are integrating voice and image search so that shoppers can see what they’re asking to buy. Ecommerce retailers that can’t cater to a voice-activated future (Read: optimise for natural language search) will quickly lose ground to their rivals.

Ecommerce companies are also partnering with payment processors to make online purchases as frictionless as possible. By offering payment options such as PayPal, Venmo and Amazon Pay at checkout, customers can leave their credit cards in their wallets, so buying becomes even easier.

No matter how mature your ecommerce presence might be now, you need to keep looking ahead to ensure future success. To elevate your ecommerce efforts in 2019, take advantage of these three emerging trends.

1. Sell your wares on social

Effective marketing is about optimising your messaging to appeal to your target audience, but messaging won’t matter if the audience never sees it. Meeting your audience members where they spend their time is crucial, and here’s a tip: If your customer base is online, it’s on social media one-third of that time.

If you’re not selling on social media, you’re missing a huge opportunity. Most social media platforms now support integrated buy buttons that transfer users to your website to complete a sale, and apps such as Instagram and Snapchat offer shoppable stories, too.

Retail brands like Jordan have also capitalised on event-related social commerce opportunities. For the 2018 NBA All-Star Game, Jordan partnered with Snapchat to offer access codes to an exclusive sale of the special edition Air Jordan III Tinker shoe. Users could only receive a code if they were near the Staples Center in Los Angeles, and the sneakers sold out in 23 minutes.

Related: 6 Steps To Building A Million-Dollar Ecommerce Site In 60 Days

2. Remix the buyer’s reality

Mixed reality technologies have yet to see mainstream adoption, but they have made huge strides in that direction. Vertebrae’s launch of its AR/VR ecommerce platform Axis aims to prove that the tech is much more than a novelty, and IKEA’s Place app provides shoppers with an AR-powered glimpse into what IKEA products would look like in their own homes.

“Augmented reality and virtual reality will be a total game changer for retail in the same way as the internet. Only this time, much faster,” says Michael Valdsgaard, leader of digital transformation at Inter IKEA Systems.

AR might not be everywhere yet, but ecommerce retailers that successfully incorporate AR capabilities into the shopping experience stand to gain a significant advantage over their competitors.

3. Strengthen your Amazon strategy

Amazon has established a pre-eminent place in the ecommerce ecosystem, and Salmon’s “Future Shopper Report” indicates that 68 percent of American shoppers head straight to the site when browsing for products. What’s more, even when customers plan to buy from another site or store, 80 percent read Amazon reviews and check prices there.

Clearly, mastering Amazon is critical. Trevor George, founder and CEO of Amazon marketing agency Blue Wheel Media, says that the only way for sellers to win on the platform is through ads: “The future of Amazon is advertising, and if a brand wants to make money now and into the future, it needs to be able to navigate Amazon’s advertising platforms.”

According to George, that means investing in auto-bidding tools such as Prestozon or Ignite, isolating the right search terms, and incorporating negative keywords so your appliance company isn’t spending money to appear in searches for Easy-Bake Ovens.

The ecommerce boom isn’t waning anytime soon, and capitalising on it requires a thoughtful strategy that keeps your brand ahead of the competition. Keep social commerce, mixed reality shopping and Amazon advertising on your mind through 2019.

Read next: Watch List: 15 SA eCommerce Entrepreneurs Who Have Built Successful Online Businesses

This article was originally posted here on Entrepreneur.com.

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How To Get Ready To Sell Your Business – Advice From Marnus Broodryk

If you’re thinking about selling your business, there are some critical steps you need to make first.

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MAKING THE SALE

A successful transaction will mostly boil down to having a solid business with great systems in place that is making decent money and the starting point for these transactions will be financial information.


Some entrepreneurs are ‘starters’, they like to start a business, get it off the ground and then flog it. Others are ‘growers’, they look for existing businesses and have the ability to grow them beyond their original value. Both will probably get to the same end point: Selling the business.

But entrepreneurs are often misled when it comes to the sale. They have put everything into the business and it is worth a huge amount to them because of it. But buyers are seldom willing to match the price, because what is being sold, and what is being bought, are not the same thing. Sellers see the emotional and financial investments they’ve put in; the buyer mostly looks at one thing: Profit.

Effort does not equal profit. The balance is out.

Related: 20 South African Side-Hustles You Can Start This Weekend

Prepare for the challenges of selling

Once you get to market you will soon realise that there are, unfortunately, fewer buyers than you’d like. Unlike listed companies, you can’t sell shares easily and quickly on a public platform. Instead, you need to find an interested individual or business, many of whom just aren’t buying what you’re selling.

Some of them are, but that doesn’t guarantee a sale. Most SMEs must put their faith in a cash deal, since banks will never finance anyone wanting to buy them. In reality, this means that you may have a genuinely interested buyer for your business, who won’t be able to get finance for it from the bank. So, after a few months, you’re back to square one. After a few rounds of this cycle many entrepreneurs will just sell out of desperation, forgetting what the business could actually be worth.

Selling a business can be very emotionally draining and this will be compounded by many people who will waste your time and mess you around. You spent a large portion of your life building this, but others will not see it the same way you do. Ensure that you prepare and mitigate against all of those issues, and have the stomach for the fight.

Always keep the end in mind

If you are looking at exiting your business, it is crucial to allow enough time to prepare yourself for it. Maybe you’re simply tired of your business and you just want to get out, but, because the business is not in a great state at the moment, you’re too fed up to care, and you simply don’t have the energy to fix the issues.

You’re at risk of letting your business go for next to nothing. All the hard work for hardly any reward.

Related: Selling Your Business To Your Business Partner

If you have the end in mind, and prepare for it, it can be a very different, more lucrative story. A successful transaction will mostly boil down to having a solid business with great systems in place that is making decent money and the starting point for these transactions will be financial information. You need to have proper financial records for your business and you need to be able to show the potential buyer how much the business is making and how it is making it. It sounds so elementary, yet most entrepreneurs don’t have financial information when they want to sell their businesses. If you think you may want to sell in the future, make sure you’re keeping solid records now.

If your business’s financials are messy, start cleaning them up at least twelve months before trying to sell your business. Remove all your personal expenses from the business and ensure that all transactions are properly recorded, and that your taxes are up to date and accurate. Work with your accountant to prepare a sales pack with all your financial information, including details of your clients, employees, suppliers, what your strong and weak points are and how the business could grow in the future. It’s at this stage that you can pick up on issues and resolve them before taking your business to the market, making it a much more attractive product.

With some (more) hard work, you will be in a great position to sell your business, you will have serious buyers and the valuation that you deserve for all your hard work. If you don’t, why bother?

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