Author: Rowan De Klerk, CEO of The CFO Centre South Africa
Most South African business owners are in for a rude awakening when it comes time to sell. Despite years —often decades —of hard work, many walk away with little more than the satisfaction of having built something. The uncomfortable truth? Most businesses are not sale-ready, and the owners don’t realise it until it’s too late.
One of our most satisfying achievements is helping entrepreneurs extract a fair—or even premium — price for their businesses.
It is an uncomfortable truth but between 70% and 80% of businesses will never be sold. When this is expressed as a percentage, we can argue that 20–30% still potentially represents a potential opportunity for entrepreneurs, but let’s express these figures slightly differently.
As of 31 March 2024, SARS statistics indicate that 916 425 (25.1%) of the 3.6 million registered companies were assessed for the 2023 tax year, and 488 118 (50.9%) of the 959 000 registered VAT vendors were active. Logically, you can only sell a VAT registered business so you could deduce that less than 100 000 businesses – and their owners – will potentially exit their businesses at some point in time. Presented the way a CFO might: just 1.6% of the adult population might exit via a business sale each year.
If your business is a key part of your plan to achieve financial independence, you need to appreciate how fine the margins are to secure a healthy exit.
When engaging clients on the potential sale of their business, these are a couple of key considerations we raise.
Understand and manage your timeframe
Many business owners fail to appreciate the amount of time it will take from when they decide to sell, to when they can cash in.
Unless your business is in a very unique situation where clients or technology are in demand, a successful sale is not something which is going to happen in 3 to 6 months. Rather, expect that a sale process can take between 3 and 5 years.
Prioritise a clear succession strategy
In our experience working with leading entrepreneurs, a well-defined succession plan is often a critical factor in achieving a successful exit.
One of the businesses we’re currently advising has received a compelling offer from a private equity firm. However, the offer is contingent on the founder and majority shareholder remaining actively involved in the business for an additional three years to unlock the full value of the deal.
This put a real dampener on the entrepreneurs’ plans to enjoy the fruits of their labour.
Be realistic about the multiple you are going to get for your business
While valuations may differ from industry to industry, you will need to give realistic thought to the valuation your business might attract.
The JSE is an interesting benchmark.
Consider that an entrepreneurial business like Investec — with strong local and international brand equity, a solid balance sheet, cash reserves, intellectual property and a 7.5% dividend yield — trades at a multiple of just six times earnings. This is a business which has the benefit of a dual-listing in South Africa and the UK – if you assume you will have to discount the 6 times earnings for your unlisted business, where does this leave you?
It’s a balance sheet – not a piggy bank
Many entrepreneurs looking to exit their businesses are quick to focus on elements like sales pipelines, relationships and future prospects. Where they often fall short is the structure and strength of the balance sheet.
It is important to remember that potential acquirers are ostensibly looking at the balance sheet and wondering what they can leverage.
Are there significant shareholder loans on the books? Is there a clear dividend policy, or are the owners simply extracting every Rand the business makes?
Can people get real data out of your business?
A good accountant can help structure your historic financials and tell a coherent story. A good CFO will help you package your forecasts and ensure that your business can provide the supporting data to drive the most attractive valuations.
This becomes particularly relevant when you consider that the buyer is going to be seeking the best possible price and will have their own team working to this end. A seasoned financial professional will be able to help ensure that you are able to put forward the most compelling story and ensure that future assumptions are soundly modeled on verifiable data.
The successful sale of your business can be a fundamental game-changer for entrepreneurs who are looking to build wealth. Those who have a focus on long-term value creation and are supported by the right team are far more likely to enjoy their retirement than those who are looking for a quick fix.
