How To Make A Business Worthless!

Imagine, putting your heart and family life, into a business, believing you are doing the right thing, only to find that your business is worthless? Yes! a zero or negative market value!

Thats what happened to Gary. It could easily have been avoided...

This is Gary, who owns a lawnmower business that does well! He was ready to run the business for the rest of his life.

Gary wanted to paint the wall in his workshop, he did that.

Gary wanted to buy a new vehicle; he did that.

Gary wanted to do a TV advert, so he looked at his projected profits, saw that he could, and so he did that.

I asked Gary why, and he proudly said, "I like to re-invest into my business, I want it to grow!"

It sounded sensible; I thought I should also re-invest in my business.

Meet Harry.

This is Harry, an unassuming chap! Harry also owns a lawnmower business. Harry's lawnmower business does really well, it's not quite as busy or tidy and clean as Gary's, but Harry is happy with its processes and reach.

I asked "Harry, why don't you paint that wall?"

He replied with... "It's on the list for the next financial year."

Seeing the complexity in my eyes,

Harry explained that he holds the profit in the business, then after the end of the financial year, he considers the net profits and

• he declares a dividend, which he considers to be his bonus,
• confirms that he can acquire the things that may grow the business,
• he asks his accountant to put any balance into retained earnings

Harry looked me in the eyes and proudly announced,

"I like to re-invest in my business and grow its value and worth."

Sometime later, both these owners called me and asked if I would market their businesses.

Harry wanted to retire; Gary's wife had sadly fallen ill.

I agreed and we began advertising.

Within two weeks, I found an investor interested in buying a lawnmower business. I took him to see both companies.

This is what Gary had to offer...

Turnover R2,500 000.00

Owner Salary R260,000.00

Assets R800,000.00

Stock R700,000.00

Net Profit (-R1000.00)

Business Sales Price R600,000.00

This was what Harry Offered...

Turnover R1,900 000.00

Owner Salary R210,000.00 (Plus R50,000.00 Dividend)

Assets R400,000.00

Stock R300,000.00

Net Proffit R310,000.00

Business Sales Price R900,000.00

The investor made an offer for Harry's business, which was accepted at R880,000.00.

The investor told Gary; his business was in trouble! Gary explained that he had reinvested in the business and had avoided paying revenue services, by using money prior to the financial year end.

The investor replied, "but your business is worth (-R1000.00), so give me R1000.00 and I'll take it off your hands."

Harry is retired in Mauritius,

Gary is trying to sell his stock and assets, to help his wife and continues to tell me that people don't understand re-investing in your business.

I think Gary never understood how dangerous instant gratification can be!

I don't think he understood the importance showing your net profit at year end in your financials.

Harry is rather proud of the outcome of his exit strategy.

What can we take away from this?

1. A Self-Employed owner makes his business worthless, by not watching the bottom line, and planning ahead.
2. An Investor or Buyer having bought Gary's business, and then changing the operational ethos, would have shown a much higher Net Profit, having bought the business for R600,000.00 saving himself R220,000.00. (A fair saving with increased value for money)

How to deal with this?

My recommendation to Investors, is look past the numbers on the page, and you'll very likely save a substantial amount of money, finding the profits obscurely "re-invested" in the likes of advertising, assets and inventory.

My strategy suggestion to business sellers, is don't wait until selling your business before recording the profits, business is all about net profit. The best strategy is to show maximum net profit on paper! What you spend it on will no longer be of interest, after it has been correctly recorded in the financials.

It's not about painted walls, high inventory, or new vehicles.

By simply delaying to after the completion of your annual financials, the overall value of your business increases, and it's a easy strategy to follow.

Diary Of Business Broker is a newsletter that shares experiences, tips and anecdotes to selling businesses in South Africa.

Alistair Plint?is with Biz2Sell Business Brokers in Johannesburg, South Africa.

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