Sometime last year a friend offered me a share of his business.
The business provides consultancy services. He wanted to sell a 25 percent share in it for sh25million shillings.
I didn’t have the money neither was I interested in the business, but I was intrigued, I wanted to know more.
The accountants know how to do this better but I wanted to get a sense of whether the price asked was fair.
I thought I needed to have a good idea of his revenues, his profitability and his balance sheet.
He had a rough idea of his revenues – about sh115m in 2018, but this were not audited accounts and I didn’t get a sense that he had recorded all his income. He is the kind of guy you don’t pay cash on a Friday afternoon.
If his revenues were sketchy, his costs were all over the place and determining the company’s profitability was a gamble. His balance sheet? What is that?
Without those three metrics I found it hard to even begin to determine whether sh25m was a fair price or not. It was also my excuse to decline the offer.
I didn’t think he took it well at the time, but last week almost a year later he came back. This time he wanted sh25m for 10% of the business.
This time it was a Whatsapp message and he attached his financials which went back three years.
His revenues last year stood at sh150m from which he had made sh32m profit and from his balance sheet I saw the net asset value of his consultancy was just over sh10m – though there was the worrying element of loans to directors – it was a sole proprietorship, which I thought gave it a more flattering valuation than it deserved.
I still wouldn’t buy it, but he was a step ahead of many businessmen in our town. I am looking forward to seeing his results in five years time.
We commit a lot of time and resources to our businesses, be it the corner shop/salon or airtime duka or the cloth and shoe selling business or the farm in the village.
But we don’t know how much we spend on our businesses and even whether we are earning anything from it. In a part of our brains the money that goes in is as if to charity and the daily cashflows are a sign we are doing well.
We console ourselves by thinking at least we are doing something with our money, not like the neighbour who squanders all his money on booze, bitches and beaches.
If we look closely while you slog and agonise with no real return – probably digging yourself further in the hole, your drunken neighbour is at least having a blast when he does.
I think we should start our businesses with the idea of selling sometime in the future rather than to add another income stream to our paycheck.
Looks like a simple distinction but will totally change how we approach the business.
"If your business is just to earn you more money you will not make the necessary investments that will ensure its sustainability...and you will be casual about record keeping, denying yourself the feedback loop that will allow you to do more of what is working and less of what is not.
But if you are going to sell the business one day, maximising revenues and therefore marketing will be important, minimising costs and therefore investing in an accountant or accounting systems will be critical and growing the company value and therefore investing the surpluses judiciously will be top of your agenda.
The man on the street thinks that the income statement is where the action is – that if we are selling more and more we are doing well.
The more astute businessman knows that what you keep of what you earn – assets, more than your income, is what will ensure growth and the sustainability of the business.
And when the buyers come knocking, while they will be buying a business model, they will gain some comfort by knowing the company has a sold asset base and little or managable debt that does not erode the company’s value.
"Our average business, which has a less than one in nine chance in surviving to its fifth birthday, collapse more for lack of internal discipline than that the market has gone against them...
Thankfully I was not my friend’s last resort for money. And he didn’t have to sell a portion of his business after all.
Because of his improved record keeping -- he still needs audited accounts, he was able to get a bank overdraft from his bank which has allowed him to not only keep in business but also opened his eyes to all the possibilities his bank has to offer in support of his business.
His mindset has now totally changed,
he s thinking from his company’s balance sheet rather than from the income statement. He is now in a marathon and not a sprint...
He is still a one man shop but that may very well change, he thinks, once covid-19 is out of the way. With that change his business has a better chance of seeing its fifth birthday and beyond.
