PREPARE YOUR BUSINESS FOR SALE - the Wonky ROA

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Here is another great article from Mark Corke of Suitegum. Remember if you would like to sign up for his free 'tips' and parts of his seminar, Here is the link.


PREPARE YOUR BUSINESS FOR SALE

Mark Corke & The Wonky ROA

21 February 2008

Your business' value is the sum of all the decisions you have made - the good and the bad ones. Add to that the consequences of decisions and attitudes related to the payers and non payers, the excellent products and the dogs, the attention given to and the ignoring of customers, the opportunities taken and the opportunities squandered, good luck & bad luck...

Calculating the value in your business revolves around many variables; income statement, balance sheet, history, future prospects and staffing issues immediately spring to mind. Of course there are many other less quantifiable elements, one of which is the redundancy built into a business - you know, the ability of a business to recover when a system fails.

In my seminars, I use the example of the griller in a restaurant not pitching for work. Somehow, somewhere the restaurant needs to have a backup for this very important, talented guy.For me the question of redundancy became particularly relevant in the last week when my laptop suffered a fairly fatal hard disk crash. Never have I been so grateful for a backup system that (mostly) works.


Knee Jerk Retail Therapy

More pertinent to the rest of us right now is the question of energy supply in South Africa, and there cannot be many of us who do not know the cost of an appropriate generator or UPS to keep things cruising when Eskom grinds to a halt.

Around braais, at clubs, in the office, on various online forums, and for us around the negotiating table, the discussion has centred on that new status symbol - the diesel generator. "Protect your Business" is the new buzz.

You know the scenario: You and your staff are working away on a project, closing in on the deadline; or you're about to start the final print run on that tender which closes in 3 hours time; or you have a shop full of customers; or the melted plastic has just been forced into the extruder; or the dough has just finished proving; or... Well you get the idea - we all have our instances - when the electricity delivery for which we have paid a basic service fee, at least, fails.

"Get a generator" they'll yell at you. At the very least that tight feeling in your chest suggests that you should be more than a casual reader of the Yellow Pages, or clicker on Google. But is that really the solution, when it comes to defending the value of your business? It may be, but I would suggest that perhaps you should take a moment to do some sums. Bear with me for a while, as there are so many permutations to the problem, and as a relatively inexperienced and scared business community enters the generator market, it is in danger of becoming a bit of a pissing contest to see who has the biggest generator. The largest I have come across so far is in a business which is awaiting delivery of a 650kVA monster to run the factory, and which the directors believe will be cheaper to run than using Eskom power. I find that hard to believe, but then I am no electrical engineer.

For sake of this illustration, we shall limit ourselves to a fairly humble 25kVA generator which will cost in the region of R65,000, or R2,500 per month on a suitable finance option. This generator will give you about 4kWh of power per litre of diesel, which works out to about R2 per kWh. Given that Eskom power is costing us about 40c per kWh, we can easily understand where this article is headed, but let's refine it some more.

How much are you going to use this generator each month? Truth is, we don't really know at this point. In the recent failures of January, some areas were suffering up to 3 hours per day, five days a week, while others were down for very short periods, and only a few times. I know of some industrial areas which have yet to suffer a failure in 2008.

I think though, that it would be fair to suggest that this humble generator of ours, with capital costs and running costs included will be in the region of R4,500 per month.

The only place you will be able to get this money, is from your bottom line. You cannot justify it by suggesting that it will generate you extra income, because the best it will do is preserve your income. So getting a generator will result in preserved income, at a higher cost, resulting in a lower profit. And that is the best case scenario, apart from the one man operator who simply takes out a book, puts his feet up, and then catches up when the power comes back on.

What is the alternative to the generator or other energy source? To not get a generator in some business may result in upset customers going elsewhere, where your competitor does have one. On the other hand your business may be such that your customers don't physically shop or wait for service, and you're able to work in the hours to get the work done. In this instance your expenses will go up, while your income remains stable, resulting in a lower profit.

The point here really is that unless you are in the generator business, if we have protracted energy delivery failures, you are almost certainly going to have a lower profit in the years ahead. Lower profits lead to lower values of businesses, and these values might suffer even more if you buy a generator.

How so? The best business buyers in town - the guys who are successful at what they do, and who pay the price, do more than just look at your income statement. For them key asset management ratios are important.

Return on assets is (Net Income) divided by (Total Assets) So, if you have a generator, you may have preserved your income, but your asset level has gone up, and so this ratio suffers. On the other hand, if you did not get your generator, your income suffers, but your asset list remains the same, and so your ROA ratio suffers again!

Is there no winner? Well, of course there is. The business owner who does his sums carefully before making the decision to buy a particular generator, if he does so at all, will retreat the least. He will optimise his decision around calculated consequences. His ROA ratio will suffer less than that of his competitor who blundered in without a moment's thought in an effort to pee further than the big lad down the road.

So while it may feel good and comfortable to be able to push the starter and gloat at your neighbours while they complain about the gentle chug-chug of your diesel, perhaps they are better off in their long term financial planning.

Cheers

Mark Corke