So you want to buy the business you work for?

Many people dream of running their own business and sometimes you’ll be in a position to think about buying the business you work in.

There’s a whole raft of things to think about along the way but here are a few to consider.

If you are successful in buying the business, that’s just the start. What are you going to do with it, and do you have the skills, knowledge and experience to successfully run the business? One way to think about that is to write down all the functions, then assign names to them from your team. You might want to get the existing owner to do the same thing; there may be some surprises for you!

Do a SWOT analysis on your team; be prepared to hire the skills you don’t have in-house

As an employee, working for the owner, you have an established relationship.  If you are going to make an approach to buy the business, you will change that relationship. There’s a risk that if you make an approach, and it does not work out (for whatever reason) you will not be able to continue in your role.

To minimise this risk, make the approach very carefully and be as subtle as you can. Be prepared to take your time and give the owner time to adapt to your suggestion.

Money matters. The chances are that you cannot pay as much for the business as a third party, with deeper pockets, can afford. Be open with the owner about your finances, and be prepared to go “all-in”. That may mean putting your house on the line, risking your pension…is your partner or family prepared to take the risk?

For the existing owner, there are a number of benefits to selling to the team and you’ll need to emphasise them. You probably cannot compete on price, so compete on the emotional appeal of looking after the business and the team. There’s also the avoidance of a protracted sale process involved in the sale to a trade buyer.

Get help early on to advise you; there may be more sources of funds available than you realise, and the conversations with the owner may be more fruitful if both sides can express opinions untainted by the (probably many years) experience of working together.

Quarterly Economic Update – Dec 2013

This is my personal view, based upon many years researching and reviewing the work of others “standing upon the shoulders of giants”

This commentary seeks to provide guidance over a 3 -5 year timescale.


Taking the three big economies of the Eurozone in turn:

As expected, Angela Merkel was re-elected and is forming / has formed the grand coalition with her political opponents. From an economic guidance perspective, this means little change to the status quo – perhaps some adjustments in the social and benefits arena – but nothing to derail the progress of the German economy.

In France, president Hollande appears to be making fewer blunders but is not addressing the challenges of the bloated state, generous retirement provisions and onerous individual and corporate taxes.

In Italy, the Berlusconi era has finally drawn to a close – although there is a rumour that his friend, President Putin of Russia, might appoint him Russian ambassador to the Vatican! That would give the former PM a diplomatic passport and immunity from house arrest. Politically, there’s no strong leadership and economic reforms are not happening. There will probably be yet another election in 2014, but it’s likely to be just another shuffle of the same pack of cards.

The southern fringes will continue to be influenced by the North African troubles; Egypt is unstable, Syria in the middle of a brutal civil war. There will continue to be a drain on Turkey, in particular but also continued refugee crises across the Mediterranean. Economic news from Portugal, Spain, Greece and Cyprus is minimal, which is good news. It may be time to call the end of the Euro shocks.

My forecast:
Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 2.8% in 2016, but individual countries will still perform at markedly different rates. All of the Latin countries are still in the recovery ward, but showing signs of better health. Germany is likely to be more stable, with growth gradually improving from 2014 – 2016/7, perhaps peaking at 3.5%. I would not be surprised by some relatively disappointing growth figures for Germany in a couple of quarters of 2014. Real growth for Germany requires more of a recovery in the southern fringe.

France continues to struggle and 2014 does not look to have a favourable out-turn. Recovery will require political change, either of leadership or of direction.

Italians are used to weak / no government and growth of 1.5 – 1.8% should be achievable in 2014 with gradual improvement through to 2016.

Smaller countries, particularly those in Eastern Europe, offer real potential for growth. Ireland appears to have weathered the crisis and has a positive outlook, and general acceptance of their fate (albeit still with some political upheaval) is appearing in Spain, Greece & Portugal.

Despite the headlines screaming about the good economic news from the last few months, we are not completely out of the woods yet. In my June commentary I referred to further problems emerging in the financial services sector and they were duly uncovered. It will take several years for that sector to return to pre-crisis levels of contribution to the economy.
The recent statistics do show improved activity across almost all sectors, which is good news, but there is a disconnection between the employment statistics and the output statistics. The implication is that we are now much less productive than was the case in 2007. The Bank of England has set a “knock-out” for increasing interest rates only when unemployment falls to 7%. It may be that productivity increases absorb some of the growth before businesses take on more staff; interest rates are likely to remain at present levels through 2015.
The longer term significant risk is energy supply and policy; we’re heavily reliant upon imported gas, have not developed new nuclear and the environmentally friendly generation is slow to fill the gaps. Shale oil & gas would appear to be favoured technology.
Growth rates of 2.5% in 2014 and 2.8% in 2015 seem likely.
Prospects in the US remain very positive, largely due to shale gas. The most positive politico-economic news in several years is the recent agreement, yet to be passed by the legislators, to withdraw the sequestration imposed by the fiscal cliff and replace it by planned savings.
President Obama has not shown a great interest in business and that seems unlikely to change, so there will be little government stimulus to the economy.
Manufacturing operations are being relocated from formerly low-cost environments (South America, China) to the US to take advantage of the low oil and gas prices. The knock on effect of this transition can be nothing but positive for the US as a whole, with a young, well educated population.
Growth rates of 3-5% during the period to 2016-7

The run up to the sporting events has attracted to worlds attention to the country and given the disadvantaged of the population a platform to protest. There’s an outcry against building football stadia whilst the countries hospitals, roads and housing are in dire need of investment.
A large young population, significant natural resources and gradually improving infrastructure, no doubt given a step change by the World Cup and the Olympics give cause for optimism. I note with interest that Jaguar Land Rover announced a manufacturing facility in Brazil recently. I think that’s a very early move.
Growth rates of up to 6 or 7% are possible in the period to 2016 with the Olympic effect but I’d expect to see a slow- down in 2017-2018, with growth falling back to 4-5%.

Continues to benefit from significant natural resources and will show good growth in the mid to medium term. There’s a substantial middle class that don’t have a political voice and any attempt to represent their opinions is met with repression. Doing business in Russia is challenging and requires that you have the right connections.
Over the medium term, growth of 5-6% is likely. Over the longer term, the big question is what will happen on the political front when Putin goes. That could cause major instability.

Faces challenges from its own political system; it remains a country of great potential with excellent education, the use of English as a business language and a young population. There is vast inequality between the richest and most influential and those who are not so fortunate. It’s noticeable that a court found a colonial era law applicable (it happens to be about homosexuality) overturning a more recent ruling. Businesses face some interesting challenges! Growth rates of 4-5% in the period to 2017

The relatively new leadership have taken some significant steps to eliminate or reduce corruption; there are fewer ostentatious displays of wealth by the political elite and domestic IPO’s (initial public offerings) have been frozen whilst investigations into some very doubtful public companies are carried out. There’s a new atmosphere and some more rigour applied to standards and procedures.
All of this helps to reduce the risk of political disturbance between the haves and the have-nots, so the outlook continues to be positive.
Growth rates of 7-9% are most likely

“Greater China”
I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.
The possible exception to this is Thailand, where the present PM seems unlikely to survive the current unrest. That makes investment decisions tricky, so perhaps Vietnam or Malaysia will benefit.
Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.
The political risk in this area is conflict with North Korea, which would heavily affect South Korea.
Growth rates could be exceptional at up to 10 – 12%

It has been a quiet few months for Japan. There’s still the challenge from the Fukushima plant overhanging any prospects for dramatic growth, together with the somewhat sclerotic corporate structures. The worlds’ 3rd largest economy will continue to grow slowly.

The main stories in this region are of course Syria and to a lesser extent Egypt. Both economies are collapsing, and refugees fleeing Syria (in particular) are impacting on surrounding countries. Factor into that mix the long standing Sunni – Shiite divide where it seems likely that Syria is a proxy for Iran’s ambitions to become the dominant player in the region.
The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.
It is difficult to be optimistic for prospects in this region.

The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.
© Tim Luscombe December 2013

Don’t get deal fever next year – get real

In 2014 there will be a number of business owners who want to exit. Many of them would have liked to retire five or six years ago, but could not do so in the middle of the credit crunch.

There’s an opportunity for the smart business to take a step change in growth, but it is not one to be taken lightly.

Making a successful acquisition could transform your business; making the wrong acquisition, or failing to integrate it, could destroy your business.

Start with the plan.

Work out what kind of business you want to buy:

Is it a business with products you can sell to your customers?

Or customers who will buy your products?

Or is it providing a service that you need?

Then work out what you want to do with it:

Treat it as a stand-alone business?

Move everything under one roof?

Somewhere between the two?

When you’ve done that, then you can look and see what is out there.

Don’t get deal fever, get real.

“Marry in haste, repent at leisure” is the old saying. You might update to “Buy in haste, repent at leisure”

Get in touch for some free advice

Dictators & one party states have their benefits

Today’s news includes a note about Cameron’s visit to China and the possibility that China might contribute to HS2. They’ve built rather a lot of high speed rail links over the last few years.

Good infrastructure is one of the key requirements to attract investment and build an economy.

I remember watching the building of the convention centre in Hong Kong on land reclaimed from the harbour. From my office you could see the chain of barges coming in from the New Territories, unloading & returning for more. That and the building of the new airport (they demolished a mountain for that) were completed at an amazing pace.

At the same time, I was travelling at least twice a month to Sydney, where a new road seemed to take forever.

India, the world’s largest democracy, has made far less progress with infrastructure projects than China, who have a one party state.

Russian railways were built by the Tsars and the communists.

Mussolini made the trains run on time.

Perhaps a few emerging market economies would benefit (economically, of course) from a dictator for a few years?

Command & control at least gets things done.





Crowd Funding Regulation

In the Times yesterday was this headline

Crowdfunding clampdown may hit small firms hard

and below is my take on this from over a year ago

Crowd Funding & the FSA – or UK vs. the USA

Posted by Tim Luscombe at 01:00, October 3 2012.

I have been looking at Crowd Funding for one of my clients, let’s call them XYZ

Crowd Funding is where many investors pool small amounts of money to invest in a business, or perhaps to support a charity or an artist.

XYZ have a substantial user base who have paid several hundred pounds for the first generation products.

They need to raise some funding for the development of the next generation of products, so asking the existing customers to contribute £20 or even £50 (perhaps in return for a discount on the purchase of the new product) seems to make some sense. The individual risk is pretty small, the company gets to develop the next generation of products, everyone wins.

Then you look at the FSA guidance on Crowd Funding and their conclusions quoted below:

Keep in mind that almost all crowdfunds are not authorised by us and you will not have access to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) if things go wrong.

We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money.

We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.

We are also concerned that some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors.

I find this difficult to accept as an appropriate response to the circumstances we are considering. I can see how this guidance might apply to investors looking to back start-up businesses with substantial amounts of capital, but really? For investment of £20 or even £100 what are the FSA thinking of?

As I have previously commentated, where were the regulators when the financial crisis blew up? Where was the FSA then?

In the US, the JOBS (Jumpstart Our Business Startups) act comes into force next year. This encourages investment, regulating the middlemen and setting limits related to net worth or income for the individual investors. Why aren’t we doing something similar?

Is it Christmas yet?

Every year all the children get excited because Christmas is coming, but all the retailers get stressed because Christmas is their busiest time of the year.

In the US their busy period is from Black Friday (the day after Thanksgiving) through to Christmas.

Wikipedia tells me the name comes from the appearance of the crowds that thronged the streets of Philadelphia but the popular myth is that it is when the retail chains move into the black (into profit) for the first time since January. Don’t tell anyone, but the smart retailers make money all year round, not just in the last few weeks of the year. The dumber ones go broke in January & February when the rent bill falls due.

Is your business seasonal? Is there a distinct pattern to your sales, so that you know that some part of the year will be quieter than another? Do you look for the pattern?

Seasonality is common in many business sectors, with summer holidays and the Christmas break affecting many, but if your business is seasonal you have three choices:

A.      Match your resources and investment to the pattern of your sales. Some businesses do this through the use of temporary staff (Retailers at Christmas is a classic example of this)

B.      Use the quiet period to do jobs that have been put off from the busy period (common in the agricultural sector, and in some parts of the building trade)

C.      Find something else to fill in the gaps

One of my clients is a florist, and their seasonality is weekly, or rather at the weekends. Everyone wants to get married at the weekend!
We’ve made a deliberate decision to target other markets, moving away from weekend work to jobs that can be done between Monday and Friday, balancing out the workload across the week. It will never be perfect, but where doubling the size of the wedding floristry would require a doubling of the team, we can double the size of the business during the week just by utilising the existing team & giving them a few more hours.

Big swings in sales lead to big swings in cash flow, big swings in cash flow stress the business (and the owner) sometimes to breaking point. If your business is very seasonal, that’s not a good place to be. Remember that more businesses fail from cash flow problems than anything else.

Find another market, or another product to sell to smooth out that seasonality.

A colleague helped a client whose business was entirely winter seasonal; they bought a business that equally seasonal, but in the summer.

The same is true of orders and projects. If all you do is very large projects, sooner or later one will go wrong or be delayed & deferred. Lots of little project to fill in the gaps are a really good idea.

The best sales graph is one that has a smooth upward curve – how can you smooth out your sales?

A system set for failure

The surprising thing from reading the news about the misbehaviour of RBS is that a structure where RBS have their own property business was not seen to be a recipe for trouble if not disaster.

If you have a business, or a department or a division, they need objectives and targets. You can guess that in this case the property business had a set of targets to maximise returns from the properties in their portfolio.

If that’s the case, you have the bank’s internal property company competing with the property companies who are borrowers from the same bank.  It’s not that much of a stretch to see that the internal company, incentivised only to maximise returns, would influence the lending teams to turn over any business that even began to struggle. Someone undoubtedly misbehaved, but the system was setup to encourage that bad behaviour.

One of my clients had a problem with their collections; very long days outstanding, and it wasn’t getting any better. When we drilled into it, the credit control team were doing their best but sometimes had to go back to the customer service team.

The customer service team’s incentives were all around speed of customer response and satisfaction  and had nothing to do with credit control, so of course the requests for help from the credit controllers were very low priority.

We made the credit control team a “customer” for the objectives of the customer service team; many of the problems were cleared up and the debtor days were greatly reduced.

When you set your departmental objectives, do you make sure they align with the overall business objectives?

Keeping a customer is easier than finding a new one

I was reminded of this yesterday by discussions in an all-day meeting planning the future of the organisation.

We’re taking a new direction, investing some additional funds and resources to increase and re-shape our marketing so that we can win new business. The meeting yesterday focused on the strategy in the morning, then the tactics in the afternoon – a very productive day.

Towards the end of the day we turned to the subject of customer retention, and realised there was a possibility that some of our new activities, unless carefully communicated, could disappoint and disillusion our existing customers.

We chose to forego some of the whizzy new stuff to keep the existing customers happy. It does not mean we will not do it – just not yet – and the cost to us is minimal. There’s an opportunity cost, to be sure, but it is pretty small.

If you lose 10% of your customers in a year, you’ll need to add 11% just to stand still.

If you break down your revenues by customer, and then by order size you get a formula that looks like this:

Total Sales = Customers x Sales per Customer

Sales per Customer = No of Orders x average order value

So to grow your total sales, you can either increase your number of customers or you can increase the sales per customer.  One of those is much harder than the other!

To increase your sales per customer, you can either increase the number of orders (the frequency with which the customer shops with you) or you can increase the average order value.

So, how much of your marketing effort is devoted to your existing customers?

Strategy or Tactics?

Many business advisors bandy around the words “strategic” and “tactical” but for me, the only real difference is the timeframe.

There will be times when you have to take a decision to solve today’s problem, but it comes back to haunt you at a later date.

It’s a bit like buying something you can’t really afford on a credit card. If you are not careful, you end up paying for it twice over (or more) by the time you’ve paid the interest.

A client of mine has been approached to sell his business, and I am helping him through the process and we are providing information to the buyer.

One piece of (quite important) information is the share structure and ownership of the business.  The MD and his wife are the majority owners, but two key employees (Nick & Bob) were given a small shareholding many years ago.

When the MD declared the shareholding, he included Nick & Bob as owning 5% of the business each, but when I looked at the accounts there were far more shares that he had declared.

Several years ago, when bidding for a large contract, a director’s loan was converted into share capital so that the business could obtain finance. 

The MD had forgotten all about that transaction. It had to be done at the time, his money was already committed to the business, and it didn’t matter to him.

But Nick & Bob don’t own 5% of the company each, they own 0.05%.

This business will sell for about 5 million pounds; Nick & Bob will receive a few thousand pounds instead of the £250k they would be entitled if they still owned the 5%.

If my client wants to do the honourable thing and give Nick & Bob the difference (I am sure he will) then taking into account the various tax implications he will be about 500k worse off.*

If, after taking the undoubtedly short term decision to convert that loan to share capital, the MD had thought through the implications for Bob & Nick in the longer term, there would have been a way to make sure they still had the 5% he had promised them.

So when the answer to the short term problem is obvious, and you just get on and do it, try to take a step back every so often & ask yourself the question

 “How will that affect me / us / the business in 3 years’ time?

*(Now I think I have a solution for this problem – I just need the corporate lawyer to check)

Business Valuation

Valuing a business is much more of an art form than a science, simply because value, like beauty is in the eye of the beholder.

A business that has immense value to one potential buyer may have very little value, or attraction, to another.

Your business manufactures and sells blue widgets. Your competition only has yellow widgets.

If the prospective buyer doesn’t care what colour the widget is, the two businesses can be directly compared, but if the buyer only wants blue widgets, your business is worth far more than the manufacturer of yellow widgets!

The over-riding principle is that in 90% of cases a business is bought for the future profits it will make, and the valuation calculation is an attempt to place a value on those future profits.

The other 10% of business purchases are for bought for lifestyle choices, a passion or an interest (think football clubs) or for egotistical purposes.

There are many different technical tools and calculations used to try and estimate value, but the real challenge is to identify the right strategic buyer and see the business from their perspective.