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.

 

How easy is it for your customer to pay you?

One business I advised had succeeded in winning business in the Ukraine, and this was turning into a significant opportunity. The sales team were getting very excited!
The finance team were getting worried – payments were erratic, and very slow.

The Ukrainian government had imposed currency controls – you could not pay in “hryvnia” outside the Ukraine, and to pay in US Dollars you needed to get finance ministry approval for each payment.
That wasn’t easy for our customers, and was hampering our business growth. We established a subsidiary company in the Ukraine, so our local customers could pay us in the local currency. Business boomed and the customers were paying much more frequently.
Have you ever tried to buy something on-line, and noticed that your preferred payment method isn’t available? I’ve certainly gone elsewhere when that has happened to me.

Another client was having trouble collecting money from his US customers. We worked with the banks, and setup a special account, in the US, to take wire transfers from US customers. They didn’t have to make international payments….

How easy do you make it for your customers to do business with you, and how easy do you make it for them to pay you?

Quarterly Economic Update – Sept 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.

Europe

The European situation is not getting much better.

In France president Hollande appears weak, pandering to vested interests and his socialist leanings. There’s little to suggest a significant economic stimulus or recovery, and in a country of traditionally high levels of taxation and regulation proposals for new taxes and president Hollande’s failure to address the social security system (in particular the retirement age) are attracting negative publicity.

In Germany, the other key driver to Eurozone growth, all attention is focused upon the upcoming elections and there’s unlikely to be any change of direction, as it seems very likely that Angel Merkel will still be in charge.

In southern Europe, Italy, Spain and Portugal have all suffered from political infighting. To me the row over Gibraltar instigated by the Spanish government looks like an attempt to disguise problems with corruption allegations closer to home. In Italy, which is still a significant economy in world terms, it is not clear what Silvio Berlusconi is planning. Will he bring down the government? Does he have that much control over his party? There’s a lot of uncertainty.

It seems very likely that Greece will need another bailout soon.

It seems reasonable to assume that the Syrian crisis (and that across the Mediterranean in Egypt) will have relatively little effect on Europe as a whole. Turkey will struggle with the influx of refugees but that is likely to be contained within Turkish borders.

My forecast is unchanged as below:

Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 3% in year 2016, but individual countries will perform at markedly different rates. All of the Latin countries will be subject to further political instability and potentially further investor / lender shocks. Germany is likely to be more stable, with growth gradually improving from 2013 – 2015/6, perhaps to as much as 3.5%. France may well be in steep decline by 2014 but that is heavily dependent upon the political situation; I do not see significant upside potential.

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.

UK

The new governor of the Bank of England, Mark Carney, has brought a fresh approach and that includes longer-term guidance for the markets, indicating that interest rates will stay low until there is a significant impact upon unemployment rates.

Businesses considering investment welcome such certainty, and that will be good for the economy.

Service sectors businesses and manufacturing are showing signs of real growth; the financial services sector is a very large part of our economy, and is by no means out of the woods. I would not be surprised to hear of another scandal in the next few months, as new management and new transparency continue to uncover the sins of the past.

The economy will also be boosted by the confidence engendered by rising house prices supported by the chancellor’s actions in providing government funding. There’s a real danger of history repeating itself – one of the causes of the 2007/8 credit crisis was an unsustainable boom in US house prices fed by lax lending. Tapering the “Right to buy” and similar schemes will be necessary, and it’s worth noting that Mark Carney has issued some comments on this already.

USA

The big question over the US is related  to world politics; if action is taken by the US against Syria will that lead to an economic backlash from Syria’s supporters, notably Russia and to a lesser extent China?  My view at the moment is probably not, I think we will hear lots of bluster but the US economy is too important a market.

It’s notable that the US presidential election cycle has commenced and that may be an influence over the coming quarters, as Obama will be keen to play up any economic success to support the ambitions of the Democrats.  Will he be able to leverage the emerging bi-partisan support for Syrian intervention into support for some business friendly measures? The economy and business does not appear to be high on this president’s agenda.

Prospects in the US are positive, largely powered by shale gas (pardon the pun) but also by the corrections to spending, borrowing and taxation implemented by the fiscal cliff. Clumsy as those corrections are, and awkwardly implemented, they are moving to addresses the imbalances in the US and with a stable (if ineffectual) government combined with a young well educated population, prospects for growth are good, and we could see growth of 3.5 to 4% in 2015/6

BRIC

Brazil & Russia are benefitting from significant natural resources and will show good growth in the mid to medium term. The longer term depends upon political stability and the willingness to develop infrastructure and eliminate corruption.  Both economies suffer from the disadvantage of a large population speaking a language other than English, which is now and will remain the defacto language of business and the internet. Neither country has a culture of educational achievement, or an educational establishment to support the development of a highly skilled graduate level workforce.

India benefits from both the education and the use of English as the language of business / commerce, but is hampered by poor infrastructure and a bureaucratic legal and administrative system. The infrastructure problems are compounded by a complex political system with national and regional bodies operating in their own interests.  Investor confidence has just been shaken by some poor statistics in the most recent quarter, which resulted in a rapid depreciation of the currency.  My words from the last version of this still seem appropriate:

“All 3 economies are still economies of promise, but not yet of delivery, and that seems set to continue for the foreseeable future. Growth rates could easily be in 5% or more, but subject to shocks and upsets.”

China is the powerhouse that is going to drive the world economy in this timeframe. There are significant stresses, both social and political, but the central government is making the right noises and very careful to cool the economic growth when it appears to be getting out of hand.  The social stress most likely to cause problems is the move of the populations, especially those of working age, from the country to the city. Parallels can be drawn with England in the mid-19th century and America in the early 20th and the rise of the urban poor. China appears to have learnt some of the lessons of history and is making great efforts to provide the infrastructure to improve mobility, including the development of new cities in less populated areas.

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 glaring exception is of course Myanmar, the former Burma, but even there the path to democracy seems to be the chosen road. That road appears less smooth, with considerable racial / religious disturbance reported.

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%

Japan

When I wrote this

“Japan is often ignored / written off in the commentaries but is still one of the world largest economies. Good opportunities exist in many sectors, but overall growth rates will be hampered by legacy issues, much as in Europe.”

I did not intend the reference to be to the Fukushima nuclear plant, but that seems likely to be the leading business news story for some time to come.  From an economic perspective this has exposed Japan’s reliance upon ageing (and unsafe?) nuclear power plant, and that is a significant infrastructural weakness. It’s difficult to do business when you can’t keep the lights on.

MENA

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.

Australasia

The story of the moment is the Australian election but I don’t see that making a significant difference. There is perhaps some upside in a significant decline in the value of the AUD against the US Dollar over the last 3-4 months, making Australian resources more competitive, but that probably still has some way to go. My comments from the last edition still stand

I suspect the story can be summarised as “the party is over” at least for now. Australia has benefited greatly by shipping commodities to China, but that seems to be cooling off, perhaps as a result of Chinese investment in Africa’s mines. Growth rates of 1-2%

© Tim Luscombe September 2013

Why aren’t the banks lending more?

I hear from business owners and advisors how badly the banks are behaving towards the small business sector, how little money they are prepared to lend and how tough their credit committees are on new applications.

Banks are being told to rebuild and strengthen their balance sheets, but on the other hand to increase their lending. One way to strengthen the banks’ balance sheet is not to lend so much….

Banks don’t make much profit lending money to small businesses.  Let’s say the bank can borrow at 3% and lend to the small business at 7% so they will make 4%.

Over the course of a year, on £100k of lending, the bank will make £4k.  That means an awful lot of good loans are required to make up for one bad loan, and it is no wonder the banks are cautious

Quarterly Economic Update – June 2013

This first of a series of quarterly economic updates 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.

Europe

As I write the Eurozone problems rumble along. It seems unlikely that there will be a dramatic climax to the turmoil, with less and less probability of a Euro breakdown or any single country exit. The divide between Germany and the rest, in terms of economic performance, is becoming greater.  There is a (very small) possibility that Germany could “go it alone” and return to the Deutschemark, but I am sure wiser heads will prevail. A lot of German economic growth has come from sales to the Eurozone, unhampered by the strength of the Mark.

Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 3% in year 2016, but individual countries will perform at markedly different rates. All of the Latin countries will be subject to further political instability and potentially further investor / lender shocks. Germany is likely to be more stable, with growth gradually improving from 2013 – 2015/6, perhaps to as much as 3.5%. France may well be in steep decline by 2014 but that is heavily dependent upon the political situation; I do not see significant upside potential.

Italy is likely to face yet another election in the near future; given how divided public opinion was at the last election (30% for a comedian, 30% for a philanderer and 30% for a nonentity) it seems unlikely that the strong leadership required to reform business and political structures will arrive. Despite this, 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.

UK

At the time of the crisis in 2007-8 the financial services sector was a large part of the UK Economy and continues to be important.  Growth in this sector is hampered by the need to comply with latest banking regulations and capital requirements, couple with public opprobrium for the sector.

Other sectors of the UK economy were and are affected by the impact on the financial services sector, most notably house building and construction.

I see a two speed recovery taking place, with services businesses requiring & using little capital returning to run-rate level of growth of 3% but the economy as a whole held back by construction and other sectors where access to and demand for finance plays a key role.  Many businesses are holding back on investment, waiting for an improvement in the overall picture.

Problems of low growth in the Eurozone are not helping, and wise businesses will be seeking to export to other markets.

USA

Prospects in the US are positive, largely powered by shale gas (pardon the pun) but also by the corrections to spending, borrowing and taxation implemented by the fiscal cliff. Clumsy as those corrections are, and awkwardly implemented, they are moving to addresses the imbalances in the US and with a stable (if ineffectual) government combined with a young well educated population, prospects for growth are good, and we could see growth of 3.5 to 4% in 2015/6

BRIC

Brazil & Russia are benefiting from significant natural resources and will show good growth in the mid to medium term. The longer term depends upon political stability and the willingness to develop infrastructure and eliminate corruption.  Both economies suffer from the disadvantage of a large population speaking a language other than English, which is now and will remain the defacto language of business and the internet. Neither country has a culture of educational achievement, or an educational establishment to support the development of a highly skilled graduate level workforce.

India benefits from both the education and the use of English as the language of business / commerce, but is hampered by poor infrastructure and a bureaucratic legal and administrative system. The infrastructure problems are compounded by a complex political system with national and regional bodies operating in their own interests.

All 3 economies are still economies of promise, but not yet of delivery, and that seems set to continue for the foreseeable future. Growth rates could easily be in 5% or more, but subject to shocks and upsets.

China is the powerhouse that is going to drive the world economy in this timeframe. There are significant stresses, both social and political, but the central government is making the right noises and very careful to cool the economic growth when it appears to be getting out of hand.  The social stress most likely to cause problems is the move of the populations, especially those of working age, from the country to the city. Parallels can be drawn with England in the mid-19th century and America in the early 20th and the rise of the urban poor. China appears to have learned some of the lessons of history and is making great efforts to provide the infrastructure to improve mobility, including the development of new cities in less populated areas.

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 glaring exception is of course Myanmar, the former Burma, but even there the path to democracy seems to be the chosen road.

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%

Japan

Japan is often ignored / written off in the commentaries but is still one of the world largest economies. Good opportunities exist in many sectors, but overall growth rates will be hampered by legacy issues, much as in Europe.

MENA

The Middle East & North African region is one of the hardest to read. Political turmoil in North Africa seems likely to last for some considerable time and the Gulf States, whilst endowed with vast natural resources and not immune to the conflicts in surrounding countries and the continued emancipation of their populations. Growth rates of anything between -2% and 5%

Australasia

I suspect the story can be summarized as “the party is over” at least for now. Australia has benefited greatly by shipping commodities to China, but that seems to be cooling off, perhaps as a result of Chinese investment in Africa’s mines. Growth rates of 1-2%

 © Tim Luscombe June 2013