21 April 2020 Compiled by Juan Engelbrecht
In 2011, I was approached by an auditing firm to assist in a business rescue project for a local wholesale and manufacturing plant. This business had been operational in South Africa for 50+ years and had their head office in the United Kingdom.
This business was a wholesaler within the hardware industry in South Africa and its products were all imported from China and the United Kingdom, where the principal company had its two manufacturing plants. Within weeks, after assuming management control of this company, I had come to realize that it would be very difficult if not impossible to turn the business around. This was partly due to incorrect Product Pricing, Market Perception and the major Shareholder’s unwillingness to invest further capital in the business.
To ensure a successful rescue, I went in search of another business within the industry to add sales. In addition to synergies it would cut down on overheads and thereby ensuring future profitability.
LESSON 1 - Vision. Any Entrepreneur and Business Owner needs to have a Vision for his or her business, I had a dream as stated above. This sounds like a challenge but add to this that I had no funds and no support from the UK partner, then the task became daunting and a bit scary. Not only daunting for the reasons above but I also held the employment of 28 employees and their families in my hands.
LESSON 2 - Faith. That month of May I spent many hours on my knees, asking for Grace and Wisdom and continued to do so through-out the process, which took 7 months to complete.
Then came the big moment, the biggest paint company in South Africa wanted to sell one of its smaller and struggling companies. The business was offered to the market by way of tender and we had missed the cut off date. I requested a meeting with the CEO and after some debate was afforded the meeting, at which I offered to do what none of the other interested parties was prepared to do. I was willing to guarantee the employment of all 106 of the current staff members.
LESSON 3 - Be prepared to take risks. The paint company had a moral and social responsibility to guarantee future employment to all its employees. This was in part due to its Code of Ethics and market reputation and an agreement with their original take over.
The paint company sought a price of R36m for the acquisition/sale of the Company. This was made up of:
- R12m for Goodwill
- R12m for Stock
- R12m for two buildings
After completing 2 days reviewing the financials, the time came to present an offer to purchase to the paint company and its board of directors. My written offer by way of a Letter of Intent consisted of:
- Employment is guaranteed for all employees
- A Three-year offer to lease both buildings at a very competitive price per square meter.
- R12m to be paid for Stock, which final value was to be determined at a final stock take (minus damaged stock and dead stock which had no movement for 12 months) on the day before effective takeover day.
LESSON 4 - Self Belief & Confidence. There is a difference between confidence opposed to arrogance and you must tread carefully and be aware of your audience and not upsetting or offending them. You need to demonstrate your passion and belief in that you can turn the business around. The company had suffered four years of financial losses at that time. If the management and the board does not see your self-belief and confidence, they may not be happy to hand over/sell the business to you or to trust in your ability to deliver.
After the due diligence phase of one week, I submitted a written “OFFER TO PURCHASE” to the board of directors. It differed from the letter of intent in that:
- R10m rand offered for the stock but this amount could be higher or lower, depending on the final stock take evaluation.
- The above would be paid in 4 installments of R2.5m each every 6 months
- The current debtors and creditors were excluded from the sale.
LESSON 5 - Innovation. This was the crucial part of the whole negotiation, the ability to think outside of the box and to come up with an innovative approach. This, as opposed to realizing that I had no money or funds and perhaps then reality setting-in and walking away from discussions. In today’s challenging economic times, it’s it is more important than ever to be innovative in our approach to all aspects of our business. Challenge your partners, peers, and staff, and find a way to get it done!
The board accepted the offer but reduced the 4 6-monthly payment periods to 4 4-monthly interval payments. I then accepted this position from the paint company and asked for a further 3 months to recruit a funder for this deal. Then came the task of marketing the opportunity for an Angel Investor/Business Partner and then selecting the correct Partner.
LESSON 6 - Marketing This is one of the most important responsibilities/tasks of management, to markets the business and to spend 4% of the Turnover every month on this essential ingredient. For me, selecting a funder was done with the same energy and commitment that I would give to my choice of my spouse. The most appropriate method in this instance was: The tried and tested method of “Word of Mouth”.
After all the above was done and we had paid our 1st installment of R2.5m, the hard work started. The execution of the vision and the dream.
LESSON 7 - Hard Work. The toil of everyday work and doing it with purpose and belief and being an example to your staff and colleagues. Gary Player, one of South Africa’s best ever Golf players is famous for this quote:“ The Harder I practice the luckier I get”
The last LESSON 8 - Ethics & Honesty. Some 2 weeks after I took over the business I became aware of 3 40ft containers with stock which was on the water all the way from China. The value of this stock was +- R4.5m and it was for the account of the paint company. I had advised the CEO of the paint company of this oversight by us and we agreed that we would pay this over 4 months (without interest) after our last payment for the purchase price. The fact that I was honest and upfront gave me the moral high ground in this round of discussions. My Grandfather always used to emphasize the importance of our name and being honest in all that we do. In business dealings, your reputation and ethics always go far ahead of you.
The final cost of the business was R19m (stock valuation) but payable over two years. Our cash flow was always strong and we used the money generated from monthly sales to pay off the company purchase price, whilst goodwill and the cost of the acquisition was 1c.
In Summary then, to acquire a R100m turnover Company without any money of your own, you need:
LESSON 1 - Vision
LESSON 2 - Faith
LESSON 3– Be prepared to take Risks
LESSON 4 -Self Believe & Confidence
LESSON 5 - Innovation
LESSON 6 - Marketing
LESSON 7 - Hard Work
LESSON 8 - Ethics & Honesty
Find out what the Seller is willing to sell the Company at ?
How important is it for the Seller that the business ends up in good and capable hands?
The Buyer must undertake not to retrench any staff for at least 12 months.
Find a way , an approach that can work for both parties, even if you must walk away from the negotiating table , once or twice during the discussions and draw it out..12 -18 months.
Juan Engelbrecht is an experienced Retailer/ Wholesaler with
35 years+ business and Entrepreneurial experience.
He has built up a solid reputation as a Turnaround specialist
He started his career as a Trainee Manager with the Ok Bazaar
and went on to hold Executive and Directors position with some
of South Africa’s biggest Companies and has also owned and grow
6 x of his own Companies.
Contact Cell 0738884124 and email juan@businessturnaround.co.za
www.businessturnaround.co.za
