Building a business you can actually sell
IN 1990, niche JSE-listed packaging firm Bowler Metcalf was trading at 7c. By this year its shares changed hands at R8,50 and investors picked up a dividend yield of around 3,5%. Headline earnings were growing at a compounded rate of 25%/ year over the past 15 years, while revenue was rising at a compounded 21% over the same period – a perfect example of an entrepreneurial business that’s built longterm sustainable value for its investors.
On an exchange such as the JSE – where it’s relatively easy to trade shares provided there’s a willing buyer – that value that’s been created can be realised with a phone call to a broker or click of a mouse button. For an entrepreneur trying to build his business, that idea of value isn’t quite as transparent.
“Are you building a business you can actually sell?” is a question Pavlo Phitidis, of small business accelerator Aurik, consistently asks his entrepreneurs. Are you going to be listing your business on a stock exchange or selling it to a local or overseas competitor? What would happen if one shareholder should decide to sell his shares to an investor that existing shareholders would be in conflict with? How would you react if your major competitor strolled into your boardroom one day and announced he held a chunk of equity in your business?
Malaysian billionaire Stanley Ho recently found himself giving up almost all his equity in SJM Holdings, Asia’s biggest casino company, after he got into an unsavoury tussle with his own family members. Ho, the world’s 13th richest man, was in dispute about how he divided up his assets between his 16 children and four wives.
“In the hype of big brands and big business many people lose sight of the fact that a company is in essence nothing more than a group of people working together towards the common goal of year-end profit. But it’s often that key characteristic of a company that determines its success or failure,” says Richard van Helden, cofounder of online legal service LawUnlocked. “Without a properly defined structure regulating the working relationship between shareholders and directors, a company’s business can become weighed down by internal disputes, animosity and deadlock.”
Van Helden suggests some key aspects should be considered up front – see box.