Sup­plier risk

Finweek English Edition - - INSIDE -

Reg­u­lar read­ers of this col­umn will know that we’re grad­u­ally shift­ing away from pure the­ory around how to value your busi­ness and in­crease its po­ten­tial, to more of an i nter­ac­tive dis­cus­sion around the f inan­cial/val­u­a­tion/strate­gic is­sues that en­trepreneurs face. What this means is this:

If you have a ques­tion/is­sue you’d like to dis­cuss with us, send an email to fin­week@val­u­a­tionup.com and we’ll try to an­swer it in this col­umn. This could be anony­mous (if the num­bers/in­dus­try or prob­lem is par­tic­u­larly sen­si­tive – this is en­tirely your call), it could also be pub­lic – in which case you’d get the added ben­e­fit of your name, com­pany and what you do, in print. As a wise man once said, there is no such thing as bad pub­lic­ity.

One of the great­est things about my work is that I get to spend time with am­bi­tious en­trepreneurs, gen­er­ally at a time when they are ex­pe­ri­enc­ing a real chal­lenge and need to get help to make more in­formed choices.

Like all am­bi­tious peo­ple, they have a view of their busi­ness and their worth that is not al­ways bed­ded down in re­al­ity and nowhere is this more true than in their per­cep­tion of the real risks they face. into the pub­lic sec­tor. Its sup­plier has other dis­trib­u­tors who sell to the pri­vate sec­tor (not so BEE) and has other BEE dis­trib­u­tors who get ex­clu­sive rights to sell some of its smaller prod­ucts.

The com­pany I met with has grown nicely for over five years. It has a great re­la­tion­ship with its sup­plier to the ex­tent that the sup­plier even gave it a R10m work­ing cap­i­tal fa­cil­ity to help it when Government paid slowly (of course, the com­pany ceded its debtors book as part of this deal). Things were good and it made a few mil­lion PAT a year… un­til last year, when the sup­plier changed its terms and cut the mar­gin a bit.

This year the sup­plier has come back to the com­pany with am­bi­tious growth tar­gets it must meet or else the sup­plier will ter­mi­nate the con­tract. The prob­lem is it can only sell to the pub­lic sec­tor in an in­dus­try that isn’t grow­ing nearly as fast as inf la­tion and that is ex­tremely price sen­si­tive. In other words, the com­pany’s up t he creek k with­out a pad­dle. dle.

So what is it do­ing? It’s scram­bling to o open doors with other sup­pli­ers, up­pli­ers, which s o u nd s g o o d u nt i l y o u re­mem­ber that at the sup­plier owns i t s debtors btors book, which will in­clude nclude the new sup­pli­ers. rs. So it ’s faced with the e only real choice – it has to do what it can in n the ex­ist- ing busi­ness but open a new one in par­al­lel. Whether it can even­tu­ally get a cent from five plus years of hard work in its ex­ist­ing busi­ness is un­cer­tain, but un­likely. Would you buy its busi­ness? For what?

So what hap­pened there? Sup­plier power, cou­pled per­haps to the un­in­tended con­se­quences of BEE leg­is­la­tion and en­trepreneurs who couldn’t un­der­stand the risk of hav­ing all their eggs in one bas­ket, es­pe­cially when it was go­ing so well. In the sec­ond in­stance there is an­other en­tre­pre­neur in an un­re­lated in­dus­try. He’s built a great team and great tes­ti­mo­ni­als. They rep­re­sent a sole sup­plier in the lo­cal mar­ket but do not have ex­clu­siv­ity on any mar­ket or ter­ri­tory. They’ve lit­er­all lit­er­ally sold their way into where they are now: build­ing re­la­tions re­la­tion­ships, de­liv­er­ing on time time, and de­light­ing with c cus­tomer care.

T They ’ v e made som some money and w wa nt to start a ac­quir i ng t he other distribut or s of this sup­pli­ers’ prod prod­uct here. I n t heor y t his s ounds good: they can c buy mar­ket ac­cess from un­der­per­form­ing un

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