Most entrepreneurs have all their assets tied up in their business. Although successful entrepreneurs can make a lot of money, having all their financial eggs in a single basket can put them and their businesses at great risk during an economic downturn. If Covid-19 has shown us anything it’s that unanticipated market setbacks can arise out of the blue. Which brings us back to the entrepreneur’s dilemma…
Speaking at a forum hosted by Citadel and Deal Leaders Africa about de-risking businesses, GIBS Professor in Economics, Finance and Strategy, Adrian Saville, explained, “Investing is about managing risk. [Entrepreneurs tend to] have all their money invested in a single asset, in a single country, in a single currency, and the risk is on!” To mitigate this risk, entrepreneurs must consider how best to externalise part of their asset base.
Diversifying risk is not a simple process for entrepreneurs. Nishlen Govender, asset manager at financial services firm Citadel, is quick to note that, in his role, he’s invested in his fair share of good businesses built by great entrepreneurs. “So, I am not going to tell entrepreneurs not to reinvest in their businesses,” he jokes. However, it must always be remembered that growing your wealth is not the same as growing your business.
Initially growth is crucial for the entrepreneur and that requires the reinvestment of capital, but Govender explains that as entrepreneurs mature, their focus starts to change. It is at this point that they start rethinking where and how they should be investing for the future.
Entrepreneurs who diversify not only have a better chance of protecting their wealth, but also of remaining agile in a fast-changing world. Global asset management firm UBS produced a paper in July 2019, entitled Global Financial Markets: How to Diversify as a Business Owner in which the authors urge business owners who are not diversifying their risk to ask themselves two questions:
- Could you maintain your lifestyle if your business failed?
- Are you missing out on opportunities by not diversifying out of a single business/market/currency/asset class?
To achieve financial freedom on this level requires business owners to wear two hats: one focused on the growth of the business and the other – built on investing in a broader portfolio of assets – looking ahead to their own future. This is not an easy ask, especially when operating in a less-than-robust economy.
UBS does, fortunately, provide business owners with some points to think about:
- Drawing on salary or dividends and investing in diversified market instruments can ultimately result in a better outcome than simply reinvesting back into the business.
- Borrowing to finance the business frees up cash for business owners to invest. Their returns on diversified assets more often than not offset the cost of debt.
- The sale or part-sale of your business can give business owners a cash injection, allowing them to invest in a more diversified portfolio. However, there is a tax consequence.
...growing your wealth is not the same as growing your business...
Selling a part (or the whole) of your business
Rich Grantham, an executive at Deal Leaders Africa, believes one of the best ways to de-risk a business is through the sale or part-sale thereof. Although successful entrepreneurs often balk at the idea of giving up any control, there are a number of positives to come from such a move. In addition to the cash windfall, partnerships can add tremendous value to a business owner and help de-risk the business on other fronts.
Five notable areas include:
- Injecting expertise – Corporate buyers or private equity firms can add essential expertise to a business. Similarly, bringing in a partner with a different skillset can greatly enhance the operations of a firm, especially as business practices and technology are evolving at a rapid pace.
- New networks – Whether you are looking to grow within different sectors, industries, or are looking to expand into Africa or even globally, new networks are essential.
- Strategic BEE partners – In South Africa, partnering with the right broad-based black economic empowerment partner can open new doors and prospects, including access to lucrative corporate contracts or government tenders.
- Renewed energy – A new partner can inject energy and enthusiasm into a business and its founders, along with new ideas and the prospect of pursuing new ventures.
- Broadening horizons – Bringing in a partner offers established entrepreneurs the opportunity to travel, relocate or explore new horizons without giving up on their business.
A successful case study
On paper this may all look good, but in the real world, selling shares in a business is a daunting experience. It comes with the stress of losing control and not getting on with the new partners. But successful sales do happen. Saville is a case in point. He sold a portion of the firm he founded in 1998, Cannon Asset Managers, to a corporate partner and benefitted both personally and professionally as a result.
“Cannon Asset Managers is a business I started over 20 years ago. By finding a strong external shareholder – a listed business which acquired shares in the company – I was able to diversify my risk by exchanging my business’ shares for cash,” explains Saville. “I remained very much an owner-manager. My interests are well aligned with the performance of the company. I am behaving not only as if I am the manager of the company, I am also the owner of the business, but by doing this, have managed to reduce my risk and exposure.”
Saville explained the move, and why he chose a part-sale. “As I become more mature, I am more focused on my personal risk management, but in the same breath, this company is my baby, and I never want to let it go,” he says. So, for him, a partnership was the best way forward. All interests were accommodated, and both parties brought something to the table, from the strong and steady architecture of the listed entity to the entrepreneurial endeavour of the asset manager.
The right fit
Saville’s success was, in large part, due to finding the right partner. Grantham explains, “Selling your business is complex – it is about finding a fit, a buyer who sees the most value in your business and in the future of your business.”
While Grantham stresses that partners should be able to add value to the business and be able to pay top dollar, Saville believes chemistry is equally paramount. “In my experience, if you get the price right and the chemistry wrong, you are in big trouble. So, finding that thing called chemistry is absolutely critical,” he says. It is hard to know when you have the perfect fit, admits Saville, but “when you do, you will feel it, see it and experience it”.
...partnerships can add tremendous value to a business...
The actual process of selling a stake in your business is a science. Grantham argues that the best strategy when taking a business to market is to attract as many interested parties to the negotiating table as possible.
These days, however, the people around the table are looking very different. “Five or seven years ago, the best acquirers were typically listed trade acquirers, big companies, and they would pay a premium. Then owners could walk away quite quickly,” says Grantham. Today, in a highly risk averse environment, the trends are towards partial sales and private equity deals. Although private equity transactions have also changed in nature.
Today’s private equity deal offers far more support for business owners. Grantham says private equity firms are looking for greater synergies across their investments, which ultimately creates greater value for the business owner who partners with them. He does warn, however, that business owners are often expected to take a longer-term view when it comes to selling their businesses. So be prepared for a phased exit, which means a business owner’s relationship with the company will not end at the sale of the business.
Take a chance, de-risk
The stark reality is that many entrepreneurs walk a thin line between success and failure. Making changes to the way they do business and manage their wealth can be daunting, but the benefits of taking action to de-risk their businesses can ultimately lead to a more secure and wealthy future.
What to know when selling your business
- Good businesses sell.
- Selling your business is a science. It is best to get a specialised firm onboard to walk you through the process.
- Get your housekeeping in order. When you sell your business, you will need your financials, your compliance certificates, your regulatory approvals, and all other administrative requirements up to date and in order.
- Do business with people who have a synergy with the business, who can enhance the operations of the business, and who are willing to back you and your vision.
- Have an exit strategy in place.
- Know what is expected of you upon the sale of your business.
- Ensure you get expert financial planning advice with regards to how to manage your finances once you have received the pay-out from the sale.
- Entrepreneurs tend to have all their assets invested in a single business, leaving them exposed to economic downturns.
- Entrepreneurs need to question if they can afford not to diversify their asset base.
- Selling or part-selling a business can be one of the best ways to de-risk and diversify.
- Finding the right partner is crucial, from those helping you to sell, to the purchaser of your business and even your choice of financial manager.
- Investors or businesses buying into businesses today do not have the same profile as a decade ago.