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  • Great experience working with you to gain clarity of what needs changing in my business. Stephen Jordan Access to Africa - 25 August 2011, Marketing Module

Building value: Transferability

IN 1990, JSE-listed niche packaging firm Bowler Metcalf was trading at 7c.

By 2011, the shares changed hands at R8.50 and investors picked up a dividend yield of about 3.5%.

Headline earnings were growing at a compounded rate of 25% per annum over the last 15 years, while revenue was rising at a compounded 21% over the same period – a perfect example of an entrepreneurial business which has built long-term sustainable value for its investors.

On an exchange like the JSE where it is relatively easy to trade shares provided there is a willing buyer, this value which has been created can be realised by making a phone call to a broker or with a click of a mouse button.

But for an entrepreneur trying to build a business, this idea of value is not quite so transparent.

“Are you building a business you can actually sell?” is a question Pavlo Phitidis from small business accelerator Aurik is consistently asking his entrepreneurs.

Are you going to be listing your business on a stock exchange, or selling it to a local or foreign competitor?

What would happen if a shareholder decides to sell stock to an investor existing shareholders would be in conflict with? How would you react if your major competitor strolled into your boardroom one day, and announced he or she held a chunk of equity in your business?

Recently Malaysian billionaire Stanley Ho 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 the division of 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 is often this key characteristic of a company that determines its success or failure,” says Richard van Helden, co-founder 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 believes there are some critical aspects which should be considered when putting together a shareholders’ agreement, so that some of these issues can be dealt with in advance.

These include:

• Comprehensive provisions dealing with the sale of shares, including the circumstances in which a shareholder will be forced to sell shares (such as the shareholders’ sequestration), the valuation of shares at the date of sale, preemptive rights and the procedures to be followed by a shareholder wishing to sell shares.

• A clear description of company decisions requiring a special resolution (75% approval), such as the sale of the bulk of the company’s assets or taking on substantial debt.

• The terms on which all shareholders may be required to fund the company, including initial contributions and the interest rates and repayment terms applicable to all loan accounts, the circumstances in which the company may call for further funding from the shareholders and the consequences of a failure to provide funding (including dilution of shareholding).

• Dispute resolution mechanisms dealing with deadlock, arbitration and minority shareholder protection.

• An exit strategy. What will happen when a third party wants to buy the company as a whole and not all of the shareholders want to sell? The inclusion of minority protection, or “come-along” and “tag-along” clauses, can be essential in these circumstances.

While it may not be a pleasant aspect for entrepreneurs to consider, some provision should also be made for the ability to transfer created value in the event of death.

“Precautionary measures should be taken to ensure reasonable continuity of the business in the event of death, unless closure of the business is desired,” notes Marshia McLachlan from Sanlam Trust.

“Continuity problems occur mostly in the case of one-man businesses, close corporations and private companies in which the deceased was the only member and shareholder respectively.”

In the event of the owner’s death, will the business be able to carry on? Will bank accounts be frozen at critical times, such as when staff and suppliers need to be paid?

Building value is just one part of the entrepreneur’s challenge and while it should be a key focus for business owners, it should not be forgotten that mechanisms need to be in place to physically transfer the value you have created.

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  • Great experience working with you to gain clarity of what needs changing in my business. Stephen Jordan Access to Africa - 25 August 2011, Marketing Module

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  • Johannesburg, Gauteng, South Africa
  • Tel: +27 (0) 11 447 5575
  • Email: enquiries@aurik.co.za

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