The majority of small businesses or start-ups as well as a sizable portion of mature businesses, neglect core operational "housekeeping" aspects of their businesses, leading to valuation difficulties when commercial opportunities present themselves, according to Germien du Plessis of integrated equity and debt specialists Bravura.
"In the process of structuring corporate transactions we find that, particularly in businesses with an IP-centric revenue line, management appear to concentrate their energies on high-productivity outputs, focusing on maximising profits whilst largely ignoring the legal and administrative aspects of their businesses," she says.
Du Plessis explains that in terms of the well-known 80/20 principle, the minority of our actions often leads to the majority of results achieved. In business, this implies that energy should be concentrated on high-productivity inputs that generate the majority of commercial results. "Managing administrative and legal matters to protect the organisation from the risks of conducting business is often interpreted as falling into the 80% category that results in 20% of the output, and doesn`t directly result in increased profitability. As such, such tasks are often grossly neglected, especially in young and entrepreneurial businesses," she says.
Du Plessis finds that entrepreneurs tend to foster an atmosphere of optimism in which a culture of doing business on a hand-shake basis or by oral agreement develops, documented only by a memorandum of agreement or loosely worded email correspondence. Too often, this results in important agreements (such as service agreements with clients), being incomplete or not being signed at all, leading to uncertainty regarding the scope of the relationship and the respective rights, obligations and liabilities of the parties thereto. "Not only does this put the company at risk of general litigation, but it also has a detrimental affect on the value of the company in the long-term. The implications of this are only fully appreciated when the organisation begins to attract investor interest and is compelled to go through a due diligence process," she says.
Du Plessis explains that, once the opportunity for a commercial transaction appears, lack of efficiency in operations and administration comes to the fore. Potential investors are often presented with conflicting information regarding legal and administrative documentation, sometimes resulting in the creation of an environment of distrust (which not only compromises the management team, but results in the acquiror needing to spend more time and money on the due diligence process). This makes it much more difficult to transact quickly in a changing market.
"At Bravura we advise our clients to put correct legal contracts in place from the outset, which in a transaction process assists them in projecting sustainable, future incomes. Purchasers are impressed by management who have a clear idea of the direction the business is taking, and who can back up their projections with up-to-date and complete documentation."
In conclusion, du Plessis adds that it is critical to ensure that the organisation is in compliance with corporate governance principles as laid out in King II, particularly with regard to risk management and that underlying assets and investments such as joint ventures, profit-sharing arrangements, trademarks and patents are properly documented.
Corporate finance specialists Bravura offer a holistic approach to equity and debt structured solutions, optimising investment returns with the application of innovative and lateral business strategies and income statement and balance sheet structuring. In addition, the company differentiates itself by its specialised focus on specific industries such as services, financial services, information technology, and logistics.
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