What you should consider when investing in a business

Investing in a business is a daunting decision. Whether you are investing in a new or established enterprise, there will always be risk involved. The best way to mitigate these risks is to gather as much information as possible on the enterprise you wish to invest in.

But how do you go about gathering this valuable information?

  1. Basic knowledge of the entity will be gathered at the beginning, through a general description of the entity and industry it operates in.

During the basic evaluation, you should determine if the entity is trading in an industry that you wish to align yourself with, whether you have experience with the product or service provided and the current economic environment.

  1. An informal sit-down should be organised, a meet-and-greet if you will. It is generally expected to enter into a non-disclosure agreement with the entity before any sensitive information is shared.

At this point, it is good practice to appoint an independent advisor that can assist with the negotiations and even act as a mediator to ensure that all parties are heard. This way the parties become familiar with one another and you gain insight into the basic operations and management of the entity.

  1. Should you proceed, a due diligence of the entity should be considered.

During the due diligence, a detailed evaluation of the company’s records will have to be performed.

Since there is a vast amount of documentation to consider, some of the core information that should be requested and considered is:

  • Financial statements for the previous 3 to 5 years;
  • Management accounts to date;
  • Dividend history;
  • Forecast of profits, investments and planned asset purchases; and
  • A tax clearance certificate.

Through the above information, you will be able to determine the profitability and growth opportunity of the entity.

  1. Should you like what you see after a due diligence has been performed, a formal sit-down should be arranged between parties to negotiate the terms of the investment.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

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Exchange control implications for branching out

As globalisation becomes an increasing commercial factor, a great many of our clients also find themselves branching out their operations and activities beyond the borders of South Africa, primarily into Southern Africa but often also beyond. Funding such initiatives may be a complex exercise, not only to decide on whether to finance the expansion through debt or equity financing (and actually obtaining such sources of funding), but also to get the necessary exchange control approvals in place to be authorised to enter into such offshore funding initiatives.

The Financial Surveillance Department of the South African Reserve Bank is primarily tasked with managing the South African exchange control regime. Exchange controls are in place to regulate the in- and outflows of currency in and out of South Africa. It is accordingly illegal to export South African currency without prior approvals specifically put in place. This dispensation also extends to the funding of South African businesses setting up operations offshore. It is for example impermissible for a South African entity to set up a business (either as a branch or as a separate entity) in another country without the prior approval of the Financial Surveillance Department (or one of its authorised dealers).

To apply for the requisite approvals clients should approach their relevant banks which would typically be authorised to act as an authorised dealer of the Reserve Bank. This implies that the bank itself would be authorised to approve certain applications made to it for foreign direct investments, although some transactions may require applications to be put to the Reserve Bank directly. Approvals will typically be conditional upon certain facts being illustrated by the applicant and it agreeing to observe certain requirements such as e.g. lodging financial statements annually, presenting regular progress reports to the bank, proving to satisfaction that arm’s length conditions are imposed, etc. Only once the necessary approvals are in place will entities be able to move funds to and from the Republic.

Exchange controls do not only affect South African residents, but also have a bearing on non-resident businesses expanding to South Africa. Debt funding into South Africa for example should be approved, even though it will initially lead to capital inflows into South Africa. The Reserve Bank would however want to specifically approve lending terms linked to inward debt funding initiatives to ensure that excessive amounts charged as interest do not leave the country. Similarly, equity investments into South Africa are also affected and South African subsidiaries of international corporate groups are required to have their share certificates issued endorsed “non-resident” by an authorised dealer. To the extent that non-resident companies engage in a level of activities in South Africa such that requires them to register as external companies, they should be aware thereof that external companies (to the extent that they represent a branch in South Africa) are considered to be a separate exchange control resident, despite the fact that the rest of the company may be operating outside of South Africa. The implication is that these South African branches too cannot introduce and remit cash offshore without prior approval either.

Acting in breach of exchange controls is not only illegal, but also a criminal offence.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Cost management: 7 tips for cutting business expenses

It is important for every business owner to make a maximum profit, both through sales and by maintaining strict financial discipline within the company. Implement sound practices from the start, and you will reap the benefits later. These seven tips on cost management will be beneficial for your small enterprise.

  1. Watch expenses from day one.

You might think that overspending during the first few months after opening your doors is forgivable, but discipline is needed right from the start. Spend money only on the necessary and always look for cheaper alternatives. Money saved now will reap rewards later.

  1. Don’t confuse business and personal expenses.

When getting ready for tax season, file your personal and business expenses separately. Be honest and keep your accounting books clean to avoid enquiries from SARS.

  1. Keep detailed and accurate purchasing records.

Accurate record keeping helps you manage your business expenses effectively. Record every purchase, from the smallest to the largest, so that it becomes the custom for everyone in the company. In this way you can see where your money is going and you can cut back if necessary.

  1. Shop around for a low-interest credit card.

As a small business there is the possibility of acquiring a credit card with low interest rates, so visit different banks and find the right one for you. Your card should assist you in expanding your business without the worries of growing debt from high interest rates. 

  1. Run reports early and often.

Review your expenses on a weekly basis so that any additions will be picked up immediately. Do this right from the start and include every aspect of your business, including salaries and any new expenses you might have incurred. This is easier than having to backtrack later.

  1. Invest in technology that will last.

Don’t try to save money on inferior technology; rather buy better quality and save on repairs and replacement costs in the long run. You will get more value from the better product and it is also tax-deductible.

  1. Continue financial responsibility.

The skill of budgeting effectively and saving money is imperative for launching a business. Don’t stop saving money after a while; continue to do so and expect the same from your employees. Growing a business is only possible when you accept your financial responsibility. By using these cost management tips your business will become financially more flexible as it expands.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Short term insurance: Consequences of being over or underinsured

Some people believe in short term insurance, others don’t. If you do believe in taking out short term insurance, make sure that your assets are not over or underinsured. If your assets are overinsured, it means you pay unnecessary premiums for insurance cover you will not be able to claim for. If you are underinsured, you think you are covered for a certain amount while in actual fact you are not covered as well as you think you are.

Overinsurance

Let’s look at Mary’s case:

Ten years ago, Mary bought and insured her car at its then market value of R50 000. Although the market value of her car decreased over time, she never informed her insurance company.

Yesterday she had an accident and wrote off her car. She puts in a claim at her insurance company for R50 000 because that’s the amount her car was insured for.

As the car was insured at market value, the insurance payout is based on the current market value of the car. At the time of the accident, the car’s market value was only R10 000.

Mary is very unhappy because she paid premiums on a market value of R50 000 and now she only received R10 000 from the insurance company.

What happened here?

Mary was overinsured because her car was insured for more than its market value. It was her responsibility to contact her insurance company from time to time to adjust the insured value of her car downwards as its market value had decreased over the years. As the car’s insurance premium was based on its market value, her premium would have reduced every time she informed her insurance company to adjust the market value of her car downwards, and she wouldn’t have paid for more than the amount she was insured for.

Underinsurance

Now let’s look at John’s case:

He originally bought his house for R50 000 and insured it at its then market value of R50 000. Ten years later disaster struck and the house burnt down. At the time of the fire, the house is worth R100 000. However, John never let the insurance company know that the market value of his house increased over the years.

John puts in a claim at his insurance company for R100 000 but the insurance company pays out only R25 000 to settle his claim of R100 000.

What happened here?

The insurance company calculated the ratio between the value John insured his house for and what it was worth at the time it burnt down as follows:

Value insured / Current market value = R50 000/R100 000 = 50%

The ratio of 50% means that the house was insured for only half of its market value of R100 000 at the time of the fire.

Then the insurance company applied the pro rata ratio of 50% to the amount actually insured to calculate the amount of the insurance payout as follows:

Amount insured x Ratio underinsured = R50 000 x 50% = R25 000

If John contacted his insurer from time to time to increase the insured amount of the house to the actual market value, the insurance cover on his house would have been in line with its actual market value of R100 000 when his house burnt down. His premiums would have increased over time to reflect the increase in the insured amount.

Both the above scenarios illustrate the same point: it is crucial that your insurance company have accurate and up to date information on which to determine the amount of your insurance cover and premiums. Ultimately it is your responsibility to keep an eye on the market value of your assets and inform your insurer of any changes in market value that would require an adjustment in the insured value of an asset.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Reference List:

Accessed on 18 September 2015

  • SAIA Consumer Education Booklet written by Denis Beckitt

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Minutes of board meetings

Board meetings and the decisions made during these meetings may be determining for the effective functioning of a company. Clients are therefore reminded of the legal requirements relating to board meetings as stipulated in Article 73(6), (7) and (8) of the Companies Act 71 of 2008, which should be strictly adhered to.

The Act requires a company to keep minutes of meetings of the board and of any of the board’s committees, and that a majority of the directors must be present before a vote may be called at a meeting of the directors. Each resolution taken by the board and also any statement made by a board member must be recorded in the minutes. A board resolution takes effect on the date that the resolution is made unless another date of implementation is recorded in the resolution. Attention is drawn in particular to the requirement that resolutions must be dated and numbered sequentially.

Providing that a company’s Memorandum of Incorporation allows therefor, a board meeting may also be held by means of electronic communication, or one or more directors may participate in a meeting by means of electronic communication. This is conditional on the electronic communication facility enabling all participants in the meeting to communicate with each other without an intermediary.

Minutes of a meeting, or a resolution, signed by the chair of the board meeting or by the chair of the next meeting is evidence of the proceedings of that meeting or adoption of the particular resolution. It is therefore important that all minutes be signed and dated by the chairman before sending them to all relevant parties and filing them.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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Ten tips for small business owners during tough financial times

When the economy is slow, small business owners struggle to survive, many for the first time. Financial problems consume valuable time and business resources, yet must be dealt with proactively. Use the resources your banker provides; he has the expertise and cares about your business and its financial well-being. Once you have read these tips and you think you need help, call your banker and ask for advice.

1. In tough times cash is king. Have a close look at every purchase you need to make, and decide if it is worth the money. Will the product generate enough cash to pay for itself? If not, don’t buy it.

2. Let your budget show the way. Without a budget you will find it difficult to cope with hard financial times. Adapt it regularly and do the same with your personal expenses. If you don’t keep track of expenses, they will become a bottomless pit into which all your cash will disappear.

3. Look at your business’s financial position and performance objectively. Do you get maximum returns from your investments? Could you sell those that are not making you money? When times are hard, survival is the only goal.

4. Examine how your debt is structured. If you have an imbalance between short term and long term debt you should restructure your long term debt so that you can pay back the short term debt over a longer period. Be careful not to take a loan against long-term assets, except if you are in critical need of money.

5. Prepare for your meeting with your banker. Make sure you have all cash flow and balance sheets and inventories at hand for your banker. That will make your review time more productive. Write down any ideas regarding your financial position and discuss them with your banker.

6. Ask your banker about the Small Business Administration (SBA) guaranteed loan programs. Your banker could be able to restructure your business debt over a longer period if the SBA is prepared to provide a credit guarantee on your loan to the bank. If your business is situated in a qualifying rural area, you may qualify for a guaranteed loan. Ask your banker about any additional resources which may be of use to your business.

7. Review your insurance coverage. Increase your deductibles and your premium will decrease. Items that are low-risk or obsolete should be removed from your inventory list.

8. Examine your life insurance policies. Some whole life policies have provisions that enable you to borrow against the cash surrender value at very low rates, or you could deduct the cost of the premiums from the cash surrender value. Determine whether your life insurance is worth the money or whether you couldn’t get by at a lower cost. Make sure all key personnel in your company have life insurance so that business can continue in any of the key players’ absence.

9. Deal with financial problems immediately. As soon as a financial problem arises, deal with it immediately. Keep your banker informed of any problems and make him part of your inner circle of confidants. Use your team as a soundboard to discuss financial difficulties and brainstorm solutions.

10. Get some perspective. Sometimes you need to get some distance from your work to solve the problems. Take a weekend off or go and watch a movie – whatever you do, leave your worries behind for a short while and focus on something else – it will make you and your business a lot stronger.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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