When to sell or recapitalise your business?

Should I really hold on to this business?

Written by NMK Africa

July 18, 2019

As a business owner you feel so passionate about your business. You have invested your heart and soul into this business, and you feel that this business is your ticket to “the good life”. No one understands your business more than you do and I fully understand you!! In this article I’m just going to highlight a different perspective as to how we can view business and create wealth for ourselves. Let’s look at two examples of when to consider selling or recapitalising your business.

When can I sell?

Mergers & Acquisitions are not simply two businesses coming together however, the right merger or the right acquisition can significantly increase the wealth of both parties to the deals. Let us begin by a simple illustration of owning 100% of a R50 million-rand business as opposed to owning 20% of a R500 million-rand company.

20% of a R500 million-rand business means your total net-worth is R100 million-rand which is double the value of owning 100% of a R50 million-rand business

20% of a R500 million-rand business means your total net-worth is R100 million-rand which is double the value of owning 100% of a R50 million-rand business. Of course, there are issues like lack of control however, there are benefits of synergies, experienced management teams and larger profits to benefit from.

Are you going to add more value to your business if you keep it?

The true question to ask yourself when considering whether to sell or continue in your business is “are you going to add more value?” or “will they add more value?” If you feel you’ve reached your ceiling, there’s no point holding on. Sell the business, make money and move on to something else. There are individuals who have made a fortune from starting businesses that are strategically positioned to be acquired by larger corporations and this has proven to generate significant cash flows.

When can I add debt to my business?

The concept of debt is often associated in a negative connotation. Most people automatically shrivel at the thought of debt and want to pay off all their debt immediately. Debt in the perspective of a business is not always a bad thing. The advantages of having debt in a business is that with a loan all you need to do is pay back interest and capital and continue managing your business.On the other hand, when dealing with shareholders you have earnings targets you must meet and if you don’t meet them there are consequences to missing earnings.

Adding debt to the Balance Sheet at appropriate interest rates creates value for your business. An optimal debt equity strategy is always essential in ensuring you unlock value in your business. Below is an illustration of a business valuation with 100% equity and one with an 80% equity and 20% debt mix.

We notice that by adding debt to your capital structure there’s potential to increase the value of your business. An important aspect to note is that debt not all debt is good!! Debt at the right interest rate is good and that’s where we come in. We study businesses and interest rates and we understand what’s appropriate for you.

So, in conclusion let us work together to make the right financial decisions for yourself and your business.

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