CFO Louis Naude reveals the top six considerations CFOs need to keep in mind when they are looking to invest in new opportunities.
As global interest rates continue to be persistently high, the delisting trend from mainstream bourses continues, as challenging operating conditions see owners looking to exit their businesses. However, therein lies an opportunity for leaders who are willing to invest in these companies.
Warren Buffett is arguably the best-known investor of all time and one of his most common mantras that has been picked up is: “Price is what you pay, value is what you get”. What he essentially means is that you have an opportunity to make money when you buy a business, not only when you sell it.
When looking to acquire a stake or outright control of a business, there are a number of key considerations CFOs need to look at. These are:
1. Liquidity
Is there enough free cash to fund the transaction and associated interest and professional fees? A very common scenario is that investors take on expensive debt which places stress on the balance sheet and this leaves the operations cash-strapped. This has a knock-on effect on the rest of the business.
2. Solvency
This goes hand-in-hand with the cashflows of the business. If you are not able to generate the cashflows required, you may find yourself being a forced seller.
3. Tax planning
If you are taking on debt to acquire the business, you should in principle be able to claim the tax benefits against the interest portion of the transaction. Have you considered your assessed gains or losses and how this will impact the tax picture and influence cashflows over the life of the transaction?
4. Due diligence
This goes beyond simply working your way through the contents of a data room of a business. Rather it extends to having an understanding of the industry and being a sounding board that can ensure that the buyer goes into a transaction with their eyes wide open.
5. Professional services
You need to factor in the costs associated with professional services when doing a deal. This is often an element which is neglected or completely forgotten by a buyer, who then finds themselves faced with unexpected expenses which can impact cashflow. When doing a transaction, you should factor in approximately five percent to 15 percent of the deal value, depending on the size of the deal, for professional services fees.
6. Relationships
The importance of relationships when approaching parties for capital to fund the deal cannot be underestimated. Whether you are approaching bankers, private equity partners or even other private lenders, relationships will be key. If you enter discussions with a lender where you have a pre-existing relationship, you could potentially lower your cost of capital.
A buyer’s market
There’s no question that it is a buyer’s market in South Africa at the moment, as various economic factors are putting pressure on business owners. Whether it is a desire to emigrate or simply not having the working capital to push through this trying period, buyers have an opportunity to buy good assets at attractive prices, despite rising interest rates.
Whether buyers will be making or losing money when acquiring these deals will be heavily dependent on the funding structure of the deal. The right funding structures will not only increase the value of the transaction when you buy the asset but will unlock future value in the business.
To take advantage of these conditions, CFOs need to be strategic when it comes to structuring their debt funding so that they can enjoy superior returns on their investments from day one.
