Scaling your business

By strive masiyiwa

Would you consider merging your business with that of another entrepreneur?

A merger is when you combine your business with one created by another entrepreneur. Most people think that Mergers only happen between large businesses, but that is not true.

I have done some really cool mergers in the past, and our business would not be as big as it is if I had not mastered the power of merging. Mergers have always given me an opportunity to make my business bigger, faster.  We call this getting @SCALE.

It is still about the two key formulas of the entrepreneurial playbook: INNOVATION PLUS MARKETING-COST=PROFIT.

A business [that has identified and reaches out and solves a human need] #Scales as a result of the “3Ps”, and nothing else!

#Product

#People

#Process.

You might have a good #Product [that solves a customer problem in an #Innovative way], but you don’t have the #People who can drive the other pieces—Marketing, Process, Cost Management.

If you hear an announcement that so and so companies are merging, would you be able to break down the benefits using the Entrepreneur’s Playbook, without waffling?

__Will the merger create a better company? Will it produce "profitable solutions to problems of people and planet”? [Prof Colin Mayer~Oxford University]

When you “merge” two companies, you are not looking for 1+1=2, but rather 1+1=4 or even 5!

If you are considering a merger, you must look at:

1. The Products

2. The Market [customers] and the Marketing

3. Innovations going forward to create better and more Products

4. The People

# Who is going to be doing what in the new company?

# What is their caliber?

# What is our ability to get access to the best people out there?

# Who are the top specialists that drive this business going forward?

# Leadership and management—Who will run it?

# How do you accommodate the founders, if they are still around?—Tough one!

# What about the board of directors?

5. The Processes

A bigger company requires more sophisticated management processes, from IT, to distribution, to HR, to financing!

6. The Costs

By combining the two companies, we must be more efficient. This means some people will probably have to leave, whilst new ones come on board.

7. Finance

This is a #Skill!

I know some of you don’t like to hear that, but I’m not here to make you happy, or join a self-pity party. Many people don’t access money because they lack skills to raise capital, and it might be a good way to solve this problem by merging with someone else who has that skill.

In a merger there is usually no exchange of money. The owners of each company must agree on a valuation procedure to be followed. These are quite straightforward for a qualified Accountant to execute.

Let’s say business A is valued to be worth $25,000 and business B is worth 30,000, then business C [the merged company] is worth $55,000.

The owners of A own 25/55=45%, and those of B own 30/55=55%, of the new company. The owners of the merged company must agree in advance who will be CEO, and who will be chairman of the board of directors.

This is captured in a proper agreement called a Shareholders Agreement.

Once signed, the courts will enforce that agreement if there is a dispute between the parties. The new owners must agree in advance how the company will be organized after the merger, including who initially occupies key positions.

Mergers can be easily destroyed if the founders have big egos, as they require an acceptance that no one can now make decisions about the company on their own.

On #BusinessWars, can you remember some really famous mergers?

There are many benefits of doing a business merger. For your #Homework, I would like you to research these benefits and add them by way of comment.

__"Dream big, stay focused, make it happen".

When you hear “mergers” you often hear another word closely associated with it: “acquisitions”. When we bought a company in South Africa called Neotel from India’s Tata Communications, it was an “acquisition” because the owners of the business were leaving.

We already had our own business in South Africa which was called Liquid Telecom South Africa. We “merged” the two businesses into one.  We had planned carefully why we were doing it, and the actions we would take. We discussed these plans extensively with the lenders and investors. And we demonstrated we could do it.

Another time, in New Zealand, we had managed to secure the country’s third mobile license. When it came to setting up the business, I found we had seriously underestimated the challenge of raising the money: There was no banker or equity investor interested in backing an operator from Africa to take on two incumbents of global reputation.

“If I want to throw money away, I can just throw it into the Ocean,” an investor told me.

I managed to secure equipment from China to get us going, but demand for service was slow; the market was wary. And rightly so.

I had read about an American company that was expanding into South America. They were not very big, but they were backed by an entrepreneur, so I called him and made an appointment. I had to fly to Seattle.

“Here is my proposal. Buy me out for paper,” I proposed to the guy in his office. “I will need a board seat. And no ‘Calls’. I don’t want to be forced to sell.”

We went back and forth, just the two of us.

“OK. You become a shareholder in my company in exchange for your New Zealand business. Now you have interests with me in South America,” he replied with a smile, then added: “I reviewed the Business Plan you sent me in advance. Our lawyers have seen the license. We will invest the money to build New Zealand.”

He reached out his hand, and we became partners. I went back to Africa, knowing that I had gone to the next level in my education, and made a bit of money on the side!

I had my money, and I remained a shareholder in New Zealand, even though I had sold it! I had fulfilled my obligation to build a mobile business in New Zealand, one of the most advanced economies in the world. Today the business is still there, flourishing, and worth billions.

At some point I sold my shares and reinvested into faster growing markets in Africa. That is business, Lol!

Stop and think about this: “Do you really know as much about Capital as you think?”

I’m still learning! I knew what to do because for years I had been reading books about how entrepreneurs like Sandy Weill built CitiGroup. I knew about PUT/CALLS from reading books!

Who said: “Come buy without money”?

Now this part is for the Senior Class:

As Liquid several years ago, we were trying to get into East Africa quickly, and we were struggling with “organic growth”. Our main competitors were eating our lunch like bullies in a school yard.

Then we heard that a major competitor was for sale. This was our chance, but there was only one problem: We had no money, and no one was willing to lend us the money, and there were no investors interested in the sector!

So we crafted a plan: We invited the competitor to have a look at our own business, as a group. They were stunned by our management capability. Our “Margins” were twice theirs, and our “CAGR” was almost in the “30’s”…

To put it mildly, we were a rocket ship, whilst they were in a slow-moving truck that had broken down!

“Here is the deal: We will acquire your businesses for paper—10% of our total stock. You can have a board seat. Then we include a PUT/CALL exercisable after 12 months. You keep the upside on your shares. It’s a better deal than selling for cash.”

After a few days, their chairman called me: “Let’s meet at the lawyers’ offices today, and we can agree on a process.”

“My team is ready,” I replied.

Twelve months later they exercised their “PUT” and I accepted. If they had not, I would have “CALLED”.

By now we were all over East Africa like a rash!

Now, I have deliberately put in terms which I want you to research:

__What are “margins”, “CAGR”, “PUT”, “CALL”?

These are staple terms and if you listen to #Business Wars or CNBC Africa, you would hear them discussed week in week out.

"Don't let what you can't do stop you from doing what you CAN do".