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Johannesburg - When you are 22 and you have just been offered a couple of million for your start-up business, it is very difficult to turn that kind of money down.
To date, this has been one of the biggest decisions JP van der Spuy, founder of online auction platform MyTrade.co.za, has had to contend with in his business career.
By not accepting an offer from a media company for his technology start-up, he has committed his time and money and a big portion of his financial wealth into turning his fledgling firm into a sustainable business.
For many entrepreneurs, the dream of selling their small business for a tidy sum is the incentive that justifies the long hours and painstaking investment of capital they put in. However, for not a few in South Africa it may well have been a risk not worth taking.
For all the success stories one reads about in the financial media of business owners who have built viable ventures and then cashed these in for millions or even billions of rands like tech entrepreneur Mark Shuttleworth, many other entrepreneurs rue the day they ever struck out to follow a dream.
Bruce Wade, who operates the Entrepreneur Incubator, said investing in your own business can be a lucrative option.
He told Fin24.com: " No better investment can be made than in a well-designed and executed business ready for sale or buyout at a predetermined time in your life. Not only will this give you a monthly salary while you are building it, but a huge cash payout when you sell."
There is no question about the payout. Speaking to Fin24.com recently, the team at Absa Wealth said that the majority of their clients in the high net worth individual category are entrepreneurs who have sold out of their businesses either through listings, private equity deals or to larger competitors.
Know when to take the money and run
Very few, they said, come through traditional high-paying corporate jobs.
The major problem, said Wade, is picking the right businesses to invest in and knowing when you are on to a winner and when to cut your losses.
"The big problem is that most investments are not growing or keeping up with inflation, resulting in your money dropping in value and never being able to return to you what you expected. I have seen too many people having to cash in their expectations for their old age," he said.
Warren Ingram from wealth management firm Galileo Capital agreed that many of the high net worth individuals he sees are entrepreneurs.
"I think there is a high proportion of people who are wealthy with a net asset value of R10m or more from the corporate world, but the very wealthy who have a net asset value of R25m or more are almost exclusively entrepreneurs," he told Fin24.com.
One observation Ingram made is that many entrepreneurs who have tied up much of their personal wealth in their businesses start planning their exits two to three years before they actually sell the firms.
"They ususally know that they have enough money, now they just don't want to lose it and they also start getting quite wary of risk, so risk managment becomes a big priority for them," Ingram said.
While there might be opportunities in entrepreneurship in South Africa, this does not mean that starting a business is easy.
According to the World Bank's 2010 Doing Business survey, South Africa has slipped in the global rankings as a destination for doing business.
SA down in global rankings
Out of a group of 183 countries, South Africa has moved to 34th place (32nd in 2009) in terms of a starting a business and from 99th to 102nd place in terms of employing workers.
In terms of trading across borders, South Africa comes in 148th place and contract enforcement 85th. Interestingly, South Africa came second in terms of ease of obtaining credit.
A key finding by the Organisation for Economic Cooperation and Development was that South Africa's low levels of entrepreneurial activity were hampering economic growth and egatively impacting the labour market.
"Product market regulation, especially as regards barriers to entrepreneurship, should be made less restrictive in order to spur dynamism," said the organisations researchers in a 2010 report.
Michael Sassoon, head of business development at banking group Sasfin, concurs. He pointed out that with limited funding opportunities available for small businesses in South Africa, many entrepreneurs throw their blood, sweat, tears and financial resources into under-capitalised small businesses at great risk to themselves.
This means that the business needs to be nursed along until its growth catches up with its lack of capitalisation - a tricky trade-off for entrepreneurs.
"His business is the goose that will lay the golden eggs and in his quest for value creation it is critical for him to nurture that goose," said Sassoon, adding: "Most great entrepreneurs have the vast majority of their wealth in their business.
"They understand their product, their customer and their offering very well and they are completely committed to making it a success."
Sassoon said it is a fine line for entrepreneurs to tread between risk and reward. "The biggest reason not to tie up most of your wealth in a mid-size business is the risk.
Advice for entrepreneurs
"Given the inherent risk of South Africa as a developing country as well as the risk of being heavily exposed to one industry and one business, one could argue that it would be better to spread one's wealth across different geographies, industries and asset classes," Sassoon said.
The flip side of that is that if you are seeking a funding partner to take your business to a new level, those funders want to see how much confidence the entrepreneur places in his own business and much risk he or she is prepared to take.
Wade provides the following advice for entrepreneurs who are storing their primary wealth within their business:
• Start with the end in mind: start the business with selling in mind.
• Build towards the exit strategy all the time.
• Look for expansion opportunities in both product expansion and customer footprint.
• Never become the centre and main source of income or wisdom in your business.
• Build a team that will remain when you are gone.
• Begin to look for investment interest at least 10 years before your planned exit.
• License or patent any new ideas that will pay your royalties.
• Hire yourself back as a consultant once you leave.
• Allow for a comeback if your other plans fall through.
• Expect to live for a lot longer than you may have hoped for.
• Never leave money or business to your direct dependants; always skip a generation and leave it to the grandchildren.
• Use business trusts to protect your assets
• Watch out for scams and takeovers that will get you booted out before you want to go.
- Fin24.com
To date, this has been one of the biggest decisions JP van der Spuy, founder of online auction platform MyTrade.co.za, has had to contend with in his business career.
By not accepting an offer from a media company for his technology start-up, he has committed his time and money and a big portion of his financial wealth into turning his fledgling firm into a sustainable business.
For many entrepreneurs, the dream of selling their small business for a tidy sum is the incentive that justifies the long hours and painstaking investment of capital they put in. However, for not a few in South Africa it may well have been a risk not worth taking.
For all the success stories one reads about in the financial media of business owners who have built viable ventures and then cashed these in for millions or even billions of rands like tech entrepreneur Mark Shuttleworth, many other entrepreneurs rue the day they ever struck out to follow a dream.
Bruce Wade, who operates the Entrepreneur Incubator, said investing in your own business can be a lucrative option.
He told Fin24.com: " No better investment can be made than in a well-designed and executed business ready for sale or buyout at a predetermined time in your life. Not only will this give you a monthly salary while you are building it, but a huge cash payout when you sell."
There is no question about the payout. Speaking to Fin24.com recently, the team at Absa Wealth said that the majority of their clients in the high net worth individual category are entrepreneurs who have sold out of their businesses either through listings, private equity deals or to larger competitors.
Know when to take the money and run
Very few, they said, come through traditional high-paying corporate jobs.
The major problem, said Wade, is picking the right businesses to invest in and knowing when you are on to a winner and when to cut your losses.
"The big problem is that most investments are not growing or keeping up with inflation, resulting in your money dropping in value and never being able to return to you what you expected. I have seen too many people having to cash in their expectations for their old age," he said.
Warren Ingram from wealth management firm Galileo Capital agreed that many of the high net worth individuals he sees are entrepreneurs.
"I think there is a high proportion of people who are wealthy with a net asset value of R10m or more from the corporate world, but the very wealthy who have a net asset value of R25m or more are almost exclusively entrepreneurs," he told Fin24.com.
One observation Ingram made is that many entrepreneurs who have tied up much of their personal wealth in their businesses start planning their exits two to three years before they actually sell the firms.
"They ususally know that they have enough money, now they just don't want to lose it and they also start getting quite wary of risk, so risk managment becomes a big priority for them," Ingram said.
While there might be opportunities in entrepreneurship in South Africa, this does not mean that starting a business is easy.
According to the World Bank's 2010 Doing Business survey, South Africa has slipped in the global rankings as a destination for doing business.
SA down in global rankings
Out of a group of 183 countries, South Africa has moved to 34th place (32nd in 2009) in terms of a starting a business and from 99th to 102nd place in terms of employing workers.
In terms of trading across borders, South Africa comes in 148th place and contract enforcement 85th. Interestingly, South Africa came second in terms of ease of obtaining credit.
A key finding by the Organisation for Economic Cooperation and Development was that South Africa's low levels of entrepreneurial activity were hampering economic growth and egatively impacting the labour market.
"Product market regulation, especially as regards barriers to entrepreneurship, should be made less restrictive in order to spur dynamism," said the organisations researchers in a 2010 report.
Michael Sassoon, head of business development at banking group Sasfin, concurs. He pointed out that with limited funding opportunities available for small businesses in South Africa, many entrepreneurs throw their blood, sweat, tears and financial resources into under-capitalised small businesses at great risk to themselves.
This means that the business needs to be nursed along until its growth catches up with its lack of capitalisation - a tricky trade-off for entrepreneurs.
"His business is the goose that will lay the golden eggs and in his quest for value creation it is critical for him to nurture that goose," said Sassoon, adding: "Most great entrepreneurs have the vast majority of their wealth in their business.
"They understand their product, their customer and their offering very well and they are completely committed to making it a success."
Sassoon said it is a fine line for entrepreneurs to tread between risk and reward. "The biggest reason not to tie up most of your wealth in a mid-size business is the risk.
Advice for entrepreneurs
"Given the inherent risk of South Africa as a developing country as well as the risk of being heavily exposed to one industry and one business, one could argue that it would be better to spread one's wealth across different geographies, industries and asset classes," Sassoon said.
The flip side of that is that if you are seeking a funding partner to take your business to a new level, those funders want to see how much confidence the entrepreneur places in his own business and much risk he or she is prepared to take.
Wade provides the following advice for entrepreneurs who are storing their primary wealth within their business:
• Start with the end in mind: start the business with selling in mind.
• Build towards the exit strategy all the time.
• Look for expansion opportunities in both product expansion and customer footprint.
• Never become the centre and main source of income or wisdom in your business.
• Build a team that will remain when you are gone.
• Begin to look for investment interest at least 10 years before your planned exit.
• License or patent any new ideas that will pay your royalties.
• Hire yourself back as a consultant once you leave.
• Allow for a comeback if your other plans fall through.
• Expect to live for a lot longer than you may have hoped for.
• Never leave money or business to your direct dependants; always skip a generation and leave it to the grandchildren.
• Use business trusts to protect your assets
• Watch out for scams and takeovers that will get you booted out before you want to go.
- Fin24.com
