KAMPALA – For you to make sense of this article it helps if you have read my earlier article “Investing in a Startup: A guide to how private capital placements work.” published on Tuesday 20th July 2021.
We are back in the hood with our entrepreneur friend Tom, owner of Tommy Source Limited.
It’s been 4 years, since he started manufacturing and vending Ketchup. Tom is a hard worker and usually works 12 hours straight including weekends. He also runs his business on a lean start up model which helps keep his expenses low.
When a business is very efficient at utilising the resources available to it can be expected to generate more profits. When this happens, its value goes up. The other factors that affect business valuations are proprietary information or assets like intellectual property (IP) and the total accessible market (TAM).
After Tom cracked open the South Sudan Market and soon thereafter, the Eastern Congo Market, his business grew so fast that he was panting to meet demand. By the end of the 4th year Sales were up 10X to UGX 200M per month and UGX 2.4 Billion for that year. However Tom had over worked himself and in spite of growing the business, his family and especially his wife was complaining that they had not built a home yet and he was spending less time with them. Tom feared that his wife might divorce him and so he had to think of a solution fast.
Secondly, his investors were also itching for a liquidity event. (In business Terms a liquidity event is usually a sale of a business asset or the business itself or taking the company public). Knowing that some deep pocket guys were also itching to get into the Ketch up Market, Tom knew he had a short window to make a decision.
As luck would have it, a fast consumer goods company from the Middle East was entering the East African Market and Ketch Up was one the products they were betting on. Being Smart operators, they knew guys like Tom could give them a bloody nose so they decided to buy him out to get a head start. They approached Tom to sell Tommy Source Limited to them for UGX 3.5 Billion. It was at a take it or leave it offer.
Tom was elated that someone was interested in buying something he had created from scratch but on the other hand he loved his company and the staff that he worked with. He approached his Board of Directors (made up of mainly people that had invested in the business) and they too favoured a sale of the business. He knew then he would have to sell but he had some conditions for the buyer. The buyer would have to retain all his staff for a period of 1 year. This was accepted and a deal was struck.
With the due diligence in progress before the money was wired Tom needed to figure out who gets what. It had taken 5 solid years to get this far and it was time to share in the spoils of an entrepreneurial hunt.
1. First on the line was Vicky. She took the riskiest bet of 40M in Land value for 10% of the company and waited 5 years and she was handsomely rewarded with UGX 350 Million.
2. Family and Friends were next in the line. They invested UGX 50M for 10% of the company and waited 5 years and were to get UGX 350 Million
3. Light Ventures Capital invested UGX 200M for 15% of the Business, waited for 3 years and were rewarded with UGX 525 Million.
4. Former workmates and assorted investors invested UGX 188M for 14% of the Business, waited 3 years and shared UGX 490 Million.
5. Lastly, our hero Tom shared 51% of the sale and got UGX 1.785 Billion for 5 years of a crazy bet, sleepless nights, crazy travel schedules and a near heart break.
Once the transaction settled, the first thing Tom did after cutting the checks for his investors was to buy a house for his family that had all along lived in a rented home. He also took his wife on vacation as he planned his next move. After all, he was only 40 years old.
Important things to note.
1. Businesses are built for 2 things: to be sold or be used for cash flow to support a living. Decide early what you are building for.
2. Every time you take on Investor Money, start working on some sort of a Liquidity event so that your investors can have an exit.
3. The more a business becomes efficient the more valuable it becomes but always remember to package your value well so it can be transferable.
4. Investing in business is risky. 8 out of 10 businesses fail and the outliers like Tommy Source are far in between. Once you decide to invest, also be prepared for any eventuality including being asked more money to put in the business.
5. Entrepreneurs have to be fair and honest in their business dealings otherwise the whole thing comes crumbling down.
If you are Tom, would you again jump back into the entrepreneurial frenzy or would you take early retirement? Please let me know.
The Author, Livingstone Mukasa is a Financial Advisor, Entrepreneur, People’s Professor of Streetnomics and the Author of “The Great Financial Rebuild” & “Investing for the Future”
