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Ask anyone trying to run a business in South Africa in 2023 and they’ll tell you: when days are dark, options are few. Although the worst of load shedding seems to have taken a sho’t left for now, it’s rather hard to believe that Stage 6 has magically disappeared forever.

 

Or has it?

Nobody knows.

What we do know is that business in South Africa is an extreme sport, where “swimming upstream” doesn’t do justice to describing what life is like for business owners here. Still, there’s plenty of opportunity (and reward) for those who enjoy walking on hot coals.

For some, the obvious alternative is to cast their eye abroad and dream about owning a business where the grass is (in some cases) greener, the consumers earn better and the lights stay on all day. South African business owners are increasingly considering overseas expansion, often as part of a broader plan to emigrate.

With the easiest language and time zone move of all, the UK is always on the radar for South Africans. This trend raises the question of whether it is solely local adversity that is driving South African entrepreneurs to explore global opportunities, or if there are valuable prospects in SMEs across the pond.

We also need to question just how green that grass is after all. Nothing is ever as good or as bad as popular opinion would have you believe. A quick look at UK inflation and interest rates will confirm that for you.

Many fish in the sea. Many that can’t swim

In the UK, there are roughly 5.5 million small businesses. This number peaked at 6 million in the height of the pandemic, which shows how many “side hustle” businesses came and went in the past couple of years.

At first glance, this seems like a world of opportunity for those on the hunt for a small business to purchase. The UK statistics help us dig deeper, with the critical insight that 74% of these businesses are solely operated by their owners and are therefore not really viable options.

And of course, the mere existence of employees doesn’t mean that the business is fit for sale. Just because a small business exists, it doesn’t mean that you should buy it. The stark reality is that the vast majority of businesses simply aren’t viable propositions, and that’s before we take into account how far away they are from home.

The lights may be on, but is anybody home?

The UK economy isn’t all sunshine and roses. To be fair, the UK doesn’t typically offer much sunshine in any context. Inflation is running away from the central bank, despite an incredible run of interest rate increases since the depths of the pandemic.

It is true that there is a lot of opportunity in that market, but this doesn’t mean that every business is going to survive this economic cycle. Of course, chaos tends to breed opportunity. The combination of inflation and interest rates may dish up some relative bargains in the UK.

Surprise! Multiples in UK private companies aren’t that different to SA

Rightly or wrongly, there are rules of thumb in the South African market around appropriate earnings multiples that are usually paid for small businesses. These rules of thumb exist in the UK market as well, with the surprising insight that the multiples aren’t really that different to the local market.

Finance theory dictates that they should be higher, due to the relatively lower country risk vs. South Africa. This suggests that on a relative basis, South African private companies may be less lucrative to acquire than UK counterparts. Of course, this is a generalisation of note. Whether a deal is good or not will come down to the specifics.

In recent discussions with partners in the UK, we’ve also found that certain sectors seem to be structurally cheap. A good example is the services industry, where buyers are happily mopping up companies and consolidating them into groups of e.g. accounting firms or even dentistry practices. Perhaps because they aren’t armed with the right information, sellers are transacting at bargain prices for the buyers.

New lands, not in rands

Offshore opportunities offer access to a broader market and potential customers, leading to increased business growth and revenue. There are so many ways to use offshore markets, ranging from an acquisition of a new product or service in that country, through to acquiring a distributor for a Proudly South African product.

Sometimes, a local design just needs the right market. The first prototypes of the Kreepy Krauly were built in South Africa, but it was only when the product was taken to Australia that it really started to find success. There are plenty of examples of South African exports doing well in global markets, ranging from Nando’s through to Sally Williams Nougat. As a final feel-good story, Computicket (the world’s first computerised ticketing system) is a Straight Outta’ Benoni tale of an offshore technology acquisition and the launch of a highly successful business.

Regardless of your specific situation, offshore action can provide an opportunity to diversify your income and reduce reliance on a single market, thus mitigating risks associated with economic fluctuations and currency volatility. Value creation is also achieved through demonstrating the business’ ability to adapt and thrive in different markets, further enhancing the brand reputation and attracting potential investors.

Although venturing offshore can lead to a more valuable and scalable group when acquiring businesses abroad and integrating them into existing operations, this is easier said than done.

It pays to go with what you know

There’s a difference between opening up new markets for an existing product and acquiring an entirely separate business in a new market. South Africans tend to bring plenty of ingenuity and resilience to the table, yet many listed corporations have gotten it horribly wrong when expanding offshore. If the highest paid executives can’t get it right, entrepreneurs need to be extra careful.

When considering what kind of business to buy, it’s crucial to make informed decisions that align with your expertise and the amount of time you intend to spend in the country, ranging from a few board meetings during the year through to a full emigration.

For instance, if you have built your entire career in the IT industry and are moving to the UK, it might not be the most opportune time to venture into restaurant ownership. It is essential not to underestimate the operational risks and the importance of familiarity with the market. Since you are already undergoing a significant change by moving either yourself or your business (or both) to a new country, it would be wise to stick with a sector you are familiar with, leveraging your existing skills and knowledge. 

The value of the right advice

At bizval, we have dedicated ourselves to providing investment banking quality insights to the “missing middle” of companies – those that need more sophisticated advice but are too small to get attention from traditional investment bankers.

Ranging from our Live valuation tool through to bespoke Concierge valuations and Bootcamp services to help founders prepare for transactions, our service offering has been designed by founders, for founders. And with our network in the UK and other countries, we can even help you find the right offshore business.

Visit bizval.co to find out more. DM

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