Springboks’ Playbook for Business Success

Lessons from rugby on winning strategies in unlisted interests and valuations

By Cassie Carstens


It would be almost inappropriate not to refer to the final of the Rugby World Cup in this article.

There are wonderful lessons embedded in sports, and the Springboks’ journey to the final is filled with such examples.

Rugby is played with an oval-shaped ball, and Jacques Nienaber, the Springbok coach, and his team would hardly devise a game plan based on how such a ball bounces.

As just another bench coach, I think their success lies in devising a plan based on what is within their control and searching for what the opposition cannot (or will not) see in a game pattern.

One area of financial planning that receives very little attention is the analysis of business owners’ unlisted interests, and more specifically, the implications if a metaphorical oval ball bounces wrong for them.

The death or disability of a partner holding shares in an unlisted company can cause more pain than an Owen Farrell high tackle if its structure is poorly arranged.

So many problems can be solved by simply searching for parts of the financial analysis that may not be obvious but have serious implications. It’s a process you can control.

In what entity are your shares held?

It may be a mix of administrative laziness or ignorance, but too many business owners still hold their shares in their personal names. If you die, the value of your shares is included in your estate. Estate duty, as well as capital gains tax, is automatically payable upon death.

The second problem is that, in the absence of a valid buy/sell agreement, your co-shareholder(s) interest in the company is bequeathed to his or her spouse or children upon death.

While this may not necessarily have estate or capital gains tax implications for the spouse, it holds a myriad of other potential disadvantages for both the spouse and the remaining shareholders.

We encounter few businesses with multiple shareholders where the remaining shareholders welcome the deceased partner’s spouse or children with open arms. Are you comfortable with an heir as a business partner?

The possibility of an heir as a dormant partner is full of pitfalls. The partner needs to keep growing the business, while the heir only shows up twice a year to collect dividends. The risk for the heir is that the partner may mismanage the business or, worse, simply close the business and open a new, similar one, thus destroying the value of the inheritance.

A buy/sell agreement is necessary to address this potential problem.

The agreement should outline all provisions for the buyout of shares upon death or disability. Most shareholder agreements include a clause for mandatory sales. However, many business owners make the mistake of thinking that it provides sufficient protection. In the absence of adequate funding, the deceased partner’s family cannot be bought out, placing a significant cash flow burden on the remaining shareholders.

There is usually a clause that states that if the remaining shareholders do not want or cannot buy the shares, it can be offered to a third party.

However, this route has a low probability of a favourable outcome for the family of the deceased partner.

The shareholder agreement is usually relatively vague about the details of the mandatory buyout of a partner.

Without a buy/sell agreement, there are usually no clear guidelines for, among other things, determining the value of the shares, the event that triggers a mandatory sale of shares, and the timeframe for purchasing the shares.

Where there is a buy/sell agreement, it is crucial to ensure that the Memorandum of Incorporation or Shareholders’ Agreement is not in conflict with the buy/sell agreement.

How are shares repurchased?

The simplest way is to take out insurance through a buy/sell policy that will pay out in the event of death or permanent disability.

Insurance is only the answer when the company does not have the necessary cash flow to buy out the shares over an acceptable period.

Where companies have many smaller shareholders and can easily buy out the shares, insurance is obviously unnecessary, but it is important to have an agreement in place.

In a recent case we encountered, two partners (with interests of 51% and 49%, respectively) in a company valued at R80 million did not have a mandatory buy/sell agreement for death or disability.

The cost of buy/sell insurance to facilitate a mandatory sale is about R500,000 per year. It is a bitter pill to swallow and will often result in the subject remaining on the to-do list forever.

If you want to use Nienaber and his team’s approach, you need to think out of the box about this. By closely examining the management reports, we were able to determine that they paid about R1 million too much in currency trading commissions over the past year and gave up an additional R500,000 through suboptimal use of cash reserves.

We were able to justify the buy/sell insurance and fend off a potential disaster while generating greater profits in the process.

What is the value of the shares?

In most analyses, we find that a valuation policy on how the share price should be calculated is lacking in unlisted companies.

This opens the door to the South African Revenue Service’s (SARS) own calculation and interpretation of fair value, as well as a dispute between the surviving partner and the heirs.

It may boost the ego to say your business is worth multimillions of rands, but make sure it can be mathematically substantiated, and that it is backed by a mutually agreed-upon valuation signed by all shareholders.

Business owners have a lot on their plate, and it is almost impossible to expect them to have the time or knowledge to address these problems.

As with the World Cup final, nothing can be done about a flawed strategy once the final whistle has blown.

Make sure the correct financial plan for your business is put into action while there is still playing time.

Cassie Carstens is a certified financial planner of Woodland Wealth. Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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