As gears are stepped down in honey production and extraction winds up in February-March, some honey-sector business owners will be steeling themselves to farewell a profession that may have returned the love, but not the livelihood. Others have already sought to sell their businesses in a market bereft of buyers. Bruce Roscoe believes that value lies hidden in what honey producers do and know. In this report he sets out ways that this value can be realised.
By Bruce Roscoe
To read some business brokers' sales pitches, the honey industry outlook is as rosy as the colour of their eyeglasses. Comvita Ltd achieved its "highest ever export volume" last year; honey is New Zealand's "fastest-growing export commodity"; and the industry is "not able to keep up with global demand".
(Brokers print a disclaimer saying that listing information is provided by the vendor.)
Among their number some brokers possessed of honed people and negotiating skills will get a sale over the line. In the honey company cases seen by this writer, though, they appear as commission hunters working with blunt instruments. Volume rather than value driven, they are inclined to rush transactions rather than hold out for a price worthy of a seller's business.
They focus myopically on the real estate that your business owns, but cannot be blamed for this. The national qualification required of real estate agents and business brokers is the same – a licence issued by the Real Estate Authority and the prerequisite New Zealand Certificate in Real Estate (Salesperson) (Level 4).
Brokers' "online confidentiality agreements", in this writer's experience, are largely ornamental. While some confidences are kept, others are betrayed. In one case, a seller's details were promptly posted to a website. In other cases, spouses and partners talk. "We tell each other everything", a friend from schooldays told me. Perhaps the breaches start from there. They start and spread from somewhere.
An alternative to engaging a business broker is to ask your accountant to discreetly advertise and manage the sale of your business. There are four advantages to doing this – your accountant understands your business better than anyone other than yourself; your relationship with your accountant is already one of trust; working as a team, your accountant and solicitor can conclude a transaction; an agreement on commission on a sale or other transaction reward can be reached on more favourable terms than those offered in a broker's contract.
The Difference Between a Business and Shares
You may think you are selling your company, but a prospective buyer's advisers will argue against buying it. They will want your company to sell the business that it owns. If you agree, you will remain the shareholder of an entity that conducts no business and owns no assets. Or still owns those assets that a buyer declined to accept as part of the purchase.
The buyer's advisers are saying that they do not trust you. They believe that you may have forgotten or even hidden liabilities such as a loan or some promise on which your company may be called upon to keep at cost in the future. The buyer of your company would inherit such liabilities, but the buyer of your company's business would not.
Also, in the likely case that the buyer merges your business with an existing business leaving you as the owner of what will become a shell company, the cost of winding down your company will fall on your shoulders. Liquidation accountants' charges can reach scores of thousands of dollars. You can insist from the beginning that it is your company that is for sale.
How to Identity a Candidate Buyer
The company that is likely to take an acquisitive interest in your company is one that conducts similar businesses to a comparable scale. It may share chapters of your history and already be familiar with what you own and what you do. It is likely to understand the value of your knowledge. List such companies which your solicitor can approach in confidence. Among those, the ideal company is one that operates a stable primary or secondary business unconnected to agricultural production.
Offshore honey packers or food companies that operate honey brands have little incentive to purchase the production asset in New Zealand while they can buy bulk honey at low prices. The thread connecting foreign investment in this sector to date is less honey than value-added products that contain honey centred on dietary supplements, health foods, and personal care products. Much time can be squandered on voyeuristic inquiries from abroad. Australia, where mānuka is understood, perhaps is an exception.
The Valuation Starting Point
Let's value your business. Draw a line through a sheet of paper and on one side list the things you can touch and the things you know.
Combined, those are assets – tangible and intangible. Land, buildings, machinery, vehicles – you can touch these, and none are likely to hide value.
Value is unseen in the things that you know – your production processes; your name; your customers' names; the names of businesses you have found trustworthy. The value of such knowledge is often uncounted and all but given away in some cases where land value reflects the sale price of a business. For the moment, guess a value for what you know, and add that amount to an estimate of what you can touch. Add the two to arrive at a total asset value.
On the other side of the paper list what you owe – for example debt to a bank, outstanding payments on a lease, unpaid taxes. Add these and subtract the total from the asset value to produce a net asset value (also called "equity" or "shareholder's equity"). You have just constructed a balance sheet and calculated the theoretical value of your business. This is the starting point. Working with your accountant, you can fine-tune estimates for the various line items.
Proprietary Processes
Giving shape to what you know is the first step to realising its value. Whether extracting honey or finely granulating or crystallising it, you may have tinkered over the years to arrive at a novel process deserving of a trademark or even patent. We know in Japan from tasting New Zealand honey samples that processors are not all doing the same thing. Some honeys are of average taste, some good, and still others outstanding.
A registered process as "intellectual property" is a valuable asset. Citing perhaps the example of 100% Pure New Zealand Honey Ltd, which has trademarked "Pure Flow™" as a process, it may be worthwhile describing your processes to a trademark or patent attorney with a view to naming and registering them.
Your Name as a Trademark
Molan Gold Standard™ is known as a trademark of the rating system developed by Professor Peter Molan for mānuka honey. The late professor's name itself was trademarked as "Peter Molan™" by his employer, the University of Waikato, via its 100%-owned unit Waikatolink Ltd. If your name associates with your products and is known in the industry, you may be able to trademark it. It will hold value. That value should be realised in your favour rather than left to accrue to a new owner of your business.
Lists of customers over at least the three-year period to date and those product and service vendors that have earned your trust are valuable (and should not be released to a broker; perused in an accountant or solicitor's office under watch, maybe.) All product labels and graphic designs used in your business are valuable.
"Goodwill" Is Not an Expression of Goodwill
Beware brokers' loose usage of the accounting term "goodwill", which can be deceptively pleasing to anyone's ear. It means only the difference between a balance sheet valuation of an asset and a higher market value for the same asset. Here's the catch. It is not possible to calculate a fair balance sheet amount for your knowledge. (Only the broadest guesstimates can be made.) Therefore, it is also impossible to calculate goodwill to any degree of accuracy. Goodwill valuations will always be subjective.
The two NZX publicly quoted honey companies – Comvita Ltd and Me Today Ltd – are immensely challenged by this grey area, as their reports to the exchange reveal. The people most likely to appreciate the value of your intangible assets (principally your knowledge and intellectual property), are your close peers and yourself. Only you can ascribe a value to them. Begin by asking the question, "What sales amount would I have achieved without using my name?" Then repeat the question for each of your other intangible assets.
A likely scenario is that prospective buyers will attempt to cherry-pick your assets, starting (and perhaps ending) with land. In one broker's honey company listing, the word "land" occurs three times more than the word "honey". Another listing is titled, "Manuka Honey Production Business - Assets Sale", which all but gives the show away.
You can defeat this view of the world seen by a frog inside a well by separating your tangible from intangible assets. Package the "what you know" component of your business for separate sale to a peer company which understands its value and wishes to become a flag bearer for your name and augment its own honey brands with yours. The "what you can touch" part of your business can be packaged for sale to those whose interest is only land and buildings and other fixed assets.
Alternatives to Selling
Leasing land, buildings, machinery, and other assets may be an alternative to selling that allows you to re-enter the industry at a later date in a stronger market. In a downturn some honey producers may be looking to expand in a way that does not require a large capital outlay and may show interest in leasing options.
Another is to combine with similar scale honey producers to form a cooperative. Drums of honey can be exchanged for equity in the venture, members' brands can be continued under one umbrella, and processing and packing can be rationalised at shared premises.
Curtains and Light
Emotionally, this is a difficult time. Once during a meeting that should have concluded with the sale of an agricultural property, the owner said, "If I sign this, it's over, isn't it?" Yet he had been offered all that he had asked. He could not let go. The silence was broken by someone saying, "I'll put the kettle on".
If you enjoy tramping, swimming, golf or other forms of relaxation or recreation, it can help to allocate more time to those activities during what may become a long and draining experience. Exercise and a focus on new beginnings can help draw the curtains on one window while letting light in through another.
Bruce Roscoe is a Japan-resident former foreign correspondent and securities analyst. He is now a researcher and occasional honey trader and consultant.
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