Chapter 11 - Growth and exit strategies

Question 1

Emotional attachment

Answer 1

Emotional attachment to and involvement with a business can be defined as entrepreneurs’ unconditional love for their own businesses, which derive from their continuous involvement in carrying out the operations. While practical decision-making is critical to running a successful business, it is equally important that entrepreneurs develop an emotional attachment to their businesses. This improves entrepreneurs’ levels of commitment and involvement to securing maximum benefits fortheir businesses, ratherthan forthemselves (Floyd, 2005).
In addition to business owners, employees also develop an emotional attachment to their organisations. This inspires them to work with passion and to feel a profound connection with their workplaces. Those employees who are
emotionally attached help organisations to move forward by having a positive impact on aspects of the business such as the product, customer service, costs in their jobs, and quality and productivity of business operations. Being attached also makes it possible for staff to recommend it to others. Staff are also more likely to commit their time and efforts for helping the organisation succeed in the long term. This shows that employees are not only motivated by extrinsic factors but also by intrinsic factors, such as personal growth, being a part of a larger process, and working for a common purpose.

Question 2

Business cycle

Answer 2

The business cycle may be defined as the economy-wide fluctuations in production and other economic activities which occur over several years and
months of a long-term growth trend. The cycle characteristically involves shifts at times occurring between periods of fast economic growth, economic decline and economic stagnation. In the measurement of business cycles, the growth rate is measured in terms of real gross domestic product (Nemethy, 2011).
Another characteristic of business cycles is that they do not necessarily follow the predictable periodic pattern and are based purely on fluctuations in economy.

Question 3

Trends

Answer 3

There are a number of economic theories available in literature explaining the fluctuations in aggregate economic activity. Some of them are explained here.
The business or economic cycle have short-term fluctuations, as well as a long-term trend. The long-term trend as indicated in Figure 11.1 is a growth trend, but
can also be a decline trend. A series of recessions and recovery cycles will result in the long-term trend. A recession is when the economy is in decline over the
shorter term. A recession is therefore when the economy is in decline for a consecutive period of time

Question 4

Trends continued

Answer 4

A major indicator for these cycles is the gross domestic product (GDP) of the country. It is important to note that each industry can have its own indicator, and
that certain industries will do well during recessions, and others will do poorer. When the economy enters the trough period, or a turning point, it will show the
first signs of a slowing in the pace of the recession, and it enters the recovery phase. The recovery phase is when most businesses prosper in the economy, as
consumers have extra money to spend and they purchase all kinds of luxury goods, or goods they were not able to purchase during the recession

Question 5

Trends continued

Answer 5

The economy enters a peak period as soon as the recovery phase slow-down and is known for slow and insignificant economic growth. After the peak period,
the economy can enter a recession and repeat the cycle. Should the peaks and the troughs be at higher levels each time, the long-term economic trend will be
growth. It is important to understand that not all economies are growing, as some economies are declining.

Question 6

Exogenous and endogenous

Answer 6

In mainstream economics, there is debate over the extent to which external or exogenous factors versus internal or endogenous factors are the cause of
economic cycles. They may further be classified into supply-side and demand-side explanations. Supply-side explanations argue that ‘supply creates its own demand’ while demand-side explanations states that effective demand can fall short of supply, thereby leading to recessions or depressions in the economy.

Question 7

Keynesian economics

Answer 7

In business terms, Keynesian economics expresses fluctuations in aggregate demand. Such fluctuations cause the economy to come at short-run equilibriums
at such levels which are different from full employment rates of output. It involves the interaction between the Keynesian multipliers and accelerators that gives rise
to the cyclical shocks. Thus, the amplitude of variations in the economic output depends upon the amount of investment representing the level of aggregate
output (or multiplier) and is determined by the aggregate demand (or accelerator).

Question 8

Credit-debt cycle

Answer 8

This is an alternative theory which states that the primary cause of business cycles is credit cycles. This can be explained further as follows: a net increase in private credit causes economic expansion while a net decrease in these components causes recession. Every business, whether small or big, has a vision of expansion. It is important to plan and shape effective strategies and policies that can help in growth. In this
context, growth means the increase of profitability.
In order to grow, a company needs a well-organised plan or strategy to increase profits, its company size, its production and its assets within the market and
within the available resources. Competition in the market is increasing on a daily basis so companies need to earn more profit so that they can expand efficiently (Pech & Stamboulidis, 2010). They also need to increase their size in order to take on more business and fulfil market demands on time. There are three key growth strategies that entrepreneurs can consider. These growth strategies are the following:
Intensive growth strategy
Diversification growth strategy
Integrative growth strategy.

Question 9

Advantages of starting a business during trends

Answer 9

There are several advantages to starting a business during a recession as well as during the recovery phases. Even though it may be more difficult to start a
business during a time of recession, it may be less risky, as the entrepreneur will scale the business in sync with the business cycle and build systems during a volatile or difficult time which will be leveraged during the upcoming recovery period. Starting a business during the recovery period of the business cycle may result in a flourishing business, but the entrepreneur needs to be careful not to over-capitalise the business, or to grow too quickly, as during the next recession, the owner will need to scale down operations whilst demands diminish.

Question 10

Intensive growth strategy (IGS)

Answer 10

Using this technique, a company undergoes significant expansion. This applies across all the following areas: scales of operations, production and employees.
This method involves a variety of products that are manufactured on a large scale, as well as the marketing for sale of these products.

Question 11

Market penetration

Answer 11

During this strategy companies penetrate deeply into the market in order to increase sales of the current product in the existing market. This is done by
aggressive distribution and promotion of product and brand. The company increases market shares and makes its product available to customers on a large
scale to develop its market. The major challenge with using this strategy is that a large amount of capital has to be spent on promotional advertisement.

Question 12

Market development

Answer 12

This strategy aims to increase the volume of sales of the existing product in new markets. This can be done in a number of ways. For instance, the business can
change the name of its product so that it is compatible with the culture of the new market or even change the product’s packaging so that it is more attractive and arouses curiosity about the product. An example of this is how Media24 translated Huisgenoot into English and published it as You to reach a broader market.

Question 13

Product development

Answer 13

This strategy suggests that the business can be grown if an improved product of the same type is developed for the existing market. The business can either
replace the existing product or sell it in addition to the new one. For example, Microsoft sells Windows 7 Professional in addition to its new product, Windows 7
Ultimate, which is more advanced. Another example is banks that sell cheque accounts and label them Silver, Gold and Platinum, along with value-added
services for different levels.

Question 14

Diversification

Answer 14

Diversification is applied where the company launches both new products and services. This is a risky strategy, since the business moves into markets in which it has little or no experience. The major challenge of this strategy is making the decision either to replace or continue the current product based on whether this would impact that company’s market.

Question 15

Diversification growth strategies

Answer 15

This strategy can be adopted when it is confirmed that a company cannot grow any further in the existing market through its present product. Within this
strategy, there are three options for diversification:
Concentric
Horizontal
Conglomerate.
The success story of Michael Eilertsen in this chapter is a great example of how diversification helped the business grow. A well-known example is Woolworths,
which had expanded from only offering clothing to expanding into the food sector.

Question 16

Concentric diversification

Answer 16

The foundation of this strategy is research and study of the market. Concentric diversification takes advantage of new opportunities using the platform of the
current business to provide machinery and technology to manufacture the new products and within the context of a familiar market. The company thus begins
producing new products, but existing production is still considered the core business. For example, Just Letting was a company involved in renting out
properties only. It then developed into the Just Group, which also sells properties.

Question 17

Horizontal diversification

Answer 17

This kind of diversification also includes research into new opportunities for growing the business in a familiar market. However, it differs from concentric
diversification in that the diversification requires new technology that is different from existing technology used by the business. While the products use new
technology, the company can use its existing distribution and supply network to get the products to market. This strategy works well when new products are made to be used with the main product that the company produces. An example is that of Apple, initially an IT hardware company, that later started manufacturing software such as games and
operating systems which were compatible specifically with Apple hardware.

Question 18

Conglomerate diversification

Answer 18

Conglomerate diversification involves development of a new product that is not technologically connected with the existing manufacturing technology. As a
result, the company has to invest in purchasing technology to develop this product and the product makes use of a new market. However, this technique is not simple, it is complex. It is dependent on many factors, such as the availability of essential resources, market seasonality and the competency of personnel. This type of diversification is often seen in the case of mergers between two different companies.

Question 19

Integrative growth strategy

Answer 19

This strategy is used in the instance where a company has a strong base of business, but is unable to use the strategy of growth. At the same time, integrating
growth does not conflict with their long-term objectives. The company practices integrated growth both by acquisition of the other property and by internal extension, altering the position of the company within a branch.

Question 20

Backward integration

Answer 20

A company can integrate elements of other businesses that supply the raw materials it needs to produce its goods. In this way, the company can secure a
continuous supply of raw materials. An example is the acquisition of a textile factory by a ready-made garments manufacturing company.

Question 21

Forward integration

Answer 21

A company that uses this strategy may integrate its distribution channel as part of the company. This gives the company full control over distribution of its product.
For example, a ready-made garment manufacturer could take over retail shops in orderto ensure its garments are reaching an established market.

Question 22

Horizontal market

Answer 22

In this case, units of different companies manufacturing similar products are merged. This means competitive firms are brought together to have a single
management and ownership with a common name. An example is the supermarket Shoprite/Checkers.

Question 23

Risk of growth

Answer 23

Just as growth is a positive sign of a company, there are also risks associated with it. As a company grows, it enters different environments with new challenges.
Three typical risks are those associated with new businesses, competition and strain to the current operation.

Question 24

Risk of a new business

Answer 24

Growth requires a heavy investment in raw material, employees, assets and technology. Investment such as this uses time, money and space. Investment must
be made ahead of revenue being received from the new growth strategy. Many companies end up draining their cash reserves to fund new growth.

Question 25

Risk of competition

Answer 25

The environment in which the new business is established is often very different to that which the business already knows. The company will be surrounded by existing competitors, sometimes including established, large companies that are
used to the new environment. This challenges the new business to get up to speed quickly.

Question 26

Risk of strain to current operation

Answer 26

Growth can cause challenges within the company on a number of different levels: staff need time to adjust to changes, and systems of controls, management and
procedures often need to be overhauled. Retaining high quality during a growth period is challenging, as is dealing with an increase in customer relationships and
diminished brand perception.

Question 27

Turnaround strategies

Answer 27

A turnaround strategy is a rapid change in corporate strategy that addresses a combination of negative issues, such as declining profitability, diminishing return
on investment or loss of market share (Hopkins, 2008).
These issues surface because of sudden changes in the external market, including customers, suppliers
or competitors. This strategy is thus a process dedicated to corporate renewal. It involves the use of various techniques, such as analysis and planning to
rescue troubled companies and return them to solvency. The first stage of a turnaround strategy includes management review, root failure causes analysis, activity-based costing and SWOT (strengths, weaknesses, opportunities and threats) analysis to determine the cause of the failure of the company. After completing this analysis, a long-term strategy in the form of a restructuring plan is created. After getting approval, turnaround professionals implement the plan,
review its progress and make changes to the plan as required.

Question 28

Objectives of turnaround strategies

Answer 28

The ultimate aim or goal of a turnaround strategy is to return an underperforming, failing or distressed company to normal in terms of profitability, liquidity,
solvency and cash flow. In order to achieve these objectives, the company must reverse causes of distress, achieve a quick improvement in financial performance, resolve the financial crisis, regain stakeholder support and overcome internal
constraints. The turnaround strategy should be implemented only after an evaluation of people, technology, control, innovation and the focus on business issues.

Question 29

Stages of a turnaround strategy

Answer 29

There are essentially three stages to a turnaround. Each of these stages will now be discussed.

Question 30

Pre-turnaround

Answer 30

This stage is the period immediately before profitability begins to decline. At this point, the company is still in profit, but is losing ground.

Question 31

Period of crisis

Answer 31

At this stage, the company is at a point where it needs turnaround. This stage is marked by a reduction in gains, such as declining profits, fall in market share and
a poor cash situation within the company

Question 32

Period of recovery

Answer 32

This stage is considered to be the turning point and is the longest stage, since it can sometimes take years before completion. In this stage, serious action is taken
in order to turn around the company. Many important decisions are made, often relating to scaling back production and entering into an aggressive growth stage. The company’s future strategic direction and plans are made clear during this stage.

Question 33

Turnaround techniques

Answer 33

There are many different techniques that can be used for a turnaround. It is often better to turn a business around than to close it, as there are numerous
implications for closing or selling a business.
There are several techniques to turn a business around, and one of the great examples are Zappos in the United States, which is currently owned by
Amazon.com, the largest bookseller in the world. Zappos had cash flow problems and did not want to get rid of their employees, as they were needed. Zappos then asked them to work for free for a couple of months and offered them shareholding
and a salary when they recovered. When they recovered, those workers benefitted and became millionaires. Without such a strategy, Zappos, which is currently the biggest online shoe store in the world, would not have existed. Turnaround techniques may temporarily reduce employment, but in the longer
term they save and create employment. Because they are important, the next sections will discuss these techniques. The four main techniques are:
Retrenchment
Repositioning
Replacement
Renewal.

Question 34

Retrenchment

Answer 34

Retrenchment is about an efficient reorientation and a refocus on core business. The prime objective of this technique is to reduce the scope and size of business.
This is done by selling assets, stopping unprofitable production lines, outsourcing, abandoning difficult markets and downsizing. Such actions help in reducing
financial losses, stabilising the company and working against problems which are causing poor performance. They also help to generate resources which can be
utilised for more productive activities and for preventing furtherfinancial losses. In South Africa, retrenchment is commonly associated with the reduction of staffing through termination of contracts of employment. However, as demonstrated above, in reality it involves a more comprehensive approach than
purely downsizing of staff numbers.

Question 35

Repositioning

Answer 35

This strategy is also known as an entrepreneurial strategy. The main focus is to generate revenue through a change in product portfolio, new innovations and market position. This includes developing new products, entering new markets, modifying the image or mission of company and accessing alternative sources of revenue.

Question 36

Replacement

Answer 36

This is a strategy where the top management of the company is replaced. This generally affects the chief executive officer (CEO) and senior managers. This
strategy is used when it is believed that a change in leadership will ensure that the approach which caused the company’s failure is no longer used. The new
management team is expected to use its experience and background to bring about strategic change and recovery. The new leader has to listen to employees’
views, solve their problems, motivate them and delegate power. In considering this strategy, a business should be aware that a new CEO can also potentially cause obstruction in achieving turnaround. Replacement should only be considered when a company has an opinionated CEO who does not think
impartially or in an open-minded manner about problems. Such a CEO will tend to resort to addressing all problems based on past experience rather than in a
forward-thinking manner.

Question 37

Renewal

Answer 37

This strategy helps a company to identify and pursue long-term actions which can lead to success. The first step in this stage is to analyse the existing structures in
the company. Such analysis may result in closure of various company divisions, expansion into other business areas or development of new markets. This
approach introduced innovative core competencies which lead to an increase in knowledge and a stabilisation of company value. This strategy may also have some unanticipated ill-effects, such as the
elimination of efficient resources or routines during the closure of existing divisions.

Question 38

Benefits of turnaround

Answer 38

The key benefits of a turnaround are the following:
It results in stability and continued operations.
It allows the company to secure rescue capital.
It ensures an accelerated return to profitability.
It minimises the costs of the current crisis.
It takes stock of and responds to the different viewpoints of creditors, shareholders, customers and employees.

Question 39

Harvesting and exit strategies

Answer 39

Harvesting in a business plan would indicate to investors when their first opportunity will arise to trade their shares in the business. Harvesting is therefore
an exit strategy for investors in the business. Harvesting allows for equity investors to be repaid. This is normally 3 to 5 years, depending on the complexity of the business and nature of the industry. One way to provide a harvesting opportunity is by providing an initial public offering (IPO) or sale to another business. A harvesting strategy in the business plan indicates to investors that the entrepreneur has the intent to properly build up the business and make it an
attractive investment. To achieve this goal, they will have to employ proper management staff and control procedures and run the business correctly.
Exit strategies therefore describe the methods used by business owners to carve their way out of past investments. Such a strategy is therefore a way of leaving one’s current business either after success has been attained or to mitigate the business’s failure (Cangeni & Miller, 2004). An exit strategy is sometimes termed a strategic withdrawal or exit plan. It is a
method used to transition ownership of a company or the way parts of the organisation operate.

Question 40

Exit planning scenarios

Answer 40

Creating an exit strategy also involves mapping pathways based on various scenarios. These scenarios are outlined in Figure 11.3. Apart from considering the 4 Ds and exit planning scenarios, business owners
must also address the following in their exit strategy:
Incorporate the business to make sure that you and the business are legally recognised as separate entities.
Put in place a method for assessing the business’s value annually in accordance with international valuation standards. Develop an employee benefit plan that outlines steps to be followed on departure of each partner, whether through retirement, disability or death. Plan ahead, outlining who will retain ownership of the company and who will be paid out at set points in the future.

Question 41

Modified Nike manoeuvre

Answer 41

In this instance, the business owner extracts most of the available resources of the business on a daily basis for personal use. This drains the company financially.
Typical activities showing this strategy are: owners paying themselves huge salaries and rewarding themselves with very high bonuses, irrespective of the
company’s actual position in financial terms, and issuing a special class of shares that are owned only by business owners, thereby giving them more dividends
than other shareholders receive. Using this strategy, owners primarily focuses on keeping the business small, taking out a comfortable portion of profit and living on their income from the business. This is commonly known as a ‘lifestyle company’.
In public sector companies, this approach is looked down upon; however, in the case of private companies, it is considered to be a good option.

Question 42

Advantages of the modified Nike manoeuvre

Answer 42

It ensures high take-home pay and a good lifestyle for the owner.

The business owner can access money from the business whenever he/she needs it

Question 43

Disadvantages of the modified Nike manoeuvre

Answer 43

It can have negative tax implications.

If the owner is not careful, funds that are needed for future development of the business can be exhausted through personal use.

Question 44

Liquidation

Answer 44

Liquidation is the process by which a company (or a part of a company) is brought to an end. It can also be referred to as dissolution or winding up. During
liquidation, the property, resources and assets of the company are redistributed.

Question 45

Advantages of liquidation

Answer 45

It is a natural way of ending a business’s activities.
It does not involve any negotiations.
It does not create anxiety about transfer of control of the company to another party.

Question 46

Disadvantages of liquidation

Answer 46

It ends any opportunity to explore the potential of the company.
It adversely affects the business’s reputation and relationships.
Shareholders may be unhappy about the money disbursed to them and this can lead to disputes.

Question 47

Management buyout

Answer 47

In this strategy, the existing business owner sells the company to the next generation of managers. This type of transaction is usually carried out with a
combination of debt and private equity investment. Management buyout gives immediate liquidity to the owner through a cash payout, and allows the company
to run as a private enterprise. This model provides a seamless transition for the company and its employees.

Question 48

Advantages of management buyout

Answer 48

It gives senior management the chance to become business owners. The new company has a highly motivated team of employees who are eager to
make a profit and already have an in-depth knowledge of the business. The commercial due diligence will be easier and less time consuming.

Question 49

Disadvantages of management buyout

Answer 49

Managers have to be willing to take on a serious acceptance of risk and financial commitment.
Since this approach invariably incurs additional debt, the company will have to increase its product prices and may not be able to compete on market price.

Question 50

Acquisition

Answer 50

In this instance, another company purchases the business using cash or stock in the acquiring company, or a combination of both. The new owner has the option of making substantial changes to the company’s administration, operation, employees, management and business lines, but may instead choose to retain the status quo.

Question 51

Advantages of acquisition

Answer 51

If your company has strategic value for the acquirer, it may pay far more than your company’s worth.
If multiple acquirers are involved in a bidding war over your company, then the company’s worth increases significantly.

Question 52

Disadvantages of acquisition

Answer 52

It can lead to cultural and system clashes in the merged company.
If the company is organised around a specific target market, that may prevent your company from being attractive to other acquirers.

Question 53

Initial public offering

Answer 53

In the case of IPO, the owner sells a portion of the company on public markets. The management team remains in the place for a period, investors and managers sell stock, and the company continues to operate the same way as in the past. The
company is subjected to additional regulations like Sarbanes-Oxley requirements. Wall Street analysts and investors will scrutinise the company’s quarterly
performance.

Question 54

Advantages of IPO’s

Answer 54

There is a rapid growth in the value of stock.

Question 55

Disadvantages of IPO’s

Answer 55

Few companies have this option available to them.

Much time is spent in selling the company rather than running it.

Question 56

Evaluating the business

Answer 56

Evaluating the business is the process of estimating business value. This can be done on the basis of assets, such as investments in the market, stocks, patents and trademarks, or on liabilities, being bonds. Valuations of businesses are needed for
investment analysis, financial reporting, capital budgeting, acquisition transactions and mergers.
There are several methods to value a business in today’s market, depending on the profitability, nature and size of the business. These methods are described in this section.

Question 57

Financial value of business

Answer 57

The financial value of a business can be calculated using any of the following three methods:
An assets-based valuation
A discounted cash flow valuation
The ROI method.

Question 58

Asset based valuation

Answer 58

This method is used in businesses which are not performing well and where profits are low by comparison to investments. The method does not place a value on goodwill. It derives value purely from the value of equipment and stock held by the business (Navarro, Bromiley & Sottile, 2010). This method of valuation is used primarily when the other valuation methods return a value which is less than the total tangible assets of a business. It is based
on the concept that the business owner is least probable to trade his business for a loss by selling it at less than he can get by orderly disposing of the business assets. Stock is rated at invoice cost. It may also be discounted, depending on the
quantity of slow-moving- or dead stock.

Question 59

Discounted cash flow valuation

Answer 59

The DCF method is based on forecasting of the cash flows in an enterprise. It stipulates that the sum total value of a business depends on future net cash flow
from the business and the discount cash flow tracked back to the present at appropriate discounted rate.
There are two elements used to calculate future cash flows:
The total cash amount generated in a single year
The total cash anticipated from final sale of the business at a period in the
future.

The DCF method is practical where cash flows of the future can be forecast with reasonable accuracy. As a result, this method is extensively used in the evaluation
of mining companies. The method can also be applicable for small- or medium organisations having long-term contracts or where the organisations have a
history of regular cash flows. This method is considered one of the best valuation methods to use. However, it is used mostly by large-scale firms rather than small- and medium-sized
businesses. This is because of the difficulty that smaller companies have to forecast cash flows, estimate future sale price, and evaluate suitable discount rate.

Question 60

Return on investment

Answer 60

Return on investment (ROI) is the most commonly used method to evaluate businesses worth up to R2 million. It is based on the return that an owner receives
before drawing his salary. It reflects the proportion of return that an owner receives on his capital venture in the business. The total profit used in calculation
is not the same that is shown in the profit and loss statement. Several adjustments are made to the profit and loss statement to show the return to an owner and to include non-business expenses and one-off expenses (Hogarth Associates, 2011). The net profit is defined as the return to an owner before tax, interest,
depreciation and owner’s salary. Generally, only the business assets are valued and sold. The assets include plant and equipment industries, stock, trading names, intellectual property and goodwill.

Question 61

Evaluating the value of the business

Answer 61

There are many ways to determine the value of a business. In this section, only a few of these methods will be discussed. They are the earnings before interest and tax (EBIT) method, the price-to-earnings method, the valuation by averaging the results of three (VART) method, and the rule of thumb method. Each of these
methods is now discussed in more detail.

Question 62

Earnings before interest and tax

Answer 62

The earnings before interest and tax (EBIT) method is the most frequently used method for valuation of private businesses worth of approximately R2 million and above. Only a few add-backs are made when valuing a large business. Interest is added back, as is depreciation in some cases. The earnings of owners are not added back as the valuation of the businesses is running under management. The EBIT profit figure is generally used in valuation calculations.

Question 63

EBIT method

Answer 63

The formula used in the EBIT method is:
Value of business = Profit x EBIT multiple
The EBIT multiple that is used can vary from two to six, and is occasionally higher, depending on a number of factors such as:
The total EBIT figure
Growth potential
Stability of sales and profits
The type of industry
Barriers to entry
The ability of the business to generate profits without the owner’s involvement
Market dominance
The quality of the management team.

Question 64

Price to earnings method

Answer 64

The price to earnings (P/E) method is used for valuation of public and private companies. This method is similar overall to the EBIT method, but has two
differences:
The after-tax profit is used in the calculation of value
A different ratio is utilised to compensate for this.

The P/E ratio that is used in calculations is derived from sales evidence. The ratio can also be derived from public company information. The average P/E ratio of a
number of public companies similarto the one to be valued is derived. In the case of private companies, the P/E ratio is discounted by between forty to seventy per cent to reflect the size of the business and lack of share liquidity when compared with public companies.
Private company owners need to bearin mind two factors:
The discount factorthat is explained above
A P/E is equivalent to about 1.3 times an EBIT due to the after-tax nature of the P/E, that is, a P/E of 10 is roughly equivalent to an EBIT of 7.

Question 65

VART

Answer 65

A very common valuation method amongst business brokers in South Africa is the VART method. This method is recommended by the Institute of Realtors. The advantage of the VART method is that it includes different dimensions to the value of a business, due to the calculation and averaging of the results across three valuation methods:
Extra earnings potential (EEP)
Return on investment (ROI)
Payback period (PP).

Question 66

Rule of thumb

Answer 66

This is the least used method for valuation. However, it does have its use in certain This is the least used method for valuation. However, it does have its use in certain