16th November, 2018
By Julius Masaba
I recall last time telling you about the three projects I was working on and here we are.
Now, of the three projects I mentioned last time that am working on, the first one wants to start full-blown production, his historical financial accounts are also good (traction) but with a loss in the first year. His main set back is inefficient, low capacity machinery making him produce small quantities and a product not purified for the market. He is also piloting the product in the market to see if the quality is what the market wants.
Now there is a problem of looking for the market with the small quantities — what if he gets five wholesale buyers who want the product in 3 months time and yet he doesn’t even have three quarters of the quantity/stock? He is also stuck between first producing the purified final product and getting the market/buyers. His dilemma is; “What if he brings in the machinery using the finance we are looking for, produces en-mass and the market ends up not buying the product?
All that said, I have done my job for him as a finance acquisition/sourcing advisor — the financials are in check. The ball has been rolling for the last few months as far as engaging individual and institutional financiers is concerned, targeting grants, equity, convertible debt and if the worst comes to the worst, he contemplates taking pure debt.
However, from my analysis of his financial situation, I barred him from taking any more debt reminding him of the lesson he learnt from the past experience, unless it’s of a very good interest rate. He borrowed close to $1,000 from a local bank at his idea stage. Up to this day, I still wonder how he managed to convince the bank to give him that money! It however made operations sleep for almost a year and a half. His current financing need is between $225,000 and $300,000. But he will take any amount from $20,000 and above. That’s how rugged his financing journey is.
The other, a 5-year old SME is in agricultural value addition. This investee is currently looking for $25,000 distributed as 20% capital investment and 80% working capital. He needs a packaging machine, the balance is for purchasing raw materials, packaging materials and marketing.
He has never done any above-the-line (ATL) marketing, and with poor social media marketing. He has been able to run with traditional channel marketing (produce, pack in the van, hire field sales executives to sell on commission) and it has worked wonders. The only advantage is the young, energetic and hardworking team of young boys and girls.
Currently, we are also eyeing a regional fund. The good side with this investee is the availability of enormous data, traction and the ease with which the financial or revenue projections/forecasts can be made or prepared. Very promising investee but the biggest setback is the poor internal controls/systems. You see, you need to have a good accounting background to discover or identify things like mixing expenses (cost of sales and overheads), share capital and directors injections, director’s drawings and his salary, etc.
If you are a financial or investment advisor and looking for financing for such an investee, please have an overall look at his whole accounting system. Because you will meet a financier who will ask you about the investee’s asset base, cash balance in the bank, creditor days, credit reference status etc. Those are some of the tit-bits in the investor engagement process, especially with individual investors. It’s when you do a full-blown outside-looking-in analysis that you will uncover such…just a due diligence, you may not need an auditor!
This leads me to the third prospective investee, a big but little known player in the Ugandan healthcare industry. I say ‘big’ because this one has existed for over 30 years, but running the business ‘Tata’ style — cash-based transactions. So for this one, my partner calls me one evening and tells me to help him do some assignments and since we were meeting the target individual investor who had said ‘yes’ to the meeting within 5 days, I had to do the assignment in 48hours or less! Those are two sleepless nights of preparing past 2 years management/financial accounts.
For a company that has been in existence for over three decades, while on ground I was shocked to find no proper accounts available. All we could get from the accountant’s office were accounts for the last two years, prepared and the books bound by an outsourced accounting firm! That is one indicator of a poor accounting system. So what did we do? We asked for raw information for the past three years to help us get a confident ground. But key were the fixed asset register, revenues, expenses, debtors, creditors, bank balance, cash at hand, etc.
Trouble was when we were not given the fixed asset register because it was inexistent. Apparently the company management/directors could not disclose the assets the company owned, to any accountant or outsider. Anyway, we went ahead and prepared the accounts amid back and forth communication via email, WhatsApp, SMS, phone calls etc. You will never know how a disorganized a company/client is until you discover some of these things.
Well, we ended up distributing the assignment to another person to make things quicker. Did we even beat the 48hour deadline? Hell NO! My partner’s passport delayed as meeting the investor in the United Arab Emirates (U.A.E)was the arrangement.
Anyway to cut the story short, my partner managed to meet the Arab investor. He had prepared the investee’s business plan well and now it was presentation time. Before he could even finish the first introductory slide about the investee, he was cut short by the investor. The Arab man shook his head and said;
“Wait, what’s going on here? I don’t know about the health sector in Uganda or medical field…I don’t even understand what you are talking about. You know what…I have another appointment somewhere…so what you can do is finish this up with my chief finance officer (CFO) and he will give me details.”
This Arab investor has put up a mega hotel in the heart of Kenya worth billions of shillings and here we were, asking for $50,000,000. He looked at the amount as peanuts because the lowest project he has ever invested in was worth $75,000,000! That’s how ‘unserious’ he said we were.
The trick: DO a background check on your investors!
That’s how terrible the blow was for us. However, it showed that there was some light at the end of the tunnel when we took it up with his CFO as directed. However, there was still much to do as the CFO disclosed to us. The Arab investors had a few terms and conditions.
One was that, we/the investee needed to have at least 10% of the amount being asked for in the bank. That is $5,000,000 as bank balance! Trouble was, while preparing the accounts you have to use the bank statements too to get the cash at bank…and do you know what the investee’s bank balance was reading? About $1,000 (Ushs4,000,000)! That’s how bad it was, for a company that has been in existence for more than 3 decades.
It never ran money though the bank, only cash-based transactions — paying salaries in cash, paying suppliers millions in cash (not cheque), over 50 bounced cheques in a single month, paying contractors in cash, etc. We are still figuring out how to fulfill the Arab investor’s term.
Two was that, we/the investee, need to have a bank account in the U.A.E. Doing that would cost us about $35,000 depending on the company form (joint stock, limited liability company, etc.), and that can only happen if we have a branch of the investee company or a representative office in the U.A.E. Never in my business advisory or finance career encountered such. The reason for that was that the Arab investor could not channel the funds by cross-border wire transfer (direct from investor account in U.A.E to investee account in Uganda).
Ideally, the investor has to give the funds to the U.A.E investee branch/representative office which has a U.A.E bank account and then it wires/transfers the funds to the Ugandan investee bank account (where the head office is domiciled). These Arab investors are smart. The reason for this is to avoid bad investment deals. Many times they have been fleeced of their money due to disappearance by African investees or failure to pay and attempts to sue them turn futile.
Apparently, legal costs also come in. Legal proceedings in a commercial court for such cases most times when handled for instance in U.A.E (after the Arab investor filing a complaint), the case may be referred to the Ugandan courts (foreign) where the U.A.E courts may have no jurisdiction. Also cases of expediting the defendant may at times be fruitless if there is a lot of corruption or if the defendant disappears.
The investors don’t want this back and forth process. So if the investment deal goes bad and need to go to courts of law arises, the Arab investor will just storm the courts and lodge a complaint against the investee branch/office representative in the U.A.E as the area of jurisdiction, not Uganda.
NB: This article first appeared on Medium, by the same author. Click here
About the Writer
Julius Masaba is a private investment researcher and business consultant. He also works with Ablestate, https://www.ablestate.org/ and a WordPress writer/blogger on startups, entrepreneurship, business and finance. He loves tech.