tmp9BF TMP

About The Author
Jacques Magliolo has been an investment and corporate strategist for the past 17 years. His
experience includes stockbroking, financial columnist and journalist, business development
and corporate strategy.
Prior to setting up his own consultancy, he was a director and head of research for a local
stockbroker, where he provided institutions and private clients with industry research,
analysis, presentations, trading strategies and in-depth industry and company reports.
His responsibilities included strategic analysis of global market trends, political and
economic assessments, industrial company analysis, identification of arbitrage opportunities
in warrants and equities and structuring client portfolios. The strategic analysis of global
trends was used to determine which sectors (and thereby companies) would be best suited
for clients asset allocations. It is this experience that drew Magliolo to writing his latest book,
A Guide to AltX.
He is also the author of four previous books, including Share Analysis and Company
Forecasting (Struik, 1995), The Business Plan: A Manual for South African Entrepreneurs
(Zebra Press, 1996), The Millionaire Portfolio (Zebra, 2003) and Jungle Tactics: Global
Research Investment & Portfolio Strategy (Heinemann 2003).
Today Magliolo concentrates on assisting entrepreneurs to restructure their firms to become
more efficient and ultimately profitable. He has developed a four phase approach to
corporate intelligence (outlined in A Guide to AltX) which includes global market research,
due diligence, business plans, corporate profiles and implementation strategies. These four
phases form the basis of this book.
Therefore, this book takes the reader through the four phases to provide a clear
understanding of the complexities involved in undertaking any major project, whether to list
on AltX, undertake a merger, move into new markets or expand globally. Essentially,
undertake the following:
Magliolos clients are from both listed and private firms. His aims are to assist clients through
the entire process to achieve their business goals. Lately Magliolo has been concentrating of
assisting entrepreneurs to value their companies and, where necessary, restructure prior to
listing on the JSE Securities Exchanges new market, AltX.
Moroccan-born Magliolo immigrated to South Africa in 1969 and currently lives in
Johannesburg with his wife and three children.
AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS
Introduction
Is this book necessary?
Planning is not in vogue today. I have met many entrepreneurs who operate because they know
the industry. It is unfortunate that may of these businessmen and women are not in operation
today.
In this globalised world, it takes more than a technical knowledge of the markets to succeed. I have
read many books and articles on this subject, given seminars on numerous occasions and have
spoken repeatedly to groups of professional planners about the value of research prior to listing a
company, moving into new markets, conducting a hostile takeover or simply surviving in this
increasingly hostile world.
In stockbroking there is a Chinese wall between corporate finance and research. Analysts are not
permitted to know which projects or clients financiers are working with for fear of trading
irregularities. If, for instance, I knew that the finance division was busy drawing up a prospectus for
Client X, I could deduce that this client was in the process of expanding his business. If this was
the case, I could buy the shares of this company and wait for the announcement and, usually, a
price movement. This could constitute insider trading.
However, planning without research is simply firing in the dark. Take, for instance, the story of a
client who wanted to expand his chemical business into sub-Saharan Africa. His original brief was
to write a business plan to build new factories in Tanzania and Malawi. When I started to ask
questions on the market, regulatory requirements, environmental, economic, empowerment and
other issues, the entrepreneur was almost clueless. He knew his business well, but had little
knowledge of the environment and factors that affect businesses.
Planning is thus unfashionable. Let me quickly stress true planning based on a solid foundation
of research is not yet commonplace. More importantly, putting into practice a solid strategy is still
rudimentary in many parts of the world. This problem is by no means unique to South Africa. As
Mark Twain said about the weather, everybody talks about it, but nobody does much about it.
There are very few American, British or French companies I have encountered over the past 15
years that have well developed long-range plans. A minorityprobably less than 25% can
produce five-year forecasts of sales of existing products or projected earnings based on
extrapolation of past trends, but these cannot be considered comprehensive business plans.
If you want to list on AltX, you will need to be coordinated. Again, I need to stress a point here
you need a strategy not just to list, but to maintain success after listing. The aim of this book is not
to provide entrepreneurs with a specific strategy, but to set out a general methodology to increase
the chances of being granted a listing on AltX and to maintain a level of success after becoming a
public company.
This book is thus set out in three parts; as explained in the Preface: How the Book Works.
Why is there a lack of strategy?
I believe there are three reasons underlying this deficiency. Firstly, many senior executives do not
really believe that planning a strategy is necessary or, if they do, they cannot find the time needed
for it. Continued prosperity and current operating demands relegate planning to a low position on
the priority list.
Secondly, managers have difficulty in turning planning theory into practice. While they can accept
-2-
the underlying concepts, they encounter serious problems in applying them in a practical fashion to
their own business. Planning becomes an added and confusing task instead of an integral part of
the management process.
Thirdly, in my experience special approaches to planning are required for different kinds and sizes
of businesses and the literature has not yet recognized this. This book is mainly directed at
managers in businesses of SMEs that perhaps have two or more divisions. While it is not
specifically intended for large, diversified public companies, perhaps many will find that they have
strayed from plans or have never implemented them.
The purpose of this book is thus to help to resolve these three deficiencies by demonstrating the
urgency for planning prior to a listing, and by providing a practical approach that medium-sized
companies can follow. It is intended to serve as a working guide for managers in developing and
putting into use an integrated system of business planning that will lead to a listing and, ultimately,
increased profit. If it helps them towards this, my objectives will have been achieved.
Of course, following on from my book The Millionaire Portfolio (Zebra, 2002), investors will find this
book interesting in that it will help them to evaluate the potential of AltX companies to form part of
their portfolios.
It is not my intention to summarise The Millionaire Portfolio in this book, but one of the most
relevant sections of that book was on ratio analysis which needs to be expounded on in Part One
of this book. To avoid re-doing a whole chapter, I have inserted only the mathematical formulas in
the appendices.
It is important to note that investments, such as shares traded on AltX, are subject to various risk
factors. Stockbrokers, who are allocated Designated Advisor status by the JSE Securities
Exchange, will consider whether these are suitable investments for their private customers and
give the appropriate advice and risk warnings.
All these issues are discussed in this book.
Gender note: Where the words he or him are mentioned, the feminine is also implied.
Jacques Magliolo
bci@magliolo.com
January 2004
-3-
Foreword By Noah Greehill

A Guide to AltX
2004 is hopefully to be a year to be remembered positively. All indicators seem to
be in place. It is the year where the focus will be on the progress South Africa has
made ten years after the first democratic elections. And many would agree that
this country had done remarkably well.
Our economy is the most robust for many years, there are plans in place to roll
out the anti retroviral programme to deal with one of South Africas most pressing
issues and our matric pass rates continue to improve quite dramatically year on
year.
At the JSE Securities Exchange (JSE) we too are confident of a fine year. We are
certainly not going through the listings boom of the late nineties when everyone
and his beleaguered poodle were listing. We are, in fact still experiencing the
fall-out of that time, with the JSE attracting only five new listings for 2003.
We view this simply as a market correction and a clean up of some dodgy
historical listings. Much has been done to ensure investors of a safer investment
opportunity with a stronger focus on corporate governance and more stringent
listing requirements.
AltX, Africas first alternative exchange was opened in October 2003. At the time
of writing we have three listings lined up and are bullish on the growth of this
new market. We have been astounded at the interest shown by many
entrepreneurs.
It has become clear that there are two types of good businesses. Those excellent
businesses suitable for a listing, and those, which for various reasons are not.
We are looking for the businesses that would support the type of market we want
to create.
It is particularly helpful that Jacques Magliolo has written A Guide to AltX as it will
help prospective companies to discern whether they are suitable for a listing. It
will also prove helpful for those investors who want a more in depth
understanding of the workings of AltX.
We believe that the success of the market is based on three things: number of
companies listed, combined market capitalisation and liquidity. From my point of
view these can only begin to be measured two years from now.
The Department of Trade and Industry (the dti) has partnered with the JSE on
AltX and endorses and supports the new initiative. The aims of AltX and that of the
dti are the same we are seeking to support the building of successful, large
South African businesses.
We are building AltX on the premise of quality. Since our first announcement at
the end of June 2003, followed by the appointment of Designated Advisers (DAs),
we have been meeting with numerous companies that believe themselves to be
suitable for an AltX listing. A couple of these companies have even presented to
the AltX Advisory Committee mandated to recommend new listings on AltX to

the JSE.
Everyone directly associated with the new market is committed to the principle of
quality. We want to build a quality market with a virtuous spiral; quality
companies, quality investors, quality results, which will attract more quality
companies.
The sales cycle of a listing is anywhere between two months (for a transfer from
one of the other boards) and eighteen months (for a completely new listing). We
are expecting transfers from the Venture Capital and Development Capital
markets which are to close at a still to be determined date. Issuers listed on
these boards will need to apply for an AltX listing in the same way as a totally
new listing and transfers are by no means automatic.
The AltX quality chain begins when a potential issuer applies via a DA. DAs are
the guardians of the listing requirements and will guide the company through the
initial listing process as well as the maintenance of their listing. The company and
the DA present the application to the AltX Advisory Committee, which comprises a
number of industry experts who carefully evaluate the suitability of the company
for listing.
Interestingly, companies that have presented to the committee so far, have not
been turned away outright. The committee has generally made pertinent
suggestions for short-term growth or change, and recommended the company
return at a later date.
Once a listing is approved, all executive and non-executive directors are required
to attend the Directors Induction Programme. The aim of this programme is to
enhance director education, thereby avoiding the excuse, we didnt know that.
The bedrock of the South African economy, SMEs and particularly black economic
empowerment businesses simply have to be given a viable opportunity to raise
capital and grow. The JSE is confident that it can meet the needs of these
entrepreneurs through the AltX approach of ongoing sales, marketing and
relationship management. AltX will be providing you with a wider, and make no
mistake, quality investment horizon.
We are keen to assist you if you are interested in more information:
www.altx.co.za
altx@jse.co.za
T 0861-00-ALTX
Noah Greenhill, AltX manager

Johannesburg, January 2004
Noah Greenhill is responsible for AltX, a division of the JSE Securities
Exchange.
Contents Page
Introduction
Is this book necessary?
Why is there a lack of strategy?
Foreword
By AltX manager Noah Greenhill
Preface
How the book works

Essence of the four phases
PART 1: BEFORE LISTING FACTORS TO CONSIDER

Chapter 1: A Starting Point
Whats NEW?
PHASE ONE: RESEARCH
What is fundamental analysis?

Measuring a company's financial health
o Measure of solvency
o Measures of liquidity
Why bother with market research?
DIY research
Is listing viable?
Structural analysis of the industry
The structural analysis within industry
Analyzing industry scenarios
Evaluation of capital requirements
The top down approach
Requiring capital
Sources for established businesses
Private equity financing
Going public: The IPO
The back door method of listing
o Cash shells
o The reverse take over
Methods of obtaining an IPO
Debt financing
Government Sources
General financing considerations
Regulatory issues
The last word on financing
Chapter 2: How much is your company worth?
Past profitability
Why value the business?
Three basic criteria affect valuation.
The circumstances of valuation
-5-
Valuation techniques
o Industry rules of thumb
o Entry cost valuation
o Equity-based valuations (asset)
o Earnings-based valuations
o Multiples
o Revenue-based valuation
o Yield-based valuations
o Member-based valuations
o Discounted cash flow valuation (DCF)
o Some financial statement explanations
The Balance Sheet: Cash & Working
Shareholder's Equity & Book Value
Discounted future cash flow method and continuing value
Chapter 3: Valuing Start-up Companies
Market Approach
Cost (asset-based) approach
Income Approach
Reasons to VALUE start-ups
Chapter 4: Nine Steps to Determining Investment Value
Fair market value vs. investment value

The nine steps
Chapter 5: Due Diligence - The Final Stage of Preparation
PHASE TWO: UNDERTAKING DUE DILIGENCE

What is due diligence?
Why is due diligence conducted?
Who should conduct a due diligence?
How is due diligence conducted?
How much due diligence needs to be conducted?
Can I overdo my due diligence effort?
How much does due diligence cost? who pays for it?
How do you maintain confidentiality during a due diligence engagement?
Does due diligence ensure that a business transaction will be successful?
Listing on AltX
PART 2: LISTING REQUIREMENTS & OTHER REGULATIONS

Chapter 6: The Basics of IPOs
What is an IPO?
Why does a company go public?
How the company uses the proceeds?
How to participate in an IPO (purchase shares at the offering price)?
Picking the right broker
A more level playing field?
IPOs that win
Continually gather market intelligence
-6-
IPO logistics
The road show
Chapter 7: Overview of the Alternative Investment Market
Suited for SMEs

Nomads and brokers
Movement to the main board
Eligibility of companies applying to AIM
Can South African companies list on AIM?
Requirements
What you need to know before applying to AIM
Benefits of joining AIM
Chapter 8: The South African Listing Process
PHASE THREE: BUSINESS PLAN, CORPORATE PROFILE & PROSPECTUS

The business plan
Writing a business plan is a dynamic process
An efficient business plan has the following information
Using the plan
The corporate profile
The prospectus
Introduction to the JSE Securities Exchange
Equity vs. debt financing: reasons to list?
o Funding
o Exit strategy
What are the disadvantages of listing?
The listings process
The corporate advisor
Sponsor
Underwriters
Transfer secretaries
Legal advisor
Accountant
Technical advisor
Listing time frame
Public relations consultant
Which market should the entrepreneur chose?
o The Main Board
o The Development Capital Market (DCM)
o The Venture Capital Market (VCM)
o AltX
Chapter 9: An Introduction to AltX
An introduction to AltX
At last, a SME Stock Exchange
Advantages for companies listing on AltX
The challenge for entrepreneurs
Clearly, there is a need for AltX
Chapter 10: AltX Listing Requirements
Section 21
-7-
List of DA Functions to be undertaken for companies listed on AltX

Sections relating the appointment of DAs
Responsibility of DAs
Shares held by DAs
Termination of contract
Other sections
Two sets of fees
Application for transfer to AltX from another sector/market/board
Corporate governance
The advantages of good governance
Keys to success
South Africa and King II
Corporate governance self assessment
PART 3: AFTER LISTING WHAT NOW?

Chapter 11: The Implementation Phase
Implementation forms part of the company

Why planning for the future is crucial
The insourced analyst division
Implementing the business plan
What are the prospects for the business?
Characteristics of success
Manage the process
How business planning can help
Why business planning is a must
The project managers task
The project managers planning process
The circle of planning and implementation never ends
Chapter 12: Seven Key Elements to Dynamic Success
The seven key elements to dynamic success

Strategic planning, resource commitment and implementation
Planning is a management responsibility
Good planning requires a top down approach
Good planning requires a planning system
The management task determines the form of the planning system
The process of planning is more import ant than the planning documents
Good planning requires gradual development
Chapter 13: Post IPO Public Relations
Post IPO communications

Mining databases
Growth strategy
Investment merits
Objectives and messages
Getting & keeping attention
Ongoing programme
Evaluating the programme
Chapter 14: Assessing stakeholder expectations
Who are the stakeholders?

-8-
Conflict and owner expectation

Assessing attitudes
Chapter 15: The Analysts Report
Coverage increases price

Multiple analysts maximize price
The Analysts Report
Appendices
1. References
2. Ratio analysis information
3 Sample business plan contents page
4. Sample prospectus contents page
5. List of designated advisors
6. JSE & AltX listing price lists
7. South Africa Stock Exchange listing requirements
8. Sample global analytical research report
9. Glossary
-9-
Preface
How the Book Works
DEFINITION: AltX is the short form of Alternative Exchange of South Africa. This
is a new stock market that is parallel to the main board of the JSE Securities
Exchange and targets Small to Medium-sized Enterprises.
After my many years in stockbroking I realized that all projects have extremely similar patterns that
need to be completed before success can be achieved. Whether the intention is to list on AltX,
merge with another company, conduct a hostile takeover or move into a new market, there are four
phases that need to be completed.
Of course, many entrepreneurs believe that taking a short cut presents no discernable increase in
the risk of failure. With AltX, such short cuts will quickly result in dismal share performance and
ultimately investor disinterest.
So, unfortunately there can be no shortcuts if you intend to list on AltX. Remember that every
aspect of the process is aimed at:
1. For the entrepreneurs benefit to better understand the market that he is operating in.
2. For the benefit of investors who may wish to buy the newly listed shares. These are
represented by the media and financial press agents.
This book aims to reduce the potential for failure by explaining the four phases for a listing on AltX.
These are:
Note that these four phases are split into three sections, which also form the basis for this book.
The need for a strategy is threefold:
Prior to listing
During the listing process
After becoming a public company
- 10 -
As head of research and a director of a local stockbroker between 1996 and 2000, I was
continually surprised that many that as many as 96% of entrepreneurs didnt have a business plan.
Those that had, showed me a plan that was often so old that it had no relevance to the
entrepreneurs current business.
I also discovered that almost all (again, 96%) of entrepreneurs operated without in-depth market
research of their own industry. Most had no idea what the market was all about they were, in
many respects, operating on pure gut feel. No wonder that 66% of businesses in South Africa go
bankrupt every year. I also discovered that the problem is often one of funds. Small to medium
sized companies often cannot pay the large accounting houses and stockbrokers millions of rands
to conduct proper research to successfully implement growth and other strategies.
They had also not conducted a due diligence on the viability of a new project. I found that even
when entrepreneurs had conducted research and due diligence and had drawn up a business plan,
successful implementation was often a problem. By implementation, I refer to undertaking the
necessary steps to successfully merge operations with another company, obtain financing or list
the company on AltX.
Given the above scenario, the four phases to corporate finance can also be used as a filter to
determine whether a project is viable (proceed to next phase) or not (shelve or reject the project).
o
PHASE 1: RESEARCH. Global, regional and domestic research is crucial to identify

main competitors, trends that could affect supply and demand, pricing, marketing,
financial and operational strategies. Many entrepreneurs draw up strategies without
properly understanding their own market. Entrepreneurs need to understand that once
they have listed on AltX, they will be required to answer analysts questions on market
trends and influences from global and emerging market movements. A clear cut industry
analysis forms the foundation to long term success as a listed company.
PHASE 2: DUE DILIGENCE. If the research indicates there is a strong possibility that a
listing on AltX will provide the entrepreneur with the opportunities and avenues he is
looking for, then proceed to due diligence. This is an assessment of the entrepreneurs
business (idea or going concern) relative to the research. Yet again, this process will
highlight problems, strengths and weaknesses in the long term strategy of the company
as a listed vehicle. It also forms a large part of the business plan and prospectus.
PHASE 3: BUSINESS PLAN. If the due diligence confirms the viability of the project,
then (and only then) would one write a business plan, prospectus and corporate
profile. Reasons for writing these documents are set out in this book, which include the
different aims and targets of these documents.
PHASE 4: IMPLEMENTATION. OK, now everything is in place to list. What now?

Final documents have been written, the strategies set out in the plan have to be
implemented. Thus Implementation is the final stage of the process and includes how
the entrepreneur should set up a corporate advisory service to continually monitor
progress, update research and implement new legal requirements (for example, the
King II report on corporate governance). Under AltX entrepreneurs will be required to
meet all the post listing prerequisites, which include providing the analysts with
analytical reports at least four times a year, press releases and submissions to SENS
(Stock Exchange News Services) of annual and half-yearly financial results.
Note that research is based on four environmental factors, namely Politics, Economics, Business
and Technology.
- 11 -
Essence of the four phases

An entrepreneur who undertakes the first phase will soon find out if his project idea is viable or not.
If it is not viable, a strategy should offer two options.
o
Reject the project outright, e.g. Too many competitors, regulatory issues, market too
small etc.
Shelve project to another time: The timing to launch project may not be right, e.g. war
in Iraq, Rand exchange rates, interest rates etc.
If viable, then he moves on to the next phase etc. as per the following diagram.
In effect, this book is a three-step approach to listing on AltX.

It is a guide to help entrepreneurs to do their homework before, during and after listing on AltX. If
you are a beginner, I recommend following these steps religiously. If you are an experienced
entrepreneur, I suggest that you co-ordinate the process yourself. The information gleaned during
the analytical methodology will be useful when you have to face a room full questioning analysts or
journalists.
- 12 -
PART 1:
Before Listing Factors To Consider
"Forecasts usually tell us more of the
forecaster than the future" US billionaire &
market expert Warren Buffett
Section Includes:
PREPARATION
PHASE ONE: RESEARCH
COMPANY VALUATION
PHASE TWO: DUE DILIGENCE
- 13 -
Chapter 1
A Starting Point
For the purists, an explanation of the term Corporate Growth Strategy is perhaps in order. I am
attempting to deal in this book with an integrated strategy for all the activities of a business
enterprise with the aim of listing on AltX, which will in turn generate the action needed to fulfill
corporate plans.
To me, this embraces both long-range planning (strategic and operational planning) and shortrange planning (annual planning or budgeting). The term I initially used for this total process was
profit planning but this now seems to be used too frequently in a narrower sense of turnover and
profit relationships so, to differentiate the emphasis of this book to other business Planning, I
have come up with my own terminology. Corporate planning means different things to different
companies, but the most frequently encountered activity of corporate activity appears to be
acquisition and merger studies. I have specifically not dealt with these issues in this book.
Almost by process of elimination, the term Corporate Implementation Strategy has been
chosen to describe a total approach to improving long-term profitability by identifying opportunities
through in-depth research, allocating resources and organizing for immediate and longer-range
action to achieve desired results. Of course, many SMEs today cannot achieve their desired
targets due to a lack of available cash flow. Listing on AltX is the single most important recent
event to appear on the South African business calendar, which I believe will expedite SMEs
obtaining funds to grow their businesses.
Whats new?
Much of the content of this book is a mesh of books and articles that I have written during the past
decade, melded together with years of practical experience in stockbroking, as a development
analyst and businessman. Remember that this book aims to set out a strategy that should enable a
listing on AltX, so I have limited the text in some instances to the essence of the subject and have
avoided in-depth discussion. For instance, under the business plan section of this book, have keep
to issues pertaining to AltX and not all aspects of a business plan. There are many books on
business plans, due diligence and research techniques. Many of these are available on the Internet
and I will gladly provide you with assistance if you contact me on bci@magliolo.com.
I would also like to acknowledge the help provided by Noah Greenhill, manager of the newly
formed and launched AltX. My purpose, therefore, is to produce a compact, readable volume that
provides senior and middle managers with:
An understanding of the philosophy and principles of strategy in business, with specific

emphasis on listing on AltX.
An appreciation of the inter-relationship between external research, internal business

planning systems and the processes of logical goals to achieve a listing.
A belief that achieving a listing is merely the start of the process of achieving long-ter
success.
An approach to the planning process from start to finish; by using practical methods that
recognize problems as they arise.
Although there is nothing particularly new in the concepts of strategic planning described here,
there are perhaps a number of aspects that I consider unique:
The concept of total business planning and control through a systematic, continuous and
- 14 -
integrated approach to analyzing all the activities of the enterprise relative to global markets.
The commitment of strategic plans to writing in a manner that impels action by those responsible for achieving results.
The ability to isolate any part of the process before incurring major expense. For instance, if
the research phase determines that a listing on AltX would not be beneficial for the
entrepreneur, the process could be stopped or diverted to finding a better route for the
company.
To maximize the drafting of documents in a manner that enables the entrepreneur to use
these for various purposes. For instance, once a business plan has been drafted, the
information can be used to draw up a corporate profile, which can be used to promote the
firm to investors, financiers, analysts, journalists and private clients.
PHASE ONE: RESEARCH

There are various types of research, but each form has a logical methodology that aims to get a
specific answer within a pre-determined timeframe. In the case of listing a company the importance
for the entrepreneur is to prove to himself that the market is conducive for a listing. There is no
point in listing a company that will face 14 competitors, high barriers of entry, emerging market
threats, currency risks and so on. These factors are among a host of issues that analysts look at to
determine the viability of investing in a company. This is what they call Fundamental Analysis.
What is fundamental analysis?
Fundamental analysis is the analysis of the financial strength of the company and factors that
influence such decisions are taken into account. There are two approaches to fundamental
analysis, i.e. top down approach and the Bottom up approach. In the following section, I will briefly
explain the bottom-up approach, but concentrate on the top-down method.
In the top down approach, the overall general factors are first analyzed to judge the general
direction in which industry is headed. The general outcome is thus a list of industries that should
perform well, given the general trend of the economy, political scenarios, business trends and
technological innovation and development; these conditions enable broad based analysis to be
conducted to determine whether further analysis is needed.
Measuring a company's financial health
To gain a true picture of a company's finances means not only scrutinizing the financial
statements, but also analyzing relationships among various assets and liabilities, thus highlighting
trends in a company's performance and changes in its financial strength relative to its competitors.
The aim of this book is not to explain how to read a company's financial statements, but to
concentrate on the use of financial statements to value a company. One way of assessing financial
strength is to conduct a full ratio analysis of the company. This is set out in great depth in my book
The Millionaire Portfolio, Zebra Press, 2002.
A full filter system using ratios is set out in The Millionaire Portfolio. Consider the following:
Measure of solvency: Debt-to-equity ratio (also called gearing) provides a measure of a

company's debt level. It is calculated by dividing total liabilities (short and long term debt) by
shareholders' equity. A ratio of 1-to-2 or lower indicates that a company has relatively little debt.
Ratios vary, however, depending on a company's size and its industry, so entrepreneurs and
investors must compare a company's financial ratios with those of its industry peers before
drawing conclusions. This ratio is mostly expressed as a percentage, so the higher the ratio the
more debt ridden the company is.
- 15 -
Measures of liquidity: Current assets divided by current liabilities yields the current ratio, a
measure of a company's liquidity, or its ability to meet current debt. The higher the ratio, the
greater the liquidity. As a rule of thumb, a healthy company's current ratio is 1.5:1 or greater.
The top down approach to research is more logical. Starting with global analysis of markets and
industries and honing that research down to the region sub-region, country and sector.
The following diagram explains this process:
EXAMPLE
Recently, I was commissioned by one of South Africas largest accounting houses to assist a client
of theirs. The brief was relatively simple. Evaluate this company to take it through to an AltX
listing.
Within 30 minutes of talking to the client I discovered a number of incredible facts:
The client wanted to list without understanding the fertilizer industry; its influence on their
market, cyclical nature of sales, consumer demands or future forecasts. They had practically no
understanding of the local market, never mind global trends, or regional effects on the local
market.
They had no idea of the value of their company, nor could they tell me how much they wanted
to raise on listing.
They knew that there were competitors in the market, but just who these were seemed a
foreign concept to them.
In addition, they did not have a business plan or strategy document. They were, in fact, working in
the dark. Despite this, they were relatively profitable, but on closer scrutiny I saw that this family
business now run by the son was slowly going under. The entrepreneur, on the advice of the
accounting house, commissioned the four phases to implementation. Some five months later,
research was completed and conclusions were that the project had a high probability of success
if certain changes were undertaken.
Here is an example of a company that is today ready to list. If the entrepreneurs had approached a
- 16 -
stockbroker to list, they would have been turned away. This happens to many entrepreneurs, who
walk away without knowing why they failed to meet listing requirements.
The requirements set out in Part Two are not the only criteria that will get a company listed. In
essence, a company may meet the listing requirements, but fail to display sound knowledge of the
market from global trends to country specific research to sector analysis.
The following is a summary of how research helped the company to prepare for an AltX listing.
o
New technology made it possible to forecast fertilizer trends in Africa. This indicated that
shortages would continue to occur for at least the next two decades. Demand factors were thus
not an issue. In addition, the company had patented a fertilizer that is cheaper than their
competitors and more potent, enabling crops to grow quicker, stronger and be more resistant to
bugs. Their method was not biological, but an enhancement of current methods.
Politically, many countries were attempting to move away from environmentally unfriendly
fertilizers, which are major pollutants. So-called environmentally fertilizers are in great demand
worldwide.
Business trends indicated that the major players had to include downstream products into
their business. They also had to use by-products derived from the production of oil. This
included ammonia, which is a by-product of petroleum production.
Economic trends indicated that the OECD region had moved from a net exporter of fertilizer
to a net importer. This meant that the region offered export opportunities from companies that
had successfully explored market and industry opportunities in Africa.
Research identified three potential companies in South Africa, namely Sasol, Omnia and
international company Kimera.
The next step was to undertake a full industrial analysis of the companies. Using Ratio
Analysis, I discovered that the client had poor cash flow, had numerous areas where
duplication of costs were being encountered, transport costs of transporting the fertilizer was
exorbitant and revenue was poor. After restructuring the firm, I was able to remove duplication
costs, and re-align the firm to meet analysts expectations of listed entities.
Why bother with market research?

Anyone who's ever worked through a business plan knows the answer to this one. Trying to list a
small business without researching potential markets and industry trends is being as sensible as
trying to surf with a lead board. In addition, market research isn't just something that is undertaken
to meet listing requirements by working on a business plan or prospectus; then simply shelved. It
needs to be an integral, ongoing part of a business' development.
It's crucial to analyze the market being targeted before wasting money on advertising that won't get
the results expected. Market research is also critical before spending time and money developing a
new product or service.
I'm always amazed at the number of entrepreneurs who just seem to do whatever they feel like
doing. For instance, several months ago, one local businessman, who has specialized in the
production of bathroom tiles for years, decided to start selling go-carts. Now they have a fleet of
go-carts lined up outside their business with a huge "Must go - prices slashed" banner over them.
For one thing, go-carts had nothing to do with the companys core business, so why would their
regular customers be interested in them? For another, even cursory research into the population
demographics would reveal that the majority of consumers in this companys area of business are
- 17 -
elderly and, therefore, are probably unlikely to buy go-carts.

My guess is that the business owner became personally enamoured with go-carts and decided to
sell them because he liked them. I like lots of things, but that doesn't mean that investing my time
and money to sell them to other people is a good idea. Investing time and money in market and
industry research can , therefore save the entrepreneur a lot of cash outflows, worry and losses.
Conducting market research essentially means gathering the information you
need to make decisions about your business. It's the systematic gathering,
recording and analyzing of data relevant to selling the goods and/or services you
produce.
There are many market research companies which will be glad to conduct industry analysis for
you. If, like many small business owners, you find hiring a company to do market research isn't in
your budget, you could opt to do your own research. The next section is a basic methodology on
how to conduct this research.
DIY research
Doing market research isn't difficult, although it tends to be time consuming. In the case of many
small businesses, entrepreneurs continually researching their markets, although they do so in an
informal manner. Every time an entrepreneur talks to a customer about what he or she wants, or
chats with a supplier or sales representative, he is conducting market research.
However, formal market research is also necessary to keep a business vital and growing. As a
listed entity this is compounded by investor sentiment towards the share. A lack of solid research
will only result in loss of confidence in management and thus share price.
On a simplistic level, market research can be seen as a grid.
Customer
Competition
Environment
Secondary
Primary
The grid shows the two types of data sources and the three areas of research that are important to
any business. The businessman needs to gather information from and about his customers to
focus on (and ultimately hone) his marketing efforts, maintain and improve customer service and to
guide efforts in developing new products and/or services. This would all be described in the
business plan and this prospectus.
Competition: Information gathered about the competition can help to determine what has and has
not been effective, provide ideas for improving products and/or services and gain insight into how
to increase or shift market share. This area is of particular importance to analysts, who are
continually assessing the competitive market to determine which competitors will win over the
other.
Environment: The environment refers to those political, economic, business and technological
forces that shape business within a geographical area. Gathering information about the
environment allows the entrepreneur to stay abreast of and respond to particular trends or events
that could impact on small businesses. Whether it's a predicted drop in interest rates, or the
closure of a local mill, it is crucial to be aware of it and judge the ripple effect on the entrepreneurs
business, for positive or negative influences. In addition, some factors could be both positive and
negative and how these will affect a business will be specific to that business. For instance, a drop
in interest rates will benefit companies with debt, while companies with cash in the bank will earn
less interest income.
- 18 -
Secondary data sources are those databases that are available to the public, some free, some
not. Telephone books, government publications and sources such as statistics, trade journals and
surveys conducted by other companies are all examples of information that's already been
gathered that an entrepreneur can use to get a fix on what his customers want, what the
competition has done and what the environment is likely to do in the near future. There are many
web site links to valuable secondary data sources. If you require assistance, contact me on
bci@magliolo.com.
Sources of secondary market research data?
Local library
Business Service Centres
Economic Development Departments
Business Development Banks
Media (survey data)
Local offices of trade associations
Chambers of commerce
Consulates and embassies
Colleges, universities and technikons
The Internet
Other government agencies and departments
Bureaus of statistics
Private organizations who conduct market/regional studies
Primary sources provide firsthand information. When customers are surveyed or questioned
information is being obtained directly from the source. While this kind of data can be the most
costly and time-consuming to gather, it can also be the most valuable, because it's the most
current and the most specific. Often, it is this form of research that provides a small company with
the necessary competitive edge that is needed to survive and prosper as a listed company.
Sources of primary market data?
Customer service inquiries.
Salespeople and prospects.
Competitors.
Trade journals.
Service and professional organizations.
Complaints.
People who are retired from the industry.
Mentors.
Primary: Generated first-hand by the business through customers, employees,

suppliers.
Secondary: Data that already exits. It comes from outside sources and includes
census reports, surveys, statistical databases and other research documents.
Is listing viable?
The first step in industry analysis and market research is to frame the question or questions that
need to be answered. Suppose, for instance, that I run a successful retail business selling leather
furniture made for the exclusively wealthy market in Johannesburg. My analysis suggests that I
need to have more products before I can list on AltX. After additional analysis, I deduce that the
curtain industry looks like a good fit.
The question: Will adding a curtain division to my business enable me to get critical mass to list on
AltX?
Through monitoring business trends (reading as many magazine, newspaper, online and trade
- 19 -
journal articles as possible related to South African business), I discover that consumers are
increasingly concerned about recycling and could in future move away from using curtains to
buying blinds. The research is, however, not completely supported by more in-depth analysis of
global, regional and South African trends. I conclude that this is just a gut feel and I need to
conduct proper research.
For a question of this nature, the most important area that would be researched would be the
Sector Analysis outlined in the previous diagram. Under this section, analysis is threefold:

Structural analysis within the industry
Analyzing industry scenarios.

This research is more general, looking at the company within its environment. Although the
relevant environment is broad, encompassing factors such as socio-economic forces, as well as
political, business and technological factors, the key aspect of the firm's environment is the
industry or industries in which it competes. Industry structure has a strong influence in determining
the competitive rules as well as strategies potentially available to the firm.
Competition in an industry is rooted in its underlying economic structure and goes well beyond the
behaviour of current competitors. The state of competition in an industry depends on a number of
basic competitive forces, which determine the ultimate profit potential in the industry. Here profit
potential is measured in terms of return on invested capital. Analysts and portfolio managers will be
quick to question the entrepreneur on such issues after the company is listed on AltX. Not all
industries have the same potential. They differ fundamentally in their ultimate profit potential as the
collective strength of the forces differs.
It is the key structural features of industries that determine the strength of the
competitive forces and hence profitability.
The goal of competitive analysis for a business unit in an industry is to find a position in the
industry where the company can best defend itself against these collective forces or can influence
them in its favour. Since the collective strength of the forces may well be painfully apparent to all
competitors, the key for developing strategy is to delve below the surface and analyze the sources
of each.
Knowledge of these underlying sources of competitive pressure highlights:
The critical strength and weaknesses of the company.

Clarifies the areas where strategic changes may yield the greatest payoff.
Highlights the areas where industry trends promise to hold the greatest significance as either
opportunities or threats.
Structural analysis applies to diagnosing industry competition in any country or in an international

market, although some of the institutional circumstances may differ.
The bulk of my research will be customer based. Start with a survey of current customers,
focused on whether they would be interested in a new service from your company. This could be
as simple as asking everyone who came into the store, or as formal as a questionnaire. If the
response was positive according to the criteria set out, the next step would be cold calling within
the targeted population. If these were positive, the next step would be more in-depth interviews
with selected respondents.
As research proceeds, it needs to become more specific. The first customer survey might be
as simple as, "Would you be interested in a curtain business?" But if indications are positive, the
entrepreneur needs to know a lot more than just whether or not customers are interested. For
- 20 -
example, I might ask how many times a year the respondent would use such a service or how
much he would be willing to pay to change curtains in their homes. Generally, the more detailed
and specific the information I gather, the more useful it will be to make a decision.
However, at this stage research is still very general, assessing factors such as threat of entry,
intensity of rivalry among existing competitors, pressure from substitute products, bargaining power
of buyers, bargaining power of suppliers and government as a force in industry competition.
The structural analysis within industry
This is based on the identification of sources and strength of the five broad competitive forces that
determine the nature of competition in the industry and its underlying profit potential. It is clear,
however, that industry structural analysis can be used at greater depth than the industry as a
whole. In many industries, there are firms that have adopted very different competitive strategies,
along such dimensions as breadth of product line and degree of vertical integration, and have
achieved differing levels of market share.
The five broad competitive forces are:
New entrants to the market

Competitive rivalry
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitutes.
How does a firm choose a competitive strategy when it faces major uncertainties about the future,
whether the uncertainty is political, economic, business or technological? Industry structure is not
static and many firms in industries face considerable uncertainty about how structure will change in
the future. The sources of uncertainty are numerous and originate both within the industry and in
its broader environment, i.e. global, regional and within the country. Most observers would agree
that uncertainty has increased dramatically in the last decade, due to such things as fluctuating raw
material prices, swings in financial and currency markets, deregulation, privatization, the
technological and electronics revolution and the growth of international competition.
Brand is the most intangible element to a company, but quite possibly the one most important to a
company's ability as an ongoing concern. If every single McDonald restaurant were to suddenly
disappear tomorrow, the company could simply go out and get a few loans and be built back up
into a world power within a few months. What is it about McDonald's that would allow it to do this?
It is McDonald's presence in our collective minds -- the fact that nine out of 10 people forced to
name a fast food restaurant would name McDonald's without hesitating. The company has a wellknown brand and this adds tremendous economic value despite the fact that it cannot be
quantified. Some investors are preoccupied by brands, particularly brands emerging in industries
that have traditionally been without them.
The real trick with brands, though, is that it takes at least competent management to unlock their
value. The major buying opportunities for brands ironically comes when people stop believing in
them for a few moments, forgetting that brands normally survive even the most difficult of shortterm traumas.
Intangibles can also sometimes mean that a company's shares can trade at a premium to its
growth rate. Thus a company with fat profit margins, a dominant market share, consistently
estimate beating performance or a debt free balance sheet can trade at a slightly higher multiple
than its growth rate would otherwise suggest. Although intangibles are difficult to quantify, it does
not mean that they do not have a tremendous power over a company's share price. The only
problem with a company that has a lot of intangible assets is that one danger sign can make the
premium completely disappear.
- 21 -
Analyzing industry scenarios

This provides the entrepreneur with a powerful device for accounting for the possibility of
uncertainty in making strategic choices. These allow a firm to move away from dangerous, singlepoint forecasts of the future in instances when the future cannot be predicted, which is even more
pertinent when assessing emerging markets. Scenarios can help encourage entrepreneurs to
make their implicit assumptions about the future explicit, and to think beyond the confines of
conventional wisdom. It is then possible to make well informed decisions about how to take the
competitive uncertainties it faces into account.
In competitive strategy, the appropriate unit for analysis of scenarios is the industry, i.e. termed
industry scenarios. These allow a firm to translate uncertainty into strategic implications for a
particular industry. By focusing on the industry, macro-economic, political, business and
technological uncertainties are not analyzed for their own sake, but probed for their implications for
competition. Industry scenarios also explicitly include competitive behaviour, a key source of
uncertainty in the choice of strategies.
The simplest way to conduct scenario planning is to either brain storm with the directors of a firm,
possibly with a researcher as leader of the session, or to hire a professional to conduct a full
analysis of the markets.
Keep the following in mind: When conducting own market and industry research, keep note the
following:
Information is only as good as the sample. Be careful when selecting a sample group to
question. To get useful data, the sample group needs to be relevant to and representative of
the companys demographics. Notice that in the curtain business example, I moved from asking
customers in the store to questioning randomly selected members of my targeted population.
That's because just asking people in the store isn't good enough. Some of them will say "Yes"
just because they like me or don't want to offend me. Informal market research is always
tainted to a degree by the relationships of the people involved.
Design the survey or questionnaire carefully. Make sure that it's focused specifically on the
information you need to know and that you haven't included any questions that may offend
anyone. Many people are put off by questions that ask them how much money they earn, for
instance. If you offend or confuse them, they won't bother to fill out the survey.
Keep the survey or questionnaire fairly short. If possible, it should all fit on one page. Some
people are intimidated by long forms; others see multiple page forms as just too much of an
imposition on their time.
Always provide some opportunity for detailed answers. Not everyone will take advantage
of it, but some will, and sometimes these comments are the most valuable.
Work out your recording techniques first. Telephone surveys are popular, but how are you
going to record what the respondents say? If you're orally interviewing someone, will you
record them or take notes? The purpose of market research is to gather and analyze the data,
so you' should have a system of recording the data worked out in advance.
Set the criteria for the information beforehand. In other words, market and industry research
is a process, which may shut down or be redirected at any time. If, for instance, the
entrepreneur finds out that no-one is interested in his idea after simply talking to his customers
(who came into the store), the exercise would be over at that point. But what if 10 customers
expressed an interest? Or 32? Before asking customers anything, the entrepreneur needs to
have the process clear in his mind. How many customers would have to express an interest in
the service to make it worthwhile to continue researching the possibility? Set the criteria
beforehand, as in, "at least 50% of customers need to show an interest in this industry or
there's no point in moving to the next stage of market research.
- 22 -
The amount of market research that is conducted is limited only by time (if personally undertaken)
or budget (if hiring a professional). However, market research is necessary at all stages of a
business' life, if continued success is sought. Only market research can truly keep the
businessman in touch with what's most important his customers, their needs and desires. When
listed, add investors to that list.
In fact, many pundits believe that market research and industry analysis helps the entrepreneur to
know his customers and targets. Market research is a time consuming process that many
entrepreneurs start but seldom complete. If a listing is being sought research is crucial as a
foundation to winning over the analysts and portfolio managers who will consider having AltX
companies on their books.
Evaluation of capital requirements

The top down approach
The value of a company equals the value of its existing assets as well as its growth potential.
Using a top-down approach to company valuation, a company is valued based on research and a
set of assumptions that will realistically produce growth in the future. The analyst therefore
determines the future value of a companys share by assessing current value plus its embedded
growth opportunities.
The following section sets out sources of capital for the entrepreneur, followed by methods of
company valuation in the next chapter.
Please note that the purpose of this publication is to explain the fundamental principles and
operating procedures of AltX, a market regulated by the JSE Securities Exchange in its capacity as
a Recognised Investment Exchange under the Financial Services Board. As such, stockbrokers
who have been appointed designated advisors (see Part 2) will provide guidance on the valuation
of a company. However, the process of undertaking the evaluation (as with the research) is
considered invaluable in better understanding the company from a financial point of view.
Persons looking to invest in securities traded on AltX should seek appropriate

advice from an analyst or portfolio manager.
Companies looking at AltX as a trading facility for their securities should also seek
detailed guidance from Designated Advisors (see Part 2) and their corporate advisor.
Requiring capital
You must know how much capital you require (this is an on-going process, intimately tied to your
business plan), when you need it and for what purpose you need the funds. Knowing the purposes
allows you to better define a financial plan and ultimately the prospectus prior to listing. For
example, if funds are needed for research and development, you would most certainly investigate
various government programmes and incentives, whereas if funds are needed to build inventory for
sales, banks and suppliers may be your providers.
A going concern with plans for higher growth via acquisition, or expansion into new markets may
need to list on AltX to gain equity financing.
So, a good place to begin is by really knowing your business and its needs in the context of the
industry you are operating in, i.e. the market opportunities and threats, e.g. level of competition in
the market. The research undertaken as set out in previous sections will have highlighted where
the company is positioned in the market. For example:
Is the company in a high or low growth markets?
Is your relative market share strong or weak?

- 23 -
If the company is in a high growth, or emerging market, and if the company has a
strong market position by virtue of better methodologies or intellectual property, then the
entrepreneur has the potential of being a shooting star as a listed entity.
However, if the company is in a stagnant, low-growth market and the entrepreneur has minimal
market share (i.e. a new entrant in a well-defined market), he will find it virtually impossible to get
analysts to recommend his share even if he meets the listing requirements of AltX (see Part 2).
Sources for established businesses

Established businesses have a few very important "assets". These are:
1. Track record of management
2. Financial statements for historical performance. Existing companies may require additional
funding to finance special orders - especially larger orders, or to embark on new projects.
Based on their performance and their financial stability, existing companies can attract outside
capital from traditional lenders, such as banks, in the form of loans against assets or from investors
in the form of new equity. Most often, new capital is required when companies wish to expand
rapidly and, for technology ventures, one of the most common forms of obtaining such financing is
the IPO (Initial Public Offering) route. This latter option is the aim of this book.
In these cases, companies have some established track record and, depending on their future
prospects, are in a good position to attract investment capital from the public equity markets by
"going public". An alternative to such financing might be through a strategic alliance or partnership
with a supplier or competitor. Established, growing companies are often candidates for acquisition
by other firms.
The important point to note here is that if a company is up and running and has some positive
history such as good products and customers and some sales history, even if it is not superprofitable, financing should be fairly straightforward. Under such conditions, the main work is that
of preparing an updated business plan and making the rounds with it. This is where some external
advisors can be most helpful, in that they can advise which sections to concentrate on, how to
present (and to whom) the business plan, assess research and assumptions of the company and
eliminate time wastage. If you are not ready to list, the advisor can assist in restructuring your
company to achieve a better image and thus better share price.
Private equity financing

Funding for start-ups is the most challenging part of financing. The founders of the company
usually provide the initial funding. Often this funding is an in-kind type of funding whereby the
founders will work for little pay, essentially contributing "sweat equity" to their venture. An obvious
additional source of capital in the early stages is that of friends' and relatives' money.
Investment in young, early stage firms is often referred to as seed capital. In the past, this was the
toughest type of funding to obtain because of the perceived risks and time to fruition. The good
news is that, and this fact is borne out by various studies, early stage investments have produced
some exceptional returns for their investors. Hence, around the world there is now the formation of
more and more seed capital funds. Even banks and dyed-in-the-wool venture capitalists are getting
into the act!
An ideal source of early stage funding comes from Angels, who are typically well-heeled private
individuals, who are prepared to take a leap of faith by investing in a business deal. They often
contribute not just their money, but also their expertise. Angels often become mentors to the
founder-entrepreneurs. Angels may be hi-tech entrepreneurs themselves who have cashed in on
their own ventures and who now wish to re-live their successes vicariously. They are perfect
partners! The trick is in identifying them and in attracting their interest.
Somewhat akin to angels, are more structured approaches to providing relatively small amounts of
capital to young companies. Among these are the Department of Trade & Industry, Development
- 24 -
Bank of South Africa and the Industrial Development Corporation. Each of them have own
prerequisites for repayment. Next to Angels, there are the more traditional sources of venture
capital. Venture capitalists (VCs) are individuals or companies whose business is that of investing
in companies by providing substantial capital and taking substantial equity positions (usually more
than 35%, but rarely more than 50%).
VCs are often affectionately referred to as vulture capitalists. They often strike very tough bargains
insofar as they require a say in running the company through board seats, for example, and they
like sizeable equity positions by contributing the required capital. VCs often fit a well-defined
mould. In that respect, they are very predictable. On average (and there are few exceptions), they
look for companies with potential sales of over R100 million, proprietary technology, a seasoned
management team and a well-defined market. Of course, these criteria preclude many companies
from getting the attention of these traditional venture capitalists.
On the positive side, a well chosen VC will work with a company through subsequent growth
stages and will act as a banker to the company with a view to cashing in eventually through a
successful public offering or sale to other parties.
Angels and VCs are the most likely sources of risk capital. In addition to these sources of equity
financing, companies should also seek debt financing from banks and other lenders. Often, banks
will lend money to start-ups if they are properly capitalized (e.g. by Angels or VCs) and if they have
sound research, a good business plan and strategic action plan.
Going public: the IPO

Going public, at least for technology firms, used to mean "cashing in", i.e. selling stock to the public
on a major exchange, such as NASDAQ (National Association of Securities Dealers Automated
Quotation System) in the US market. This would occur when a company has proved products and
customers and needs significant capital for growth. It gives early investors (angels and VCs) and
sometimes the founders a chance to put some real cash back in their pockets.
However, early stage companies can also go public on a "junior" stock exchange, such as AltX.
This is really VC financing involving a large number of typically smaller investors. The difference
between listing on various stock exchanges lies within the exchanges' listing requirements. While
some exchanges will only allow proven firms with track records and healthy balance sheets to list,
some Junior Exchanges will allow "concept" companies to list with weaker balance sheets,
although they typically require some prior seed investment before granting a listing.
The listing requirements for AltX are set out in Part 2 of this book. However, consensus among
stockbrokers in South Africa is that preference will be given to going concerns before start ups.
So how does this form of VC financing work? This type of VC financing is accomplished
through an IPO (Initial Public Offering) or financing on a junior stock exchange like the AltX.
Companies which seek to raise modest sums, even below R5 million, can list on AltX. There is an
alternative to private VC-style financing. The main difference is that an underwriter (or sometimes a
promoter or deal-maker) takes the place of the VC and effectively sells stock to a large number of
subscribers. Companies sometimes prefer this approach because they may obtain a better
valuation of their business or because it is an "easier" sell. Often the advisor will sell shares to the
companys suppliers and private clients, which has the added benefit of securing supplies. After all,
it is to the benefit of the shareholder to ensure that the company has a continued, uninterrupted
source of supply.
However, if you like the idea of listing on AltX, which should provide you with future liquidity, followon financing, incentive stock options and publicity, this may be for you!
It is my belief that AltX could do for other sectors of the South African market what Nasdaq did for
the technology industry. Instead of financing the IT industry, AltX could finance progressive minds
of entrepreneurs struggling to expand operations. However, after the problems encountered with
the Development Capital market and Venture Capital Market, including lack of information on the
- 25 -
company, liquidity, transparency and corporate governance, some work will be needed to change
the mind-sets of public investors. On the other hand, what better way than AltX to allow the general
public to invest in exciting (though smaller) companies.
AltX financing can really promote companies in new and exciting markets with "hot" products (like
Internet and cellular products in the past five years). This means that the company can enjoy a
high valuation and founders will experience minimal dilution. In cases where the company has yet
to start generating sales, i.e. when it is still a concept, valuations are the most distorted - in favour
of the firm. There is a well-known joke about this: "The worst thing that can happen to you is that
you achieve your business plan." Why? Because this is when reality sets in and investors realize
that you are really building a business and not running a lottery.
There is a strong belief among stockbrokers that start ups will only be allowed to list on AltX once
more established companies are listed. This will create a record for AltX and help change the
mindset against so-called penny shares.
An IPO is not the only way for a company to become public, i.e. have its shares traded by the
public. A very popular mechanism by which a company can obtain this status is by transacting a
Reverse Take Over.
The back door method of listing

There are two basic method of obtaining a listing without undergoing the full formal requirements.
These are buying a cash shell and a Reverse take over
The cash shell
When a listed company sells either all or most of its assets and has mainly only cash left in its
books, it is called a cash shell. This listed entity then has a specific period of time, as determined
by the JSE, to inject new assets into the shell. If it does not do this, it is then delisted. Therefore, a
entrepreneur who wishes to list can buy these shares and inject his assets into the firm, A listed
cash shell company then has acquired a viable business, either for cash, or for the issue of
additional shares in the cash shell company. The norm is for the entrepreneur to have a change of
name and movement to another sector. Either way, the entrepreneur has effectively bought
himself a listed vehicle but it does not mean that he can avoid research, due diligence and
documentation. The investment community will still require information to determine the investment
viability of this companys shares.
Example:
Let's say that ABC limited, an inactive retail "cash shell", has one million shares issued.
The entrepreneurs company XYZ (Pty) Limited can take over ABC Limited by buying the
shares of the company. It can now rename the company XYZ Limited, reverse its assets into
the company and, thus, ABC the cash shell is now XYZ Limited
The reverse take over
A Reverse Take-Over (RTO) also allows an entrepreneur to take a short-cut in going public. All he
needs to do is to find an already public company that has fallen on hard times such as a mining
company that is inactive with virtually no assets or liabilities. Its real asset is its listing status.
In such a case, an unlisted company acquires the shares of a listed company which results in a
change of control of the listed company. At times, control can take place by buying the debt of a
company and forcing the company to issue shares for the debt, which (if calculated correctly would
result in a change of major shareholding and thus control.
Such a listing requires the publication of a transmuted listing statement. In other words,
documentation is still needed.
However, the RTO need not come just from the unlisted vehicle. In a reverse takeover a
compatible listed company can acquire an unlisted company with the purchase consideration being
- 26 -
paid by the issue of new shares in the listed company. These new shares must be sufficient in
number and value to ensure that the shareholders in question have a controlling interest in the
listed company after the issue of new shares.
The RTO is referred to as a "back-door" listing as you can escape some of the red-tape associated
with an IPO. With an AltX listing, for instance, directors have to stand before the AltX committee
before being granted a listing and have to attend an induction programme after listing.
Once the newly reversed company stock starts to trade, the entrepreneur can attract new investors
more easily by offering them liquidity and he can sell new shares through private placements or
exchange offerings. Typically, it is often easier to attract private placement investors before the
completion of the RTO, on the expectation that they will enjoy both liquidity (ability to sell their
investment) and short-term capital appreciation.
In addition, once the IPO has been completed - regardless of how you got there the entrepreneur
can always do subsequent financing via rights issues. Such placements constitute the vast majority
of financing. The main challenge is to maintain an active market for the stock. If not, the trading
price will decline, making future financings very costly in terms of dilution. It is also crucial to
remember that the entrepreneur is now in two quite different businesses, i.e. one involved in
product sales and the other involved in stock sales. The maintenance of a successful share profile
is outlined in Part Three of this book.
Methods of obtaining an IPO

In South Africa, there are three principle methods of obtaining a listing.
An Introduction: This method can be used where the company does not need to raise capital and
has a sufficiently wide public spread of shareholdings. It is the quickest and cheapest method of
listing, as there is no offer to the public and minimum formalities are required.
A private placing: This has proved to be the most common method of obtaining a listing. In this
instance, shares in the company are placed or offered to prospective shareholders through private
negotiation. Usually this will be done through a sponsor or a merchant bank.
A public offer: A public offer can either be an offer for subscription or an offer for sale.
Offer for subscription: the public are invited to subscribe for unissued shares and the
proceeds accrue to the company.
Offer for sale: existing shareholders invite subscribers to purchase their shares and
therefore the proceeds accrue to the shareholders. This method requires a prospectus
that must be approved and registered with the Registrar of Companies. The public will
have a certain period of time within which to submit their applications and payment. It is
up to the company to decide on the basis of allocation if there is an over-subscription. If
the offer is over-subscribed, the company earns interest on the payments received until
the date of refund. This increase may be used to offset the costs of the offer.
A final word on going public: It is not for everyone. Founders must prepare themselves for
volatile variations in stock price and the constant glare of public shareholders. The businessman
can "waste" a whole day just pacifying disgruntled shareholders who want to know why their stock
has dropped a few cents or why they didn't double their money last month! You will have to file
regular financial reports and issue frequent press releases and analytical reports (even if you have
little news). Again, this is outlined in Part Three of this book.
- 27 -
Enough said.
Let's suppose that you decide to become a publicly traded firm on AltX How do you
do it?
This is discussed in greater detail in Part Two of the book.
It is thus sufficient to state here that the entrepreneur needs a Designated Advisor.
This is a stockbroker who has been granted the right to act as a sponsor.
A sponsor should also act as a "fiscal agent", advising on all financing matters
pertaining to the public markets. In essence, the sponsor assumes the role of the
Venture Capitalist.
The sponsor does the so-called due diligence (set out as Phase Two in the following
text) work on the entrepreneurs company and manages and coordinates, along with
an army of lawyers and advisors, the process of going public.
Remember that if you can't get a sponsor excited, you won't get investors excited
either. The best way to find a sponsor is to identify at least three firms, hold a few
meetings and decide which one can best help you to meet your goals. The various
stock exchanges will give you a list of their members and help you identify likely
candidates. Also, speak to your peers i.e. other companies who are public
Debt financing
Banks play a role in venture financing. Many entrepreneurs do not understand this role. Let's be
very clear on this: Banks are risk averse (would you want your deposits at your bank squandered?)
and as such are asset and cash flow lenders. If your cash flow can handle debt servicing (i.e.
interest payments) and if you have sufficient liquid collateral, talk to the banks.
Debt financing is the "cheapest" form of financing you can obtain (next to government hand-outs or
interest-free loans). This is especially true with today's current interest rates. However, banks are
becoming more aggressive and are also jumping on the knowledge-based business bandwagon
with their own seed funds and other programmes.
Traditional bank loans have been administered in the form of a Line of Credit which can fluctuate
depending on a company's day-to-day cash requirements. These loans are "demand" loans which
can be "called" at anytime by the bank. On a positive note, banks are becoming more innovative,
especially in the way in which they deal with entrepreneurs. They are considering more aggressive
ways to lend money through such instruments as convertible debentures. Since banks are asset
lenders, one should certainly consider "term loans" which are similar to mortgages. Term loans
could be used to acquire capital assets (equipment, property, etc). Other financial organizations, in
addition to banks, can be approached for equipment financing (i.e. leasing companies).
Factoring is an innovative type of debt financing which some banks and private firms are getting
involved in. Factoring involves a company's use of its Accounts Receivable asset to secure
immediate cash. It works like this: You sell your products on credit to credit-worthy organizations
(big business, governments, universities) which usually take up to 90 days to pay you. This is very
hard on a growing concern because you are really acting as bank to your customers. Sometimes
banks will assist you with a line of credit secured by your receivables and other assets. However, a
factoring "house" will essentially "buy" these receivables from you. This will cost you more than a
conventional line of credit in terms of interest charges and fees, but may provide working capital as
needed. It should also be noted that a good factoring firm can act as your in-house credit
department by helping you avoid high risk clients and by acting as your collections department.
- 28 -
Another form of debt financing takes place when suppliers grant credit to companies. This
eliminates the need for companies to raise as much capital since their trade suppliers are, in
reality, banking them. This form of financing is often the easiest and cheapest to obtain. Equity
financing, on the other hand, is very expensive. It may not appear that way, but remember that
when you sell equity you are selling a share of profits for life.
Government sources
There are numerous other sources of funding available as well. Of these, government funding
cannot be overlooked. Assistance to business is available from all levels of government for all sorts
of projects with varying criteria. This is a in topic itself and some of the government's web sites
should also be explored.
Lucrative government programmes entail government grants.
General financing considerations
Fundraising, because it involves money, is not a simple process. We often hear about financial
scams. Accepting or taking money, especially from "strangers", regardless of the form of financing
- be it debt or equity - requires a certain degree of formality or legal process. Obviously, anyone
providing a company with their hard-earned money will want some assurances that their
investment is protected and that the recipients will not squander the proceeds or "cheat" the
investors. Even with the best and most honorable of intentions, it is still necessary to spell out the
details as to what conditions or privileges are associated with the investment.
Is a board seat included?

How and when can the investment be repaid?.
Although much of the responsibility for ensuring due process rests with the negotiating
parties, there are also substantial government and stock exchange regulations which
are often overlooked by unwary entrepreneurs
Regulatory Issues
In the papers we generally read about public companies whose shares trade on public stock
exchanges. Such companies are regulated insofar as they fall under regulatory bodies, whose role
is to protect the investing public from unscrupulous corporate practices. In so doing, companies
must put up with a certain amount of red tape. There are very well defined and very detailed and
complicated rules that govern matters such as the issuance of shares and the raising of capital in
general. Whereas these rules are supposed to protect investors, they often make it very difficult for
companies, even legitimate ones, to raise capital. There is a common and quite prevalent
misconception that only public companies are affected by these rules. In fact, many small, private
companies have at some point been not complied with these regulations. For example, the King II
report on corporate governance set out in Part Two.
Suffice it to say that when you are raising money you MUST engage the services of a competent
securities lawyer to ensure that you are not on the wrong side of regulations.
And then there is the matter of disclosure. What must you document and disclose to investors? Do
you need a prospectus? Or will an Offering Memorandum do the job? Again, check with a
corporate advisor and lawyer! This subject can be very complex and intriguing. For the time being,
take comfort in knowing that there is a lot you don't know, but at least you do know that there's a lot
you don't know!
The last word on financing
Financing is an exercise in packaging, that is, putting together a complete financial plan that
matches your needs with those of investors and financiers.
This exercise takes time, but is ultimately worth it. As stated in this section, these experts will need
research, due diligence and a business plan before they can draw up a Prospectus to list your
company on AltX.
- 29 -
Regardless of the source of capital, one should expect the fundraising process to take anywhere
from a few to several months. It doesn't happen overnight. Equity investments usually will take
longer to complete than debt financings. Banks, contrary to conventional thinking, can respond
quickly as their procedures are well established. At least, banks will let you know quickly if you do
not qualify. Investors may take many weeks or months to decide. Don't forget about leverage. No
one likes to be the sole investor. It is possible to start with a small amount of founders capital,
possibly personal borrowings. This can leverage some golden sources that in turn can attract risk
capital.
Finally, suffice it to say - that if you have a good business deal, a good financing deal is just a
negotiating step away! Remember, you should never give away any equity - it should always be
sold or earned. And, you should always get more then you need. You may need it!
In the nest chapter we assess how to value a company.
- 30 -
Chapter 2
How much is your company worth?
The two questions anyone thinking of listing must ask:
How much is your business worth today?
How can you make it more valuable in the future?

These are of paramount importance to any business owner who wishes to list on AltX. These
valuations will be reflected in Phase Three under the drafting of a prospectus.
This section summarises the main issues involved in valuing a business. It can also be used by
anyone who is buying, selling or simply running a business to understand how businesses are
valued. The worth of a business hinges upon how much profit a purchaser can make from it,
balanced by the risks involved.
Valuation is the first step toward intelligent investing. When an investor attempts to determine the
worth of shares based on fundamentals, he can make informed decisions about what stocks to buy
or sell. Without fundamental value, the investor is merely speculating on gut feeling.
For years, the financial establishment has promoted the specious notion that valuation should be
reserved for experts. Supposedly, only analysts have the requisite experience and fortitude to go
out into volatile market and predict future prices. Valuation, however, is no abstruse science that
can only be practiced by MBAs and CFAs. Requiring only basic mathematics skills and diligence,
anyone can determine such values. Before a share can be valued, you need to have some notion
of what a share of stock is. A share is not some magical creation that ebbs and flows like the tide;
rather, it is the concrete representation of ownership in a publicly traded company. If ABC Limited
has one million shares in issue and an investor holds a single share, it means he owns a millionth
of the company.
Why would someone want to pay you for hat millionth? There are quite a few reasons. There will
always be someone else who wants that millionth of the ownership because they want a millionth
of the votes at a shareholder meeting. Although small by itself, if amassed that millionth and five
hundred thousand other of this share suddenly provides a controlling interest in the company and
can make it do all sorts of things, like pay fat dividends or merge with another company.
Companies buy shares in other companies for various reasons. Whether to conduct an outright
takeover, in which a company buys all the shares, or a joint venture, in which the company typically
buys enough of another company to earn a seat on the board of directors, the stock is always on
sale. The price of a stock translates into the price of the company. It is this information that allows
other companies, public or private, to make intelligent business decisions with clear and concise
information about what another company's shares might cost them.
The share is a stand-in for a share in the company's revenues, earnings, cash flow and
shareholders equity. For the individual investor, however, this normally means just worrying about
what portion of all of those numbers you can get in dividends. The share of ownership entitles the
investor to a share of all dividends declared by that company. Even if the company's stock does
not currently have a dividend yield, there always remains the possibility that at some point in the
future there could be some sort of a dividend.
Finally, a company can repurchase its own shares using its excess cash, rather than paying out
dividends to shareholders. This effectively drives up the stock price by providing a buyer as well as
improving earnings per share (EPS) comparisons by decreasing the number of shares outstanding.
- 31 -
Mature, cash flow positive companies tend to be much more liberal today with share repurchases
as opposed to dividends.
The main categories of valuation are based on earnings, revenues, cash flow, equity, dividends
and subscribers.
Past profitability
It is crucial to understand that past profitability and asset values are only starting points. Intangible
factors, such as key business relationships, goodwill, global positioning, market and industry
analysis and investor perception that often provide the most value for listed entities.
This section thus concentrates on:
The uses of valuation
Key factors affecting the value of a business
The standard methods of valuation
How to calculate profit for the purpose of valuation
Why value the business?

There are four main reasons for valuing a business.
To help you buy or sell a business
To raise equity capital
To create an internal market for shares
To motivate management
Buying or selling a business.

Understanding the valuation process can help the entrepreneur to:
Improve the businesss real or perceived value
Choose a good time to buy or sell a business
Negotiate better terms
Complete a purchase more quickly

There is a better chance of a sale being completed if both the buyer and seller start with realistic
expectations.
To raise equity capital.
A valuation can help you agree on a price for the new shares that are about to be issued.
To create an internal market for shares.
A valuation can help the entrepreneur to buy and sell shares in a business at a fair price.
For example, when a retiring director wishes to sell his shares in a private company.
To motivate management. Regular valuation is a good discipline. It can:
Provide a measurement for management performance
Focus management on important issues
Expose areas of the business that need to be changed
For a company listed on a stock exchange, the quoted share price is a constant indicator of
value. Therefore, valuing a business has benefits for both the entrepreneur who wishes to list the
company and for the investor who wishes to buy shares in this company. Businesses that are not
listed need to monitor their value in other ways.
Three basic criteria affect valuation.
Circumstances of the valuation

How tangible are the assets of the business
Age of the business
- 32 -
The circumstances of valuation
A going concern can be valued in several different ways.
A forced sale will drive down the value. For example, an owner-manager who has to retire
due to ill health may have to accept the first offer that comes along.
If a company is being wound up, its value will be the sum of assets sold less liabilities.
How tangible are the assets of the business
A business that owns property or machinery, for example, has tangible assets.
Many businesses have almost no tangible assets beyond office equipment. The main thing
you are valuing is future profitability.
Age of the business
Many businesses make a loss in their first few years of operation.
A young business may have a negative net asset value, yet may be highly valuable in terms
of future profitability.
Valuation techniques
Whenever people talk about equity investments, one must have come across the word "Valuation".
In financial jargon, Valuation means how much a company is worth. Talking about equity
investments, one should have an understanding of valuation.
It is important to remember that the true value of a business is what someone will pay for it. To
arrive at this figure, entrepreneurs use various valuation methods.
The main valuation methods are based on:
Industry rules of thumb
Entry cost
Equity-based valuations
Earnings-based valuations
Revenues-based valuations
Yield-based valuations
Member-based valuations
Discounted cash flow
Asset valuation
Earnings per share (EPS)
Price/Earnings ratio (PE)
Price/Sales ratio
Dividend yield assessment
Assessment of subscribers
Use of cash flows
Industry rules of thumb: This method uses an established, standard formula for the particular
sector. When valuing a business, you usually use at least two of these methods to arrive at a
value.
Entry cost: This method values a business by comparing with the cost of starting up a similar
one from scratch.
Equity-based valuations: This method is appropriate if a business has significant tangible

assets. For example, a property business. Essentially, it is the valuation of assets.
Earnings-based valuations: There are two basic methods, namely Price:Earnings (PE)
ratio and valuation of Earnings per share (EPS). These methods are appropriate if the
business is making sustainable profits.
Revenue-based valuations assesses the price to turnover and expresses this figure as a
percentage.
Member-based valuations assesses the level and quality of subscribers.

- 33 -
Discounted cash flow: This calculation is based on future cash flow and is appropriate for
businesses that have invested heavily and are forecasting steady cash flow over many years.
For example, a quarry.
Industry rules of thumb

In some industry sectors, buying, selling or listing a business is common. This leads to the
development of industry-wide rules of thumb.
The rules of thumb are dependant on factors other than profit. Some industries have peculiarities,
such as:
Turnover for a computer maintenance business, or a mail order business.
Number of customers for a mobile phone airtime provider.
Number of outlets for a food franchise.

Buyers will work out what the business is worth to them. Take the example of a computer
maintenance business with 10,000 contracts, but no profits. A larger competitor may pay R100 per
contract to buy the business. This is because it could merge the two businesses and make large
profits.
Intangible issues
The key source of value of a business may be something that cannot itself be measured. A strong
relationship with key customers or suppliers may be critical. For example:
If a business holds the license or distributorship rights of a potentially successful product, the
businesss value will increase accordingly.
Management stability may be crucial if the purchaser is not bringing in a strong new team. If
the owner-manager or other key people are going to leave, the business may be worth far
less. For example, the profitability of an advertising agency may collapse if the key creative
person leaves or if key sales people leave, as they may take important customers with them.
Check any restrictive covenants contained in employees contracts. The covenants could add
value if the employees form an integral part of the business. They could, however, also damage
the value if a potential buyer intends to radically change the staffing arrangements.
The more risks there are, from a purchasers perspective, the lower the value will be. There are
specific actions the entrepreneur can take, with a view to building a more valuable business.
Set up excellent management information systems, including management accounts. Good

systems make nasty surprises unlikely.
Spread sales across many different customers.
Tie in key customers and suppliers through contracts and mutual dependence.
Minimise exposure to exchange rate fluctuations and other external factors.
Entry cost valuation

Equation: To make an entry cost valuation, calculate the cost to the business of
purchasing its assets.
This section does not apply to entrepreneurs who are looking to list on an exchange, but refer to
those who intent to buy a company. I have kept this section brief. Rather than buy a business, the
entrepreneur could start a similar venture from scratch. An entry cost valuation reflects what this
process would cost.
To make an entry cost valuation, calculate the cost to the business of:
- 34 -
Purchasing its assets.

Developing its products.
Recruiting and training the employees.
Building up a customer base.
Once the cost has been calculated, make a comparative assessment of how the following factors
could affect a cost valuation:
The use of better technology.
The effect of cheaper rentals, by locating in a less expensive area.

The entry cost valuation can then be based on cheaper alternatives, which is more realistic.
A company is sometimes worth more if it is sold piece-meal, than if sold as a going concern. This
can happen because there is a hidden asset that most people are not aware of, e.g. land
purchased in the 1980s that has been kept on the books at cost, despite dramatic appreciation of
the land around it. Keeping an eye out for a company that can be broken into parts worth more
than the whole makes sense, especially in volatile emerging markets. This is also called break-up
value.
Equity-based valuations (asset)

Equation: Total Assets Total Liabilities
Add up all assets, subtract liabilities and you have the asset valuation. This method does not take
account of future earnings. An entrepreneur should use asset valuations if he is in a stable, asset
rich business. Property or manufacturing businesses are good examples.
The starting point for an asset valuation are the assets that are stated in the balance sheet of a
firms accounts. This is known as the net asset value (NAV) of the business. In some countries
this is call Net Book Value.
This is one of the most commonly used methods of valuation. As the name suggests, it is the net
value of all the assets of the company. If you divide it by the number of outstanding shares, you get
the NAV per share. One way to calculate NAV is to divide the net worth of the company by the total
number of issued shares.
You then refine the NAV figures for the major items, to reflect economic reality. For example:
Property or other fixed assets that have changed in value.

Old stock that would have to be sold at a discount.
Debts to the business that are clearly not going to be paid. Conversely, over conservative
provisions for bad debts.
Intangible items, such as software development costs. These should usually be excluded.
Book value is based on historical costs, not current values, but can provide an important measure
of the relative value of a company over time. The figure that results is the company's net book
value. This is contrasted with its market capitalization, or total share price value, which is
calculated by multiplying the shares in issue by their current market price.
You can also compare a company's market value to its book value with a per-share basis. Divide
book value by the number of shares in issue to get book value per share and compare the result to
the current share price to help determine if the company's stock is fairly valued, trading at a
premium or discount. Many shares trade above book value (premium) because investors believe
that the company will grow and, so too, will the value of its shares. When book value per share is
higher than the current share price, a company's stock may be undervalued (discount) and a
bargain to investors. In fact, the company itself may be a bargain, and hence a takeover target.
- 35 -
Consider the future status of the business.

If a business is going to stop trading, it will lose value due to:
Assets being sold off cheaply. For example, equipment sold off at auction may only achieve
a fraction of their book value.
Debt collection is more difficult.
The cost of closing down premises.
Redundancy payments (if applicable).

The problem that many entrepreneurs have years after listing a going concern is that many
assume that they can sell off assets and receive their listed value. They forget that these are
accounting numbers and sometimes unrealistic. Consider a company owning a 40 year old building
in Cape Towns thriving CBS. That building might have been depreciated fully and is carried in the
books at a minimal amount, while having a resale value of millions.
The book value grossly understates the sell-off value of the company. On the other hand, consider
a fast changing industry with four year old computer equipment that has a few more years to go
before being fully depreciated, but that equipment couldn't be sold for even 10% of its value. Here
the book value overstates the sell-off value.
So investors aiming to buy shares in AltX companies must consider book value to be assets less
liabilities, which are just numbers, not real items. If you want to know how much a company should
be sold off for, hire a good investment advisor, which is often done on take-over bids.
Earnings-based valuations
Equation: PE = Share Price divided by Earnings per Share EPS.
Where EPS is calculated by dividing Attributable profit by shares
in issue
Price/earnings ratio (PE) is the more common yardstick of a company's value than Net Asset
value.
By definition, PE is the current share price divided by the EPS for the past year. For example, a
share trading at R20 with earnings of R2 per share has a PE of 10 times. While there is no set rule
as to what is a good PE, a low PE is generally considered good because it may mean that the
stock price has not risen to reflect its earning power. A high PE may reflect an overpriced stock or
decreasing earnings. As with all of these ratios, however, it's important to compare a company's
ratio to the ratios of other companies in the same industry.
Therefore, for both investor and entrepreneur the most common way to value a company is to use
its earnings. Earnings, also called net income or net profit, is the money that is left over after a
company pays all its bills. To allow for apples-to-apples comparisons, most people who look at
earnings measure them according to EPS. In South Africa, Headline Earnings Per Share (HEPS)
was introduced in the 1990s and this figure excludes extraordinary items from the profit figure. It is
a more accurate figure as it removes figures that are once off, such as the sale of property.
However, EPS alone means absolutely nothing.
To look at a company's earnings relative to its price, most investors employ the PE Ratio. There
are lots of individuals who stop their entire analysis of a company after they figure out the PE
Ratio. With no regard to any other form of valuation, this group of investors blindly plunge ahead
armed with this one ratio, purposefully ignoring the vagaries of equity analysis. Such investors look
for "low PE" stocks. These are companies that have a very low price relative to their earnings.
- 36 -
Multiple value: A small unquoted business is usually valued at somewhere between five and 10
times its annual post-tax profit. Previously most notably in the IT market the ratio has exploded,
with some valuations being drawn from multiples of 70 or more. However, the differential has
closed significantly, with IT-based companies seeing the sharpest drops. Following the 1997/8
market correction earnings multiples can range from nine to 25.
The PE ratio is the value of a business divided by its profits after tax. Once the entrepreneur has
decided on the appropriate PE ratio to use, the businesss most recent profits after tax is multiplied
by this figure. For example, using a PE ratio of five times for a business with post-tax profits of
R100,000 gives a PE valuation of R500,000.
PE ratios are used to value businesses with an established, profitable history.
PE ratios vary widely.

Quoted companies have higher PE ratios than unlisted ones.
Their shares are much easier to buy and sell.
This makes them more attractive to investors than shares in comparable unquoted
businesses.
A typical PE ratio for a large, growing quoted company with excellent prospects might be 20.
However, today companies listing will find it difficult to persuade investors to buy shares on
PE ratios that exceed comparable companies. For instance, a motor company listing on the
Automobile Sector of the JSE would find it difficult to use more than a seven times PE ratio,
as competitors in that sector have an average of 7.2 times PE ratios.
Typically, the PE ratio of a small unquoted company is 50% lower than that of a comparable
quoted company in the same sector.
Compare your business with others
What are your quoted competitors PE ratios? Newspapers financial pages give historic PE
ratios for quoted companies.
What price have similar businesses been sold for?
PE ratios are weighted by commercial conditions.
Higher forecast profit growth means a higher PE ratio.
Businesses with repeat earnings are safer investments, so they are generally awarded
higher PE ratios. For example, a maintenance business in a growth industry will have a high
PE ratio.
Adjust the post-tax profit figure to give a sustainable picture.
Many analysts assume that for a growth company, in a fairly valued situation, the PE is about
equal to the rate of EPS growth. For example, if XYZ Limited grew earnings per share at 13% over
the past year, then they would suggest that at a PE of between 10 and 15 times would be fair. If a
company has lost money in the past year or has suffered a decrease in earnings per share over
the past 12 months, the PE becomes less useful than other valuation methods. PE has thus to be
viewed in the context of growth and cannot be simply isolated without taking on some significant
potential for error.
Low PE stocks: With the advent of computerized screening of stock databases, low PE stocks
that have been incorrectly priced have become rare. Today, all investors have to do is punch a few
buttons on an online database and quickly has a list as long as his arm. This screening has added
efficiency to the market. When you see a low PE stock these days, often it deserves to have a low
PE as it has questionable future prospects. Therefore, entrepreneurs must have a fairly rated
company or the market will quickly correct it up or down, and the only impression that investors
will left with is one of inconsistency and unprofessional behaviour.
As intelligent investors value companies based on future prospects and not past performance,
stocks with low PEs sometimes have limited futures. This is not to say that investors cannot still
find some great low PE stocks that for some reason the market has simple overlooked -- you still
- 37 -
can and it happens all the time. Rather, you need to confirm the value in these companies by
applying some other valuation techniques.
The PEG And YPEG: The use of growth and PE is called the PEG ratio: The most common
applications of the PE are the PE and growth ratio (PEG) and the year-ahead PE and growth ratio
(YPEG). The PEG simply takes the annualized rate of growth out to the furthest estimate and
compares this with the current share price. Since it is future growth that makes a company
valuable to both an entrepreneur and shareholder seeking either equity financing or capital growth,
this makes some degree of intuitive sense.
If a company is expected to grow at 10% a year over the next two years and has a PE of 10, it will
have a PEG of 1.0.
PE of 10
10% EPS growth
= 1.0 PEG
A PEG of 1.0 times suggests that a company is fairly valued. If the company in the above example
only had a PE of five but was expected to grow at 10% a year, it would have a PEG of 0.5, which
implies that it is selling for one half (50%) of its fair value. If the company had a PE of 20 and
expected growth of 10% a year, it would have a PEG of 2.0 times, worth double what it should be
according to the assumption that the PE should equal the EPS rate of growth.
While the PEG is most often used for growth companies, the YPEG is best suited for valuing
larger, more-established ones. The YPEG uses the same assumptions as the PEG but looks at
different numbers. As most earnings estimate services provide estimated five-year growth rates,
these are simply taken as an indication of the fair multiple for a company's stock for the future.
Thus, if the current PE is 10 times, but analysts expect the company to grow at 20% over the next
five years, the YPEG is equal to 0.5 and the stock looks cheap according to this metric. As always,
it is crucial to view the PEG and YPEG in the context of other measures of value and not consider
them as magic money machines.
Multiples
Although the PEG and YPEG are helpful, they both operate on the assumption that the PE should
equal the EPS rate of growth. Unfortunately, in the real world, this is not always the case. Thus,
many simply look at estimated earnings and estimate what fair multiple someone might pay for the
stock. For example, if XYZ Limited has historically traded at about 10 times earnings and is
currently down to seven times earnings because it missed its estimates in one year, it would be
reasonable to buy the stock with the expectation that it will return to its historic 10 times multiple if
the missed year was only a short-term anomaly.
Base multiples on a set of assumptions derived from research: When an entrepreneur
projects fair multiples for a company based on forward earnings estimates, he has to first make a
lot of assumptions about what is going to happen in the future. Although he cannot do enough
research to make the risk of being wrong as marginal as possible, it will always still exist. Should
one of his assumptions turn out to be incorrect, the share will probably not go where he expects it
to go. That said, many investors and entrepreneurs out there are using this same approach,
making their own assumptions as well; so, if you are not vigilant and not continually assessing the
environmental factors (as set out on PAGE XX) the company will end up having the same rating as
other similar companies.
A modification to the multiple approach is to determine the relationship between the company's PE
and the average PE of the All Share Index. Local companies listing offshore should use the
S&P500 as a yardstick. If XYZ Limited has historically traded at 150% of the All Share Index and
the Index is currently at 10, many investors believe that XYZ should eventually hit a fair PE of 15,
assuming that nothing changes.
- 38 -
This historical relationship requires some sophisticated databases and spreadsheets to figure out
and is not widely used by individual investors or entrepreneurs, although many professional
advisors often use this approach for companies wishing to list on alternative exchanges, like AltX.
Revenue-based valuation
Every time a company sells a customer something, it is generating revenues. Revenues are the
sales generated by a company for providing goods or services. Whether a company has made
profits in the last year, there are always revenues. Even companies that may be temporarily losing
money, have earnings depressed due to short-term circumstances (like product development or
higher taxes), or are relatively new in a high growth industry are often valued off of their revenues
and not their earnings. Revenue based valuations are achieved using the price:sales ratio, often
simply abbreviated PSR.
The price:sales ratio takes the current market capitalization of a company and divides it by the last
12 months trailing revenues. The market capitalization is the current market value of a company,
arrived at by multiplying the current share price times the shares in issue. This is the current price
at which the market is valuing the company. For instance, if XYZ has 10 million shares in issue,
priced at R10 a share, the market capitalization is R100 million.
Some investors are even more conservative and add the current long-term debt of the company to
the total current market value of its stock to get the market capitalization. The logic here is that if
you were to acquire the company, you would also acquire its debt, effectively paying that much
more. This avoids comparing PSRs between two companies where one has taken out enormous
debt that it has used to boast sales and one that has lower sales but has not added any nasty debt
either.
The next step in calculating the PSR is to add up the revenues from the last four quarters and
divide this number into the market capitalization. If XYZ had R200 million in sales over the last four
quarters and currently has no long-term debt, the PSR would be:
10 million shares x R10/share+ R0 debt
R200 million in revenue
= 0.5
The PSR is a measurement that companies often consider when making an acquisition. If you
have ever heard of a deal being done based on a certain "multiple of sales," you have seen the
PSR in use. As this is a perfectly legitimate way for a company to value an acquisition, many
simply expropriate it for the stock market and use it to value a company as an ongoing concern.
Uses of the PSR: As with the PEG and the YPEG, the lower the PSR, the better. If XYZ lost
money in the past year, but has a PSR of 0.50 when many companies in the same industry have
PSRs of 2.0 or higher, it can be assumed that, if it can turn itself around and start making money
again, it will have a substantial upside. There are some years during recessions, for example,
when none of the auto companies make money. Does this mean they are all worthless and there is
no way to compare them? You just need to use the PSR instead of the PE to measure how much
you are paying for a Rand of sales instead of a Rand of earnings.
Another common use of the PSR is to compare companies in the same line of business with each
other, using the PSR in conjunction with the PE in order to confirm value. If a company has a low
PE but a high PSR, it can warn an investor that there are potentially some one-off gains in the last
four quarters that are pumping up EPS. Finally, new companies in popular industries are often
priced based on multiples of revenues and not multiples of earnings.
Yield-based valuations
A dividend yield is the percentage of a company's share price that it pays out as dividends over the
course of a year. For example, South African mines declare results every quarter, so if such a
- 39 -
company pays R1.00 in dividends per quarter and it is trading at R100, it has a dividend yield of
4%. Four quarters of R1 is R4 and this divided by R100 is 4%.
Yield has a curious effect on a company. Many income-oriented investors start to pour into a
company's share when the yield hits a magical level. Like any ratio if used on its own it can be
misleading.
Member-based valuations
Sometimes a company can be valued based on its subscribers or its customer accounts.
Subscriber-based valuations are most common in media and communication companies that
generate regular, monthly income, i.e. cellular, satellite TV and online companies. Often, in a
subscriber-based valuation, analysts will calculate the average revenues per subscriber over their
lifetime and then figure the value for the entire company based on this approach.
For instance, if ABC Limited has six million members and each sticks around, on average, for 30
months, spending an average of R20 a month, the company is worth:
Six million x
R20
30
= R3.6 billion
This sort of valuation is also used for satellite TV companies and cellular phone companies.
Another way a company can be valued is on the amount of accounts that member have with the
company. These acquisitions often completely ignore the past earnings or revenues of the
company, instead focusing on what additional revenue could be conceivably generated from these
new accounts. Although member-based valuations seem rather confusing, their exact mechanics
are unique to each industry. Studying the history of the last few major acquisitions can tell an
inquisitive investor how the member model has worked in the past and can suggest how it might
work in the future.
Discounted cash flow valuation (DCF)

DCF is the most widely used technique to value a company. It takes into consideration cash flow
and also time value of money. What actually happens in this method is as follows:
Cash flows are calculated for a particular period of time
The time period is fixed taking into consideration various factors.
These cash flows are discounted to the present at the cost of capital of the company.
These discounted cash flows are then divided by the total number of outstanding shares
to get the intrinsic worth per share.
Equation: The valuation is based on the sum of the dividends forecast for each of
the next five years (at least) plus a residual value at the end of the period.
This is the most technical method of valuing a business. It depends heavily on assumptions about
long-term business conditions. It is used for cash-generating businesses which are stable and
mature. For instance, a publishing house with a large catalogue of titles, or a water company with a
local monopoly.
The value today of each future dividend is calculated using a discount interest rate, that takes
account of the risk and the time value of money. For instance, in an inflationary environment (such
as South Africa) R1 received by a business today is worth more than R1 received in the future.
If a business can inspire confidence in its long-term prospects, then this method underlines the
businesss solid credentials.
The most common application of the discounted cash flow is to separate businesses that truly
generate cash from ones that just consume it. The most straightforward way for an individual
investor to use cash flow is to understand how cash flow multiples work. In a private or public
- 40 -
market acquisition, the price-to-cash flow multiple is normally in the 6.0 to 7.0 range. When this
multiple reaches the 8.0 to 9.0 range, the acquisition is normally considered to be expensive.
For the more figures literate: In a leveraged buyout (LBO), the buyer normally tries not to pay
more than 5.0 times cash flow because so much of the acquisition is funded by debt. A LBO also
looks to pay back all the cash used for the buyout within six years, have an Earnings Before
Interest, Tax, Depreciation and Amortization (EBITDA) of 2.0 or more times the interest payments,
and have total debt of only 4.5 to 5.0 times the EBITDA.
Investors interested in going to the next level with EBITDA and looking at discounted cash flow are
encouraged to check out a bookstore or library. Since companies making acquisitions use these
methods, it makes sense for investors to familiarize themselves with the logic behind them as this
might enable an investor to spot a bargain before someone else.
Some financial statement explanations

The Balance Sheet: Cash & Working Capital: US Stock guru Ben Graham developed one of the
premier screens for ferreting out companies with more cash on hand than their current market
value. Firstly, Graham would look at a company's cash and equivalents and short-term
investments.
Dividing this number by the number of shares in issue gives a quick measure that tells you how
much of the current share price consists of cash. Stated simply - buying a company with a lot of
cash can yield a lot of benefits, i.e. cash can fund product development and strategic acquisitions
and can pay for professional advisors and executives. Even a company that might seem to have
limited future prospects can offer tremendous promise if it has enough cash on hand.
Another measure of value is a company's current working capital relative to its market
capitalization. Working capital is what is left after you subtract a company's current liabilities from
its current assets. Working capital represents the funds that a company has ready access to for
use in conducting its everyday business. If the purchase price for a company is close to working
capital, you have bought a Rand of assets for a Rand of share price -- not a bad deal, either. Just
as cash funds all sorts of good things, so does working capital.
Shareholder's Equity & Book Value: Shareholder's equity is an accounting convention that
includes a company's liquid assets like cash, hard assets like real estate, as well as retained
earnings. This is an overall measure of how much liquidation value a company has if all of its
assets were sold off -- whether those assets are office buildings, desks or inventory. Shareholder
equity helps you value a company when you use it to figure out book value. Book value is literally
the value of a company that can be found on the accounting books.
To calculate book value per share, take a company's shareholder's equity and divide it by the
current number of shares in issue. If you then take the share's current price and divide by the
current book value, you have the price-to-book ratio.
Book value is a relatively straightforward concept. The closer to book value you can buy something
at, the better it is. Book value is actually somewhat sceptically viewed by todays analysts, since
most companies have latitude in valuing their inventory, as well as inflation or deflation of real
estate depending on what tax consequences the company is trying to avoid.
However, with financial companies like banks, micro-lenders, brokerages and credit card
companies, the book value is extremely relevant. For instance, in the banking industry, takeovers
are often priced based on book value, with banks being taken over at multiples of between 1.7 to
2.0 times book value.
Another use of shareholder's equity is to determine return on equity, or ROE. Return on equity is a
measure of how much in earnings a company generates in four quarters compared to its
shareholder's equity. It is measured as a percentage. For instance, if XYZ made R1 million in the
- 41 -
past year and has a shareholder's equity of 10 million, then the ROE is 10%. Some use ROE as a
screen to find companies that can generate large profits with little in the way of capital investment.
Discounted future cash flow method and continuing value

Lets re-iterate: The multiple-period method estimates economic income for discrete future periods
and then discounts these benefits using a present value discount rate. All of these approaches rely
on valuation models using discounted cash flow (DCF) methods.
The DCF analysis is an income method to estimate the total fair market value of the business entity
by calculating the discounted projected cash flows back to the date of valuation.
The overall valuation is divided into two parts. In the first part, explicit projections of cash flows are
made for each year. This is referred to as the explicit value period, since explicit forecasts of
periodic cash flows are used in the valuation. After the explicit value period, instead of projecting
cash flows forever, it is common to estimate a continuing value. However, it does not rely on
explicit forecasts of the cash flows that are to be received during the continuing value period.
Instead, the forecast of cash flows is implicit in the assumptions that are used to estimate
continuing value as set out in the research carried out in Phase One.
For most new ventures, continuing value is a very important component of total present value
especially with start up companies (see next chapter).
- 42 -
Chapter 3
Valuing Start-up Companies
Early stage companies typically forecast several fiscal periods of substantial losses, followed by
slow then rapidly growing positive cash flows. The valuation of a company with this type of
earnings profile is very sensitive to the type of valuation assumptions made. Therefore, care should
be taken when finding an individual or consultant to perform this type of firm appraisal. Research is
more crucial with this type of firm, as the entrepreneur has only an idea or, in the case of an
invention, a prototype. So, he has to prove not only that the idea works, but that it will make a profit
in the industry that he is targeting, i.e. that there is a market for this product.
Remember that the entrepreneur is trying to sell an idea to a group of people who are used to
(even demand) making decisions on financials. In the case of a start-up, all you have is a set of
forecasts, based on assumptions, i.e. There is no historic data to confirm the viability of the project.
Generally accepted valuation approaches for early stage companies are similar to those used in
valuing closely held businesses, i.e. companies with few major shareholders. These can be divided
into three major groups:
The market approach
The cost (asset-based) approach
The income approach.
The application of each of these methodologies has unique factors related to the valuation of startup companies that complicate the appraisal process. Many analysts prefer the quantitative
approach and, therefore would tend to hone in on the income approach. Due to contrary views on
the subject in South Africa, all three methods are briefly outlined.
Market approach
The market approach involves identifying either comparable or guideline companies within the
industry of an early stage company that are already publicly traded. Pricing evidence from selected
publicly traded companies or transactions are used as guidelines and market-derived pricing
multiples are extracted from various financial fundamentals, e.g., earnings, cash flow, revenues,
book value, etc.
The multiples are applied to the subject company's financial fundamentals to get an indication of
fair market value. Unfortunately, most financial fundamentals do not provide meaningful indications
of value for early stage companies, because of their short operating history and negative
profitability. The only relevant indication of value using this approach is often based solely on a
multiple of total revenues.
Another method within the market approach involves the extraction of market-derived pricing
multiples based on the projected earnings of guideline companies. The selected pricing multiples
are applied to the subject company's projected earnings. Unfortunately, many early stage
companies do not project positive profitability for several initial years. In addition, analysts that
cover many of the guideline companies which operate in industries such as biotechnology are also
not projecting profitability, and therefore non-meaningful multiples result.
Another difficulty in valuing early stage companies using the market approach is finding
appropriate guideline companies for comparison. Most publicly traded companies have an existing
track record are substantially larger than an early stage company in terms of revenue and asset
- 43 -
size and are more diversified. The projected growth for a start-up company is generally higher than
the guideline companies, making comparisons even more difficult. Each of the above factors make
the application of the market approach to early stage company valuation very difficult. However,
there is some benefit to the comparison of an early stage company with a public company which
operates in the same industry because it provides an indication of potential earnings growth.
In addition, industry-wide PE multiples provide meaningful information with regard to third-party
investor discount rates and rate of return expectations.
Cost (Asset-Based) Approach
The cost approach (sometimes called the asset-based approach) is founded on the principle of
substitution. This methodology rests on the assumption that the replacement cost of an asset is an
indication of its fair market value. In other words, a prudent investor would pay no more for an
asset than the cost of acquiring a substitute asset with the same utility as the subject. This
approach presents the most factual data, often based on the money spent in the development of
an early stage company.
The major negative aspect of the cost approach is the assumption that money spent equals value.
Intuitively, the investment in an idea may not account for all of the intangible value related to the
operations of an early stage company. In addition, the asset-based approach may not account for
the value of all projected economic benefits of a company. Thus, in the case of early stage
organizations, the cost approach may conclude the lowest indication of value.
Income approach
This valuation methodology with its many derivatives produces a far more analytically accurate
measure of total value. Specifically, the income approach estimates the economic benefits that can
flow from a company to its owners, an organization's shareholders. Thus, the definition for the fair
market value for a company is:
Fair market value is equal to the present value of the future economic benefits of ownership.
There are two generic applications of the income approach:

o
o
A single-period method
A multiple-period method.
The single-period method includes dividing or multiplying a representative level of recurring

economic income (e.g., net income, cash flow, etc.) by a discount rate or a capitalization rate that
may or may not be based on comparable or guideline companies.
The multiple-period method uses Discounted Cash Flow see previous chapter.
Reasons to value start-ups

There are several reasons to estimate the value of an early stage company:
Attract potential investors

Strategic planning
Incentive compensation
Valuation of intangible assets
Transaction analysis
Attracting potential investors: Early stage companies often suffer from anonymity. Therefore,
active marketing to potential lenders and equity investors is critical in order to attract the necessary
capital to fund operations. An independent estimate of fair market value is often a valuable tool that
assists these companies in securing additional financing. Banks and equity investors often rely on
- 44 -
the unbiased opinion of an independent appraisal report when considering whether to provide
financial support to a startup company.
Strategic planning: The choice of new venture strategy and how that strategy is implemented
depends largely on how each alternative available to a company contributes to creating
shareholder value for venture. Thus, valuation is not a once-off occurrence, and is essential in
strategic development, construction and implementation.
Incentive compensation: Many early stage companies attempt to assemble a capable and
talented workforce. The process may require the additional investment of company resources.
However, limited access to capital may prevent startup companies from paying market wages to
potential employees. Early stage companies often offset lower wages by issuing stock options as a
means to attract talented employees. Due to the formative stage of many early stage companies
and their relatively low initial valuations, share options are issued at very low strike prices.
If a company is able to achieve the projected level of growth, or institute an initial public offering
(IPO) the capital appreciation of the stock associated with exercising the share options significantly
offsets below-market wages. Valuing the stock of a startup company is necessary to estimate the
fair market value of the options as of the grant date, providing a supportable basis for comparison
in future years.
When a startup is preparing for a potential IPO, one of the critical issues reviewed by the JSE is
the determination of whether the price of stock options issued prior to the IPO is reasonable and
not a form of compensation to the employees. An independent appraisal of a early stage
company's stock provides support for the option prices and often plays an important role in
discussions with the JSE on the issue.
Valuation of intangible assets: Early stage companies may require appraisal services related to
the value of internally developed or to-be-purchased intangible assets, for the purpose of a sale or
acquisition.
Transaction purposes: Business appraisers are frequently retained to estimate the value of
startup companies for the purpose of selling it to another entity or to determine pricing analysis, i.e.
related to the purchase of company.
To simplify valuation techniques, the next chapter breaks up value to nine steps.
- 45 -
Chapter 4
Nine Steps to Determining Investment Value
The following discussion is specifically for entrepreneurs, who own small-to-medium sized
companies, whose principal concern is a practical valuation to determine whether listing on an
alternative exchange, like AltX is viable.
I have not discarded valuation methodologies and techniques set out in previous chapters, which
are complicated and often need the assistance of advisors. The following discussion can,
therefore, be used as a pre-advisory services approach to evaluating a company. In fact, many of
the processes set out in previous chapters are normally used for larger companies and at times are
not appropriate for smaller companies.
Two issues to consider before looking at the nine steps.
Firstly, understand the following basic concepts before ploughing into the nine steps.
Fair market value vs. investment value
FAIR MARKET VALUE assumes no particular buyer or seller and is hypothetical. This is "the
value of the Marketplace". It further assumes no compulsion on the part of the hypothetical
buyer and the hypothetical seller. In other words, it is a partly mathematical approach that
provides a reasonable range of values for a non-strategic buyer, who has no compulsion to
buy. Consequently, it provides a good starting point for all valuations, but only a starting point
for a strategic buyer.
INVESTMENT VALUE assumes a value to a particular investor based on individual investment

requirements, as distinguished from the concept of Fair Market Value, which is impersonal and
detached. Most strategic corporate deals have some element of investment value as acquirers
often pay about 30% more than non-strategic buyers.
Secondly, get a true picture of the company before making a commitment.

If an entrepreneur or investor is considering listing a business or buying that companys share,
then true profitability has to be calculated. Understand that share price is calculated based on
these figures.
For the entrepreneur: If the incorrect profit figure is used, he will probably get less equity for
his shares over time.
For the investor: Using the incorrect profit figures (when divided by shares in issue) will give
you the incorrect EPS. When this figure is multiplied by the PE ratio, you get a share price.
However if the EPS is too low, the expected share price will be too low.
The starting point is to compare the owners stated profits with the audited figures and to question
any differences. Look for costs that could be reduced under new ownership. In particular, check
consultancy fees, payments to the owner and to other shareholders, unnecessary property leases,
what supplies charge and duplication of costs.
Look for areas to restate. For example, money spent on software development may have been
capitalized by the owner. The entrepreneur might consider that it should have been treated as a
cost. Use own accounting policies when calculating the businesss profits. This will often result in a
- 46 -
significantly different profit figure. When looking at future profits, bear in mind the costs of
achieving them.
These may include:
Servicing increased borrowings. Economic analysis should help in determining cost of

interest rates in future.
Depreciation of investment in plant, machinery or new technology.
Redundancy (retrenchment) payments.

The arrival of new management often leads to major changes. These may mean higher costs and
lower productivity in the first year.
The Nine Steps

STEP 1: CHOOSE A VALUATION METHOD. This is the first important judgment call and today
stockbrokers will suggest that the most common income stream is the "Free Cash Flow" method of
assessment. The figure used is operating pre-tax income, after eliminating deductions for interest
expense, excess owners salaries and bonuses and other unusual, inappropriate, non-recurring, or
income tax-driven deductions and expenses. In other words, items that are considered once off.
These are also called extraordinary items and this figure divided by shares in issue is called
Headline Earnings Per Share.
Depreciation is generally disregarded and instead reasonable annual capital expenditures is
deducted from this earnings stream. It is, in other words, an attempt to determine the cash that will
flow to the company after listing and be available for distribution, future growth or debt service.
Cash flow has become the preferable earnings stream for business valuation in recent years since
it estimated the pre-tax return an investor would seek in alternative investments and as a
consequence makes comparability with other investments and empirical data available about
investment returns suitable.
However, be forewarned that choosing an earnings stream is itself somewhat more of an art than
might be apparent. The problem is after having made all of the above adjustments should you use
the most recent year, some kind of an average of several years (five years is not unusual) and do
you weight the average? Should recent years be given more weight? The decision is the
entrepreneurs, but his ability to convince prospective shareholders will rest on the assumptions he
uses to determine cash flow. Essentially, this is derived from the research conducted as set out
in previous chapters
STEP 2. CHOOSE A CAPITALIZATION RATE. This step is the second important judgment of any
valuation. It is an attempt to determine what rate of return an investor will expect, given risks
inherent in the particular business. If an investor is willing to accept a 10% risk-free return on a
Government Bond, what rate of return will he demand for a company with considerably greater
risk? Here an appropriate PE ratio could be based on comparable companies already operating as
listed entities. Again, whether the entrepreneur can convince investors that his company is worth a
seven times PE or 10 times will be determined by research. For instance, if a motor companys
competitors have an average PE of seven times, only research will convince investors that the
entrepreneurs company is as good, as well positioned and potentially profitable as his competitors.
If he cannot convince investors, he will insist on a lower PE.
STEP 3. DIVIDE THE FREE CASH FLOW EARNINGS STREAM BY THE CAPITALIZATION
RATE. The result is a tentative fair market value of the business. An alternative is to multiply the
earnings stream by the reciprocal of the Capitalization Rate, i.e. the reciprocal of a 25%
capitalization rate is 4, of a 20% rate 5, etc.)
STEP 4. REVIEW THE BALANCE SHEET: It is critical that the balance sheets strength can be
calculated, i.e. figures are available to complete a ratio analysis (mathematical formulae are set out
in the Appendices). Investors need to have access to data to know, specifically, that the company
has sufficient working capital and fixed assets to support itself. Otherwise, investors will look
- 47 -
elsewhere for better investment opportunities. In terms of these steps, adjust the figure in Step 3
up or down, depending on the level of net current assets (excluding debt) in the books. Excessive
debtors could mean bad debts in future, while excessive creditors will place cash flow under strain
in future. This net figure can be added or subtracted from Step 3. From these calculations you
arrive at Step 5.
STEP 5. The above enables you to arrive at: GROSS FAIR MARKET VALUE
STEP 6. DEDUCT: INTEREST BEARING (LONG-AND SHORT TERM DEBT): In as much as the
free cash flow earnings stream determined in Step 1 was before interest expense it represents
cash flows to both debt and equity stake holders. Therefore, to arrive at a price for shareholders
the amount of interest bearing debt should be deducted from Gross Fair Market Value.
STEP 7. Arrive at: NET FAIR MARKET VALUE: However, keep in mind that net fair market value
may be the last step in the calculation for a non strategic buyer, but only an intermediate point to
arrive at Investment Value for a Strategic Buyer or shareholder.
STEP 8. Add: ADDITIONAL STRATEGIC VALUE: It is a this point that the entrepreneur can
make whatever additional calculations he feels are appropriate to reflect the specific strategic value
which might be inherent in the company that is about to be listed or sold.
STEP 9. The above enables you to arrive at: INVESTMENT VALUE
The next chapter looks at due diligence, how it is undertaken and factors needed to conduct such
analysis.
- 48 -
Chapter 5
Due Diligence - The Final Stage of Preparation
The last phase before the listing stage gets under way is the due diligence phase, which many
investors and entrepreneurs would prefer to avoid. The process sometimes highlights weaknesses
in the plan or strategies and it is at this stage that tough decisions have to be made, i.e. do you
proceed with he listing on AltX?
Essentially, this phase has to assess the viability of the company relative to the research
conducted in Part One.
Due diligence is more commonly associated with the acquisition of a company by another. Due
diligence also plays a key role in a listing, particularly those that are planning to become publicly
listed for the first time. Also called an Initial Public Offering (IPO), these entrepreneurs would
conduct a due diligence for different reasons. In this case it is the business itself which must tell its
story to potential investors through the prospectus. Apart from enabling the company to piece
together its history and future prospects into one succinct document, the due diligence process is a
conduit to enhancing the value of the company. This is because an outcome of the exercise is
identification of gaps that require filling if the company is to move forward confidently into the
future.
The business plan and prospectus phase is discussed in Part Three.
In this section I look at what goes on during a due diligence process and more importantly discuss
the significant benefits that accrue from this exercise to the company that is going public.
PHASE TWO: UNDERTAKING DUE DILIGENCE

What is due diligence?
There is no legal definition of the term "due diligence". The meaning of due diligence is not
conditioned by the purpose behind it or the use to which the report will be put. Therefore, put
simply due diligence is a detailed investigation of the affairs of a company. During this phase the
consultant undertakes investigative analysis of the financial and operating activities of an entity in
connection with a proposed transaction. It also assesses the possible outcome of the transaction,
i.e. will it result in a significant change in the ownership or the capital structure of the company.
This should make one appreciate at the outset that a due diligence exercise is an interactive
process that needs analysis and interpretation.
Due diligence is therefore used to investigate and evaluate a business opportunity, such as
determining whether a company is ready for a listing on AltX. The term due diligence means
exercising due care in any transaction. As such, it spans investigation into all relevant aspects of
the business present and forecasted future of the company within a targeted area of business. It
is at this stage that the research undertaken in Phase One comes into play. An entrepreneur who
has an impressive list of assumptions based on research can better overcome the scrutiny of
investors than one who has sketchy research.
Due diligence sounds impressive, but it translates into basic commonsense, i.e. a logical process
of thinking things through before committing to a project that may be unsuccessful.
- 49 -
The due diligence process should ferret out problems such as a companys tax, corporate or
shareholding structures. It should assist the directors in taking hard decisions such as selling noncore, non-profitable assets, activities or entire divisions. It will also result in a critical analysis of the
control, accounting and reporting systems of the company and concomitantly a critical appraisal of
key personnel. It will identify the value drivers of the company thus enabling the directors to
understand where the value is and to focus their efforts on increasing that value in the future. A
proper due diligence goes way past looking at the financials both historical and prospective.
Several guides have been written to assist in conducting of a due diligence, but reduced to its
basic terms the due diligence exercise involves a close examination of a number of different areas
of the business. The following is a list of the key areas which would come under scrutiny and a
brief description of what the due diligence exercise should focus on in each area:
GENERAL FIELD OF
INVESTIGATION
REASON
Financial statements
Assets
Employees
Sales strategy
Marketing
Industry in which the company operates
Competition
Systems
Legal, corporate and tax issues
Company contracts and leases
Suppliers
Ensure accuracy
Confirm value, condition and legal title
Identification and evaluation of key directors
Analyze policies and current procedures
Key value drivers and such efficacy
Understand trends and new technologies
Identify threats
Efficacy of current systems. Do they need to be upgraded?
Do any tax issues need to be resolved?
Identify risks and obligations
Are they expected to remain around?
- 50 -
Personnel
Marketing
Financial
The aim of due diligence is to identify problems within the business, particularly any issues which
may give rise to unexpected liabilities in the future. This may be evident when the process is
instigated by a prospective purchaser, who is interested in knowing as much as possible about the
company that is to be acquired. When the due diligence is carried out as part of the steps leading
to an IPO, the exercise takes on added meaning and encompasses a wider scope. The above
table illustrates the general fields of investigation and reasons for conducting such research. The
following explains some of these fields in more detail.
Detailed statements of income and balance sheets per half-year (including

annual reports) for the past three years and the current year to date.
All supporting schedules to the above financial statements for the periods
listed (e.g. manufacturing overhead detail accounts, selling, general and
administrative accounts.
These schedules should be split by major product line, if available. There

should be separate schedules for local and international markets.
Accounts receivable per customer for the past three years.

Physical inventory summary or detailed breakdown of inventory (raw
materials, work in process, labour and overhead) for the past three years.
Accounts payable by vendor for the past three years.
Listing of accrued expenses for the past three years.
State tax returns for the past three years.
Customer order reports. This is split up per customer and product line for a
period of at least three years.
Listing of shipments by customer and product line for each month for the past
three years and the current year to date.
Listing of outstanding customer contracts and outstanding customer bids for

the domestic, export and international divisions.
Description of all manufacturer's representative organizations, agreements

and commission schedules.
List of buying sources: domestic, export and international.
All employment contracts or agreements.
All bonuses, deferred compensation, share option schemes, profit sharing

and retirement programmes.
All pension plan documentation, including actuarial reports, tax returns and
funding requirements for the past three years.
Schedule of hourly wage rates and number of personnel at each rate.
Organization chart of salaried personnel.
- 51 -
Contracts & Agreements
All contracts or agreements with:
Vendors and customers

Employees
Unions
Other third parties
All recent (within three years) appraisals of property, machinery and

equipment.
A list of machinery and equipment.
All outstanding insurance claims.
All patents, copyrights and license agreements.
All lease or purchase agreements for machinery and equipment, vehicles and
property.
Legal descriptions of all property, including deeds, title reports and title
insurance documentation, together with documentation of any lien thereon.
List and description of all outstanding litigation or anticipated litigation.
Is Union contract transferable? If yes, then description of mechanics of

making transfer, such as required approvals.
Listing: It must be remembered hat the rules of the JSE Securities Exchange and those of AltX
impose certain requirements in relation to the types of information that a company must disclose in
its prospectus and the due diligence process serves to highlight these. These include the risk
factors that must be disclosed or the importance of the core activities to the business, both now
and in the future.
While there may be several reasons why a company would offer its shares to the public, there is
really one key to a successful listing and that is adequate preparation. All the parties to the listing
(underwriters, stockbrokers, legal advisors and reporting accountants) are all faced with difficult
tasks if the company is unprepared for the IPO.
In fact, the process involves gathering information (financial and operational) from the factories,
head office, directors, staff and unions. These facts have to be assessed and then reassessed in
relation to the planned listing and in view of research conducted, as described in Part One.
By identifying areas of weakness, the due diligence process becomes a tool which shows the
company the way to optimize its potential and thereby increase its value to potential investors. For
instance, the due diligence could highlight that the companys cost structure (buying raw materials)
is far too high and new suppliers have to be found before proceeding with a listing. Consequently,
it can be stated that the process of due diligence enables the entrepreneur to fill gaps between the
present status of the company and the company that should be floated. In part, this gap is an
expectations gap created as a result of how the market expects a listed company to conduct its
affairs.
In this scenario, once these gaps have been highlighted the due diligence exercise should not stop
there but should include advice given by the advisors to the company on the processes and
activities which are required to fill the gaps identified. In an IPO the due diligence exercise is a
broader, fuller exercise which apart from identifying the weaknesses also looks at resolving them
with the purpose of increasing the value of the company.
- 52 -
In essence, if the conclusions show that a company listing is viable proceed to Part 2 and
undertake the writing of a prospectus. If not viable, either reject the plan to list or shelve it until
environmental factors are more conducive to a listing.
Why is due diligence conducted?
There are many reasons for conducting due diligence, including the following:
Confirmation that the business is what it appears to be.

Identify potential defects (negatively influencing factors) and thus avoid a bad business
transaction.
Gain information that will be useful for valuing assets, defining representations and
warranties
Negotiating price concessions.
Verification that the transaction complies with investment or acquisition criteria.
The aim of due diligence is to identify problems within the business, particularly any issues that
may give rise to unexpected liabilities in the future. This may be evident when the process is
instigated by a prospective purchaser, whose interest it is to know as much as possible about the
company that is to be acquired. When the due diligence is carried out as part of the steps leading
to an IPO, the exercise takes on added meaning and encompasses a wider scope.
Who should conduct a due diligence?
For the due diligence exercise to be carried out in an unbiased manner and to achieve its purpose
of accurately presenting the state of affairs of the company, it is important that it is carried out by
an independent professional. The process in itself calls for professional input from both financial
and legal advisors, in addition to other technical advisors such as engineers or IT professionals.
This will depend on the genre of the business being studied. However, as mentioned previously the
success of the due diligence exercise is largely dependant on managements co-operation both
physically, in the time spent with advisors and mentally in their positive attitude towards the whole
process.
How is due diligence conducted?
The parties conducting due diligence generally create a checklist of necessary information.
Management prepares in particular financial statements that need to be reviewed to incorporate
realistic forecasts. In addition, interviews and site visits must be set up and conducted. Finally,
thorough research is conducted into customers, suppliers, industry experts and trade
organizations.
How much due diligence needs to be conducted?
There is no correct answer to this question. The amount of due diligence conducted is based on
the size of the business, prior experiences, the size of the transaction, the likelihood of closing a
transaction, time constraints, cost factors and resource availability. It is impossible to learn
everything about a business in the time available, so it is important to learn enough to enable the
entrepreneur to lower risks to the appropriate level and make good, informed business decisions.
Can I Overdo My Due Diligence Effort?
Yes. Too much due diligence can offend a target company to the point where they walk away from
a deal. Some market experts call this "analysis paralysis" which prevents a transaction from being
completed or provides time for a competing offer to emerge. Accordingly, it is important that due
diligence be prioritized and executed within a pre-determined timeframe.
Appropriate investigation and verification into the most important issues often must be balanced by
a level of trust concerning lesser issues.
In turn, time allocated for completion varies widely with each situation. Many preliminary
agreements define timeframes in which due diligence will be conducted. Time schedules through
- 53 -
to the closing of a transaction are typically tight - parties should ensure that adequate time is
allocated to due diligence.
However, due diligence cannot be rushed.
A due diligence exercise should not be a rushed affair even though there is usually intense
pressure to complete the analysis. Anyone who has been through a due diligence will know that
the whole process can be lengthy, can lead to frayed nerves and involve tough decisions. On the
face of it, it can also appear to be a nuisance which impinges considerably on managements time
and keeps them away from their business duties. Going public brings with it certain new
responsibilities and a public profile and public sentiment that can turn sour even if an unfounded
rumour is doing the rounds.
To start with going public increases the number of shareholders. As a result, board performance
will be subject to close scrutiny. Institutional investors in particular will look for increases in share
prices, the achievement of profit targets by the company and dividend pay-outs. Investors in
general require assurance that the company operates a system of strategic planning and
budgeting and that it has adequate financial reporting and management information structures in
place before the IPO takes place.
This is not to say that a less than fully prepared company would not become listed but trade-offs in
the shape of marketability and share price are to be expected. In other words, the market rewards
companies for being prepared for its new public status.
In practical terms what does the due diligence process aspire to achieve? Certainly the following:
To assess the reasonableness of historical and projected earnings and cash flows.
To identify key vulnerabilities, risks and opportunities.
To gain an in-depth understanding of the company and the market in which the
company operates such that the companys management can anticipate and manage
change.
To set in motion the planning for the post-IPO operations (Part Three).
How much does due diligence cost? Who pays for it?
Due diligence costs are usually based on the scope and duration of the effort which, in turn, are
dependant on the complexity of the target business and other factors. Costs are typically viewed as
an essential expense that is outweighed by the anticipated benefits and the downside risks of
failing to conduct adequate due diligence.
How do you maintain confidentiality during a due diligence engagement?
It is possible that third parties become aware that a due diligence is being conducted. For example,
contacting a customer to assess their satisfaction with the target company might result in a rumour
spreading that the company is up for sale. Accordingly, to maintain privacy only contact customers
under the guise of being a prospective customer, journalist, or industry analyst.
Does due diligence ensure that a business transaction will be successful?
A well-run due diligence programme cannot guarantee that a business transaction will be
successful. It will improve the odds. Risk cannot be totally eliminated through due diligence and
success can never be guaranteed
Listing on AltX
Going public is a significant milestone for a company. It constitutes a dramatic change in the
company and shareholder position with many new opportunities and benefits, as well as several
new risks. History has shown us that there is a positive correlation between the number of
companies going public and the rising of stock market indices. As the relevant index rise the desire
to list the company becomes more intense.
Conversely when the indices plummet, going public no longer remains top of the directors wish
list. The perennial question is, therefore, when is it the right time for the company to go public? The
- 54 -
only answer is related directly to that companys state of preparedness for an IPO to catch the
market at the right time. If the getting ready process is not acknowledged or not given enough
importance, the tremendous pressure of trying to effect the necessary changes in a short time will
most certainly leave the directors wondering why they wanted to go public in the first place. Should
the decision to go public be one the directors live to regret?
Does this mean that a due diligence should fall only within the purview of those companies that are
seeking to go public? The answer is no. There may exist several reasons why a company may
wish to benefit from the salutary effects of a due diligence exercise but without having an IPO on
the agenda. Market sentiment may be abysmal, or the business is a family business which is
intended to remain so for the foreseeable future or the profitability of the company may not be good
enough to launch it successfully on the market at that time.
A company in this position would still benefit from a due diligence exercise. In spite of the demands
on management time that this process involves, senior executives have to be committed to
strategic issues facing the company if they want to preserve and enhance shareholder value.
At a minimum, the cost of the process could be likened to the cost of buying an option to go public
which the company would be able to exercise at its discretion and at a handsome exercise price. A
company that has its affairs properly in order will not only have a less onerous task in the run-up to
the IPO, but will also find that having followed good management practices, it has enhanced the
value of its assets.
For more information on Due Diligence contact me on bci@magliolo.com.
The next section of the book looks at AltX listing requirements and IPOs.
- 55 -
PART 2:
Listing Requirements & Other Regulations
"Profitability is the sovereign criterion of the
enterprise and, profitability is the core of
any achievement - whether financial or
artistic. US management guru Peter
Drucker
Section Includes:
BASICS OF IPOs
OVERVIEW OF THE ALTERNATIVE INVESTMENT MARKET
PHASE THREE: BUSINESS PLANS & PROSPECTUS
ALTX LISTING REQUIREMENTS
OTHER ALTX REQUIREMENTS
- 56 -
Chapter 6
The Basics of IPOs
Every serious entrepreneur and equity investor knows the potential that an IPO can offer them in
both Bull and Bear markets. Even over the last three years, when world equity markets
experienced a deep bear market, the few IPOs that listed certainly held their own.
Ive been asked on numerous occasions why newly listed companies generate such excitement in
the market. With the stock market in turmoil, investors and entrepreneurs have been in a surly
mood, which (in many instances) means that newly listed companies have been launched at
discounts to true value as calculated in previous chapters. So, new issues provide opportunities
to buy shares in a company that could provide capital growth for investors in the near future. For
the South African entrepreneur, raising funds in a difficult, high interest rate environment means
having the cash to expand during bearish (pessimistic) times.
Lets start this discussion with a brief overview of IPOs
What is an IPO?
An IPO, Initial Public Offering, is the initial selling of shares to the public. After these shares are
initially issued to investors prior to listing (called The Primary Market), they are traded through the
official exchange, called The Secondary Market. The Primary Market consists of Underwriters
allocating shares to institutional and individual investors. The Primary Market essentially
represents everything that occurs before the company's stock is traded on one of the stock
markets.
Why does a company go public?
A company goes public to raise money. Going public also makes it easier to raise more money in
the future (by issuing additional shares). Other reasons for making an IPO would be to improve a
company's profile and increase the potential for mergers or acquisitions.
How the company uses the proceeds?
A company should have a very clear idea of how they will use the capital raised from their IPO.
Murky allocation plans can indicate that a company has poor investment prospects. A properly set
out business plan and, ultimately Prospectus, should set out the goals of the company clearly and
concisely See chapter XX.
How to participate in an IPO (purchase shares at the offering price)?
It is very rare that the individual investor has the financial clout to participate in an IPO; however,
with the advent of online brokerages, it is becoming somewhat easier for individuals to participate.
Today, many of the local brokers have their own on-line trading facilities, which provide
entrepreneurs with access to funds worldwide. Similarly, investors in South Africa now have
access to foreign companies through online brokers who are moving into the business of offering
IPO shares to private investors. Examples of such foreign investors are Charles Schwab, Fidelity,
DLJ Direct, E*Trade, and Wit Capital.
Each has its own investor requirements, but these tend not to be as strict as those of full service
brokers. In addition, many institutions have an aversion to IPOs during bearish times, which gives
individual investors a better opportunity to participate in IPOs. Bear in mind that in IPO investing,
individuals are usually at a disadvantage, because of the amount of cash that institutions have at
their disposal. Understanding this basic concept leads to better planning once the prospectus has
been written. Effectively, the plan is to issue shares to groups of institutions prior to listing i.e. The
Road Show, which is outlined under Part Three.
- 57 -
Picking the right broker

IPOs are controlled by stockbrokers, whether main board or AltX listings. The terminology may
differ, but there is no choice the entrepreneur has to approach and convince the broker that his
company is everything he believes it to be. The business plan is the first full document that needs
to be completed and submitted to the broker.
However, before that is done, it is suggested that the entrepreneur carries out a due diligence of
the stockbroker. It is crucial to find a broker who understands the industry that the entrepreneur
operates in, has a keen interest in establishing and carrying out a programme to list and to
maintain the companys profile to the highest standards.
The second step is to find a broker who underwrites a lot of deals. This is a critical decision
because unlike an institutional investor, who has accounts with numerous brokers, an individual
typically has one brokerage relationship.
Remember that even institutional investors dont get all of the shares they want on the offering and
make purchases in the aftermarket. Investing in IPOs is very different to investing in seasoned
stocks. Prior to the offering, there is limited information and research on IPOs. Immediately
following the offering, research opinions emanating from the sponsoring stockbroker is invariably
positive.
By using the following strategies, the entrepreneur can increase his odds of finding a suitable
stockbroker and, for investors, finding promising IPOs and avoiding poor performers.
Gain knowledge: Find out whats happening in the market that the IPO is about to be launched
into, i.e. undertake thorough research on an IPO being proposed to you.
Investigate before you invest: Insist on getting a copy of the prospectus from the sponsoring
broker and study it. Are there similar companies that are already publicly traded? What are the
valuations of these companies?
Dig out IPO and market/industry research reports: Each report digs into the fundamentals
of the issuer. Each deal is rated based on relative valuation, fundamentals, group momentum
relative to the market, and shareholder-oriented issues. Publicly traded comparable companies
are analyzed to confirm competitive positioning. Only original source financial data is used. Use
research by brokers who have a long track record of being able to distinguish good deals from
bad.
Ignore stock market hype. When there is a hot IPO being offered to you, fight your feelings
that you must own the stock. Wait a day. Wait a week. Every hot consumer-oriented stock with
a drum roll that preceded its offering has been a major disappointment for investors who
bought on the first day.
Consider comparable existing companies or larger IPOs. Due to the large number of
shares to be distributed, there is less volatility on the first day of trading. However, these
companies tend to be leaders in their industries and consequently receive major research
coverage and broad institutional ownership. There is a safeguard for investors who buy such
shares. For the entrepreneur, there is a critical need for him to know what these companies are
and to make sure there is no direct competition that would lure investors away at the pre-listing
and the official launch of the company as a listed entity.
Invest in IPOs that have major stockbrokers as sponsors. These IPOs are likely to receive
research coverage and hence, ongoing investment interest. As a rule, stay away from IPOs of
small companies managed by lesser known sponsoring brokers. Stay away if you dont
recognize the name of the sponsor.
- 58 -
A list of AltX sponsoring brokers is outlined in the Appendix. Note that such sponsors
for AltX companies are called Designated Advisors.
A more level playing field?

While individual investors are unlikely to ever equal institutional IPO clout, entrepreneurs and
investors are far better off than they were prior to the advent of the Internet. Earnings releases and
regulatory filings were only available to institutional investors and research analysts. The rest of
investors had to wait to read the information in the next days business papers. In the meantime,
we missed the opportunity to act on timely information. However, the Internet has dramatically
expanded the availability of information and speeded up access to it.
Despite the availability of information around the world the Internet has had a mixed effect on
availability of IPO information and IPO allocations in many First World countries. While the
requirement for large brokerage firms to offer independent research to individual investors will
increase the availability of diverse views on stocks, it is unclear how quickly individual investors will
have access to IPO research.
Many sponsors wait weeks before issuing the initial research opinion. The idea is not to affect the
volatility of the share prior to listing. In the US, the Securities and Exchange Commission (SEC)
has restricted analysts from appearing at road shows and offering their opinions on IPOs. While
the SEC wants to separate security analysis from underwriting pressures, I dont believe that such
restriction son information flow is a good thing. In South Africa, information flows do not seem to be
restricted, i.e. the listing of Telkom was announced at least 12 months prior to the utility becoming
a public entity.
Allocations to favourite friends and family seem to have been reduced. Individual investors will
never be on the same level as institutional investors. However, as long as information flow is
improved and exclusionary old boy practices are eliminated, individual investors will be better off;
particularly as there is more and more availability of information in South Africa from research t
prospectuses, reports on IPOs, calendars of upcoming deals and information about the IPO
market.
IPOs that win
An IPO is a well-earned milestone. However, it is one, but not the only way to finance growth. For
the purpose of this book, it has been assumed that these alternatives have been explored and the
senior management team has decided its best choice is to take the company public listing option.
The foundation of a successful IPO is thorough planning. Every year, many IPOs fail needlessly
for lack of adequate planning. Some companies watch their successful IPO turn into a languishing
secondary market and declining share price. The best way to prevent this is a plan focused on
building awareness and confidence within the financial markets, i.e. before, during and after the
IPO. Handled correctly, an IPO will be an important first step in building trust and enduring
relationships with the investment community.
The company will also need to build up a legal, financial, securities and investor relations team. It
is essential that the corporate advisor having undertaken research and due diligence- be the
team leader and to always remain in control on behalf of the company. He knows better than
anyone the intricacies and subtleties of the business and its industry.
Continually gather market intelligence
Once a decision is made to proceed with an IPO, preparation will include acquiring an
understanding of the perceptions, expectations and imperatives of prospective investors. This
market intelligence is the basis for a sound IPO strategy and will identify interest and concerns held
by the financial markets. It will also assist the team to determine the best approach and timing for
such a listing. It also provides baseline data to build relationships and measure progress once
listed.
- 59 -
The research must necessarily represent a cross section of the analysts, institutional investors,
brokers and corporate finance people with an interest in the companys industry sector. It should
extend beyond, and be independent of, the chosen underwriter or consortium of underwriters. As
discussed in previous chapters, the scope of the information should be regional, national and
international; as appropriate to the companys strategies.
Typical current market sentiment will influence the timing, asset mix (ordinary shares, preference
shares and debentures) and approach that the company will take with its IPO. Key is their
perception of the how the proceeds of the IPO will influence the companys prospects. Here the
corporate profile, which includes independent research, is preferred. Professional surveys are
objective, handled by experts in the field, and provide a third-party distance that encourages
respondents to comment frankly about the company and its prospects.
The company acquires a far more accurate assessment of how it is viewed, and will be accepted,
by the investment community, than if the survey was conducted in-house, regardless of the
professional capabilities of the in-house research team.
IPO logistics
No two IPOs are ever alike. The size and terms of the issue, proposed use of funds, corporate
complexity, market conditions, the number of regulatory impediments and jurisdictions in which the
securities are to be offered, and a host of other factors, will affect the timing, cost and success of
the IPO.
Some IPOs can be fast tracked, based on the experience of the principles and advisors and their
relationships with regulatory authorities. In most cases, however, the drafting of the prospectus will
take between two and three months to compile, review and issue. Below is a suggested planning
timetable. It should be modified according to an individual companys plans, but will provide some
guidance based on past experience.
IPO TIMETABLE
(in Days)
1
45
50
55
60
80
85
88
90
ISSUES COVERED(Prospectus phase

First working group meeting
First draft of preliminary prospectus
Second meeting: Revisions agreed
Third meeting: Signatures
Preliminary prospectus filed: Start road shows
Receive Deficiency Letter
Fourth Meeting: Final revision and pricing
Final prospectus filed
Receipt for final prospectus received and Listing
The process begins with the first working group meeting, attended by all parties. These include
company executives, lawyers, corporate advisor, auditors, underwriters and investor relations
members of the team. At this meeting, preliminary discussions are held with respect to the terms of
the offering. In addition, a detailed timetable is established and responsibilities are assigned for
preparing various portions of the prospectus.
Preparing the first draft of the prospectus can take 45 days or more. Once all assigned portions of
the prospectus have been provided to the lawyers, he will circulate a draft to all parties. At
subsequent meetings the drafts are carefully reviewed and discussed and revisions are agreed on.
It must be stressed that if an advisor was employed to undertake the research, due diligence and
the drafting of a business plan, the time to draft the prospectus should be reduced to no more than
10 days.
- 60 -
The road show

Once the preliminary prospectus is filed, the road shows can begin. Company executives and the
lead underwriters meet prospective investors and others to discuss the company, its plans and the
offering. This stage of the IPO requires thorough preparation, including:
A well-focused presentation for investors based on the key selling points outlined in the
prospectus. It should include the companys major strengths, strategies, earnings
expectations, market potential, peers and competitors and management expertise.
Preparation of executives with presentation training/refresher sessions, media interview
techniques, Q & A briefing manuals and dry-runs.
An investor hand-out package, i.e. The Corporate Profile.
Preparing a condensed version of the preliminary prospectus. Draft this document in close
conjunction with the underwriter and legal counsel.
Organizing road show logistics as required.
Working with securities firms to ensure the widest possible investor audience. Target a list of
well-known analysts, portfolio managers and financial media.
Ensure that all materials, presentations, press releases, advertising and media interviews are in
regulatory compliance.
Monitor investor acceptance. These reports allow management to fine-tune its messages
during a road show.
As soon as the JSE acceptance letter is received, revisions are prepared and, if required, the
prospectus information, including financial statements, is updated. Finally, all parties meet again to
review and approve the revisions and finalize the pricing. Then the final prospectus is filed. When
all of the JSEs comments have been addressed to their satisfaction, they will then issue a receipt
for the final prospectus.
The highly successful Alternative Investment market (AIM), which is the UK-based SME market, is
highlighted in the following chapter as a precursor to in-depth discussion of AltX.
- 61 -
Chapter 7
Overview of the Alternative Investment Market
We researched parallel exchanges internationally to incorporated best practice into
AltX. The most successful parallel market has been AIM in the UK with more than 850
companies since it opened in 1995. Collectively, these companies have raised more
than US$14 billion while on AIM. According to Noah Greenhill, AltX manager, October
2003.
Given the level of success that the London Stock Exchange (LSE) has had with its small to
medium-sized company exchange, called The Alternative Investment Market (AIM for short), it is
appropriate to briefly outline its history and objectives. After all, AltX has been designed to adopt
AIMs best practices. In addition, South African entrepreneurs are not limited to listing on AltX. AIM
might be the global alternative for raising capital that some entrepreneurs have been looking for.
AIM is the LSEs market for smaller, growing companies from all over the world, enabling
businesses to access the capital and liquidity of the London markets. It is also the largest
European growth market by capitalization and has more companies than all of the other growth
markets in Europe put together. AIM has also emerged as the most international European growth
market, with more overseas companies, than any other market. It is also the fastest growing
market. Since it was created in 1995, over 1200 companies have used AIM as a vehicle for growth
and more than 9 billion (US$14 billion) has been raised on the market.
In addition, AIM continues to experience increased interest from overseas companies, advisors
and investors. In response to this demand, in May 2003, AIM introduced an expedited admissions
procedure for companies with existing quotations on other major markets known as AIM
Designated Markets.
Companies that have been listed for at least 18 months on the main boards of AIM Designated
Markets are exempt from the formal obligation to produce an AIM admission document, although
they may be legally be required to produce such documents in connection with certain types of
fundraising or may choose to for marketing purposes.
Suited for SMEs
As one of the range of markets that the LSE has developed to meet the needs of companies and
investors, AIM is tailored to suit growing businesses. Its rules have been designed to reflect these
companies unique requirements. At the same time, AIM provides a central focus for investors who
understand growing companies and who want to invest in their potential.
AIMs flexibility means it is attractive to a wide range of dynamic companies, from young and
venture capital-backed businesses to established family concerns. Similarly, AIM companies cover
all business sectors, ranging from mining companies, real estate, mobile commerce, leisure,
entertainment and hotels, general retailers, and include companies at all stages of their life cycle.
Whatever their area of business, all AIM companies enjoy the benefits of being quoted on the LSE
including exposure to Londons liquidity, the deepest pool of global capital in the world, respected
regulatory standards and unrivalled international expertise.
There is no specific suitability criteria for companies to qualify for AIM. However, under the AIM
rules, all companies must produce an admission document making certain disclosures about such
matters as their directors' backgrounds, their promoters, business activities and financial position
- 62 -
Nomads and brokers: Importantly, all AIM companies are required to have a nominated advisor;
popularly known as a nomad from the register of such advisors published by the LSE. Similarly,
AltX has the Designated Advisor. This nominated advisor is responsible, among other duties, for
warranting to the exchange that a particular company is appropriate for AIM. This is an important
quality control for AIM and a very serious responsibility for the nominated adviser.
The entrepreneur will also need a broker. This is a stockbroking firm that is a member of the LSE.
The broker will work with the nominated advisor in respect of any fund raisings. There is no reason
why the broker cannot be part of the same organisation as the nominated advisor. The stipulation
is that there will need to be procedures in place to avoid any conflict of interest. The broker will play
an important role in bringing buyers and sellers of the companys shares together and making a
success of the flotation and trading in the aftermarket.
Typically, the best brokers will also be able to provide research on the company. There are also a
growing number of investor relations professionals who will be keen to help you to promote your
profile.
Once admitted to AIM, a company has certain ongoing disclosure requirements and needs to
retain a nominated advisor at all times. Ordinarily, once a company has been on AIM for two years
it will have the opportunity to seek admittance to the main market by using a special expedited
procedure.
AIM companies are not bound by the full Listing Rules of the UK Listing Authority. In South Africa,
AltX companies also enjoy more limited disclosure regulations when compared to Main Board
listings See Appendices. Additionally AIM listed securities are treated as unquoted for taxation
purposes, providing various potential tax benefits.
To reiterate, to list on AIM, the following has to be undertaken:
After research, due diligence and the drafting of a business plan, assessed the advantages and
responsibilities involved in listing on AIM. If the company is right for AIM, then the entrepreneur
will need to:
o
o
o
o
o
Appoint a nominated advisor

Appoint a broker
Make a pre-application announcement to the market about the company
Produce an admission document. It is possible that certain overseas companies
may be able to obtain an exemption from this requirement
Submit a declaration confirming that the company will adhere to the AIM rules and a
separate declaration by the nominated advisor that the company is appropriate for
AIM
Movement to the main board

AIM may be, and has been, used as a stepping-stone for companies whose shares eventually are
traded on the Official List. More than 85 companies have progressed from AIM to the main market.
In addition over 90 smaller companies on the Official List have transferred to AIM as it better suits
their requirements. Procedures and practices relating to AIM have developed since its inception
and are now embodied within the AIM Rules for companies, issued by the London Stock
Exchange.
AltX companies are also expected to move to the main board after a period of time, which has yet
to be stipulated. In addition, the VCM and DCM will be closed by 2005 and these companies will be
required to apply for a main board or an AltX listing.
Eligibility of companies applying to AIM
- 63 -
AIM imposes no formal restrictions on the type of business or on the industry sector in which the
company operates. The market is open to companies from all sectors, incorporated in any country
worldwide. The company should hold discussions with its corporate advisors when deciding
whether an AIM flotation is a suitable way forward. The application process is tailored to
encompass companies at all stages of their life cycle from start-up enterprises to businesses with
years of trading experience.
The main requirement is that the company is appropriate for the market, a view taken by the
companys appointed Nomad. The requirements for admission to AIM are straightforward.
No minimum trading record is required as is generally the case with admission to the LSE.
There is no minimum requirement as to the percentage of shares that must be placed into
hands of the public.
Companies that apply for their shares to be admitted to AIM must comply with relevant
legislation and regulations, i.e. requirements of the Public Offers of Securities Regulations 1995
POS Regulations.
The London Stock Exchange has issued the AIM Rules for companies, which must be adhered
to.
Can South African companies list on AIM?

Companies that have had their securities traded on an AIM Designated Market for at least 18
months prior to the date of admission to AIM can apply to be admitted without having to publish an
admission document. These companies can be from anywhere in the world. Those using the fast
track route to AIM simply need to make a detailed pre-admission announcement making it more
cost-effective to join AIM. The current AIM Designated Markets are the main markets of:
Australian Stock Exchange

Euronext
Deutsche Brse
Johannesburg Stock Exchange
Nasdaq
NYSE
Stockholmsbrsen
Swiss Exchange
Toronto Stock Exchange
UKLA Official List
Therefore, whether a company is suitable for admission to AIM is dependant on commercial, as

well as financial factors. These include the following, which companies have, or should strive to
have:
A strong management team. These are key roles occupied by suitably qualified and
experienced members.
Good prospects for growth. This is likely to be influenced by the market for the products or
services provided by the company, the competition within the sector or the companys
efficiency.
Strong financial controls.
Established systems of management reporting, including timely production of accurate

management accounts.
Any type or class of security issued by a company may be admitted to AIM. Ordinary shares are
most commonly traded, although there are no restrictions on the trading of preference shares and
debt securities.
Requirements
- 64 -
Instead of an admission document, companies are required to provide a range of information by

way of an announcement 20 days prior to the date of its expected admission to AIM. This includes:
The size of any capital raised in conjunction with the application for admission to AIM.
Confirmation that the company has adhered to the legal and regulatory requirements of the
relevant AIM Designated Market.
Details of the business of the company and its intended strategy following admission
A description of significant changes in the financial or trading position of the company since the
date at which the last audited accounts were prepared.
A statement that the directors have no reason to believe the companys working capital will be
insufficient for at least 12 months from the date of its admission to AIM.
The rights attaching to, and the arrangements for settling transactions in, the shares being
admitted.
Any other information that has not been made public, which would otherwise be required of an
AIM applicant.
The address of a website containing the company's latest published annual report and
accounts (prepared in accordance with UK or US GAAP or International Accounting Standards)
which must have a financial year-end not more than nine months prior to admission.
In short, AIM requires that its companies give investors full information, but without
regulatory impediments to the growth that is in the best interests of companies and
their investors alike.
What you need to know before applying to AIM

Before deciding whether to join AIM, an entrepreneur should consider carefully the issues involved
in joining an international stock market. He will have to be ready to accept the disciplines inherent
in having shares traded on an open market and in having outside shareholders whose interests
must be taken into account. In particular, he must be aware that flotation on a public market brings
with it the uncertainty of market conditions and, therefore, the entrepreneur should consider the
following number of factors before applying for an AIM listing.
The company's share price may be affected by factors beyond its control, including conditions
or developments in the same sector.
Flotation will inevitably lead to closer scrutiny of the company, its performance and prospects.
The board must be prepared for greater exposure and openness, in terms of financial strategy
and in promptly announcing new developments, both positive and negative.
Keeping investors informed about the company is crucial; not just prior to listing, but
subsequent to becoming a public entity.
Benefits of joining AIM

Flotation on a public market is first and foremost an opportunity to raise funds for further growth,
but there are many other reasons why a company might consider going public. These have been
discussed in various pars of this book. Therefore, in addition to benefits outlined on pages XX, the
benefit to an AIM listing is centred on its regulatory environment and access to global funds.
The South African process of taking a company through to a listing is discussed in the following
chapter.
- 65 -
Chapter 8
The South African Listing Process
Lets look at how far we have come through the process.
The starting point was research from global markets to sector and company analysis which set
the scene for a broad determination of the viability of the entrepreneurs intention to list on AltX.
This research is honed down to more specific detail, such as competitor analysis, industry trends,
company values and ultimately an analysis of the structure of the project. This is Phase One.
Given the research, the businessmans actual company (and performance) is then directly related
to the research undertaken in Phase One. Essentially, the question is asked as to whether the
specific company fits in with current research trends, i.e. while trends could be positive, the actual
company may not be a viable proposition as there may be too many competitors in that specific
market. This is known as the due diligence phase of the project, i.e. Phase Two.
If it is viable, then the next step is to pull all this data together in a plan that can be used for a
number of purposes:
For the directors to run the company in a logical manner, and according to schedules and
timetables.
For private investors, who may be interested in buying the companys product or financing
specific projects.
For potential shareholder, who may be interested in acquiring the companys shares prior to
or after listing.
These documents are essentially the same, yet have different purposes. While the first is called a
Business Plan, the second is a Corporate Profile and the last the Prospectus. The prospectus is
also used for any major corporate activity that is deemed to have a significant effect on
shareholding, financials or directorship/leadership.
It is important to stress at this point that it is necessary to have a business plan. On numerous
occasions, entrepreneurs have told me they dont believe they need a business plan as the
stockbroker will draft a prospectus for him. Fair comment, but unrealistic. Stockbrokers will not
draft a prospectus if they believe (or have been led to believe) the entrepreneur has been running
his company without a logical, well thought out strategy, which would be set out in a business plan.
Ultimately these documents are different. They are set out differently and have
specific purposes.
The next section looks at the structure of such documents for a hypothetical company that intends
to list on AltX. It is thus crucial to note how each document is laid out and the amount of
information that is given. For instance, a business plan would have more information on group
strategy than a prospectus, while the latter document would have additional valuation than the
former document.
Note: the following diagram highlights a fundamental point: the information that is needed for these
documents will have been researched, assessed and compiled from Phases One & Two. There is
little additional information that will be required now that has not already been concluded from
previous Phases.
- 66 -
PHASE THREE: BUSINESS PLAN, CORPORATE PROFILE &

PROSPECTUS
PHASE ONE & TWO: Research & Due Diligence
COMPLETED:
COLLATION OF DOCUMENTS
RESEARCH
DUE DILIGENCE
CONCLUSION
NOT VIABLE
VIABLE
2. Corporate Profile
3. Prospectus
PHASE 3
1. Business Plan
The business plan

Definition: A document prepared by a company's owners/management detailing the past
present and future of the company, usually designed to have a twofold purpose, namely as a
strategy for running the company and, secondly to attract capital investment.
See Appendix for sample business plan contents page.
It must be noted that it is not my intention to write a comprehensive methodology of writing a
business plan. The aim here is to provide entrepreneurs with enough information to write such a
plan themselves. The compilation and actual writing of the plan will provide investors with a better
and more in-depth understanding of the process that has to be undertaken prior to drafting a listing
prospectus. The more comprehensive the plan, the easier it is to convince a stockbroker to
become your sponsor.
A business plan precisely defines a business, identifies goals and serves as a firm's rsum. The
basic components include a current and pro-forma balance sheet, income statement and cash flow
analysis. It helps the entrepreneur to allocate resources properly, handle unforeseen complications
and make better informed business decisions. Because it provides specific and organized
information about the company and how the entrepreneur will repay borrowed funds, a good
business plan is a crucial part of any debt or equity application. Additionally, it informs sales
personnel, suppliers and others about the companys operations and goals.
The importance of a comprehensive, thorough business plan cannot be overemphasized as a lot
rides on it, including:
Outside funding
Credit from suppliers
Management of operations and finances
Promotion and marketing of the business
Achievement of goals and objectives
- 67 -
As Robert Krummer, Jr., chairman of First Business Bank in Los Angeles once said: "The business
plan is a necessity. If the person who wants to start a small business can't put a business plan
together, he is in trouble."
Yet despite the critical importance of a business plan, many entrepreneurs drag their feet when it
comes to preparing a written document. They argue that their marketplace changes too fast for a
business plan to be useful or that they just don't have enough time. But just as a builder won't
begin construction without a blueprint, eager business owners shouldn't rush into new ventures
without a business plan.
Before an entrepreneur begins to write a business plan, he should consider four core questions:
What service or product does his business provide and what needs does it fill?
Who are the potential customers for the product or service and why will they purchase it from
this specific company?
How will potential customers be reached?
Where will financial resources be obtained to start the business?
A business plan has major sections. Each serves a purpose, both in itself and as part of the overall
direction of the plan. The list below briefly describes categories that will make up a plan, as
presented in the order they typically appear. However, entrepreneurs should not feel that they are
bound to follow a specific format if, due to the nature of the firm, alternative ways make more
sense. For example, I found that many capital providers in South Africa prefer to know upfront:
What are you looking for? Cash? Skills?

If cash, what is your break-even?
What are your forecasted profits in the year following your break-even?
What is my exit strategy?
As a result, I place a table either on the cover of the business plan or on the first page, which
contains this information.
Another example would be the financial portion for an organization with a 20-year track record
compared with a start-up business. The mix of products and services offered can also affect the
content of a plan. Issues relating to inventory, production and storage become less significant as
the product/service mix moves toward a purely service model. For example, an organization that
relies on professional employees would provide substantial detail about attracting, acquiring and
retaining these key employees.
In any event, it pays to mention the major issues listed below, even the ones that are considered
less significant. A capital provider or investor reading the plan will be more confident about the
entrepreneurs assessment of the situation if he can identify such issues and resolve them,
however brief the section may be.
Writing a business plan is a dynamic process
It is not a prerequisite that the following issues be set out in the order shown, as long as the order
is in a logical and easy to read format. A general outline for a business plan is:
Cover / Front Page. This should contain the business name and logo
General Investor information. Set out contact details of the CEO and the corporate advisors.
Other information includes physical and postal address, telephone/cell/fax/e-mail numbers of
business and contact person. Include also date of compilation.
Contents page.
Executive Summary: It is usually written last. Summarizes and provides the reader with an
overview.
Introduction/Foreword: Highlight main points of the research conducted and state why this
business should succeed within the targeted market.
- 68 -
Overview of the Business: Describes the company, trade name, vision, mission, ethics, goals
and legal structure.
Products & Services: Outputs, sales mix, cost and profits, expansion of services and product
lines, product/service life cycle.
Industry Analysis: Trends, demand outlook, barriers to entry and growth, impact of innovation
& technology, impact of economy, government and financial health of the industry.
Market Analysis: Trends, size, competition analysis, projected market share, decisions on
products and services.
Marketing Strategy: Location, distribution channels, sales, pricing, tools: networking, circles of
influence, Internet, brochures, sales systems and database.
Management, Operations & Organization: Organizational structure, responsibilities and
support (professional services).
Strategic Implementation Plan: Staff, staffing issues, systems, communication, bookkeeping,
equipment, software, office, furniture, fixtures, land and buildings, research & development.
Financial: Start up costs, cash flow sensitivity analysis, cash flow and expenses.
Contingency & Crisis Planning: Identify risks (liability, contract termination etc.) and plan to
reduce or eliminate them.
Supporting Documentation Should be placed in the Appendices.
An efficient business plan has the following information

General comments
Many entrepreneurs skip this section, forgetting that those reading the business plan may not
know anything about the company. Remember, the purpose of the business is plan is to
demonstrate the ability of the business to deliver goods/services and to gain the confidence of
the reader. Consider the reader. They do not have the experience, knowledge or desire. Focus
on providing enough information to accomplish two objectives for the reader of the business
plan:
Gain the confidence and trust of the reader. The entrepreneur must demonstrate that he
knows how to run his business and achieve his goals and objectives.
Anticipate what the reader could be looking for, e.g. a banker will be interested in
financial projections. A seasoned businessman might be more concerned about the
entrepreneurs commitment, skills and the business concept/viability.
Modify and edit the plan for each specific group. Provide them with enough information to
answer any questions they have, as they read your plan. Avoid writing needless detail. Provide
just enough information to answer their questions and gain their confidence. The purpose is to
set the stage for a meeting and educate the reader about the important elements and key
success factors for your business.
Background Information: Start with a clear and simple statement of what the companys
products are or what services the business will provide. Avoid the temptation to compare the
companys offering to similar services or products. Reserve that for the competitive and
marketing analysis. Focus on what makes the companys offering unique and preferable to
customers. Explain what it does, how it works, how long it lasts, what options are available and
any proprietary rights.
Of particular importance is whether the company is selling a stand alone product/service or a

product that must be used with other products (e.g., computer software or peripheral devices).
Be sure to describe the requirements for any associated products/services (especially vital for
software, e.g. computer).
Another issue to consider is whether the company aims to sell items on a one-time or
infrequent basis, or whether repeat sales are the goal. If a retail store is to be opened or a
bakery or restaurant, the entrepreneur is going to count on the same customers returning on a
regular basis. However, a consultant helping to implement a new order processing system
- 69 -
probably is not going to do that for the same client again for a long time. A similar issue is how
long the product or service will last and whether you intend to upgrade or supersede the
product or service at some point in the future.
Executive summary: This is a brief overview of a business plan. It is short and as interesting as
possible and includes the business concept, financial features, financial requirements, current state
of the business, when it was formed, principal owners, key personnel and key milestones.
The Executive Summary is usually written last and provides the reader with an overview of the
whole plan.
Most often, entrepreneurs will write a plan to communicate the viability of a business idea in order
to obtain financing. It is important to develop and write the business plan for a specific capital
provider. Keep in mind who will read it and what they expect to learn from it. Essentially, a banker
will look for different items than an investor or a supplier. There are two main groups:
Internal audience: Key employees, directors and shareholders, who are (or will be) a part
of your business. Since the plan is to be used a strategy (blueprint) for the future, make
sure the structure is realistic.
External audience: People outside the business who will want to see the business plan
before they decide if they want to invest in, contract with or otherwise have a relationship
with the business. This includes bankers, venture capitalists, credit rating firms and
vendors.
Remember, you do not always have to provide a full copy of the business plan (see next section on
corporate profiles). Sometimes, an excerpt or financial statements and projections will suffice.
Where it is necessary to provide someone with a full copy of the business plan, get them to sign a
confidentiality and non-disclosure agreement. If there is a need to provide them with proprietary
information, a secrecy agreement might be appropriate. Use good judgment and exercise caution.
Contents Page: Provides an overview of the contents of the plan with headings for major sections
and sub-sections cross referenced to page numbers. This makes it easy for the banker et al to find
specific information. Remember that different people will look for sections that pertain to their skills.
For instance, the financials will be looked at by the accountant, while the valuation section of the
plan will be assessed by the sponsoring broker.
Description of Business: Discuss the present and future situation in the industry, the market
segments, range of products/new developments, global/national/economic trends and indicate how
the company fits into the marketplace and how the above will impact on the business. This is
based on the environmental factors as set out in Part One i.e. Political, Economic, Business and
Technological factors that influence business.
In addition, some entrepreneurs will add a description of the purpose of the business, a brief
history, target market, type of business, when it was started, legal structure, owners and
experience and how the entrepreneur will reach his target market. Explanations of setbacks,
losses, abnormalities in historic information and major accomplishments are also briefly explained.
Description of products & services: Describe each product/service in layman's terms and their
specific features, applications, uniqueness and how the company will retain its competitive edge.
Describe customer needs and how these are to be met, how the product is to be viewed and how
the entrepreneur intends to position the company relative to existing and potential competitors.
Describe any patent, trademarks or copyrights.
Production process: Describe the process of delivering a service or the production process for
manufacturing the products. Give a technical outline containing details and capabilities of the
companys machinery and equipment, a description of where the company is located, features,
floor layout, proximity to competitors and leasing and purchasing conditions.
- 70 -
Pricing strategy: Discuss what the company will charge and how this is derived. Set out product
pricing structures (do you intend to offer discounts) and where this places the company in terms of
the industry hierarchy in terms of price. Is there a possibility of increasing market share and
profitability?
Shareholder, management and staffing requirements: Differentiate between shareholders and
directors and provide information on the strengths and weaknesses of the people involved. If there
are any weaknesses, explain how they will be overcome. Include a brief CV outlining age,
education and experience of all key personnel; specifying their share of ownership and what each
is responsible and accountable for and who will be making decisions. In addition, state how many
people you need (still have to employ) and how you intend to find them. What skills do they need
and what will this cost? Include also a list of external support, such as accountants, advertising
agents, lawyers, corporate advisors and others.
Operational information: Provide a schedule of the hours the business is open. Identify key
employees, including a description of their abilities that make them vital to the success of the
business. It may be decided to devote a separate section to employees, if they are key to the
success of the firm, such as with IT companies. Identify the number and type of employees, the
organizational structure (attach a table showing who is responsible for what).
Type of facilities: Name the facilities (e.g., retail establishment, manufacturing plant, etc.). A
separate section may be needed if facilities are important to your business, such as modern plants
and factories.
Legal structure: This is the place to document the date and the business structure (proprietorship,
partnership or corporation). Also, identify any anticipated changes, i.e. initiating a partnership,
taking on new shareholders.
SWOT analysis, including risk and reward: Make a list of everything that can go wrong, as well
as everything that can go right. Provide an outline of how the entrepreneurial team can respond
cut prices, cancel contracts etc. Give detailed rewards, how these will be delivered and to whom,
when and how much. Is there an equity stake being offered, dividend policy, return on investment
and potential capital gains on exiting. In essence, make a list of the companys strengths,
weaknesses, opportunities and threats.
The Market:
Customers: Give a description and substantiate specific target market and define the
demographics of the sale target, i.e. cost, preferences, cash or credit, quality, concerns and
circumstances in relation to their geographic location.
Size & trends: Define the total market size and the estimated share the entrepreneur intends
to capture and the factors affecting growth such as industry, socio-economic trends,
government policy, population shifts and how such factors could affect the business in the
future.
Competition: Indicate where the product or service fits in within the competitive environment;
stating competitors, estimated market share, strengths and weaknesses in terms of sales,
quality, distribution, price, production capabilities, image, service and reputation.
Projected turnover: Provide a projection of sales for at least the next three years, based on
assumptions and sources that justify credibility of the numbers. Here the entrepreneur can refer
to the research as set out in PART ONE. It is also important to meet the requirements as set
out for AltX companies See text further on. It is also crucial that the entrepreneur provides an
action plan for how he will get the customers to buy his product and service. What features will
be emphasized, what techniques will be employed and how will the entrepreneur focus his
efforts? Describe the sales methodology, outline available distribution channels and state
whether salesmen will be selling direct to the public or using representatives, distributors or
brokers.
Sales and marketing: Include a description of the proposed strategy and list all the selling and
promotion tactics and materials.
- 71 -
Communications plan: The primary goal is to create an orderly, methodical approach to

achieving overall communication goals. Creating a plan will force the entrepreneur to think through
the most important messages, benefits and features which have the widest appeal and highest
probability of breaking through the information blur. Remember that if the intention is to list the
company, there will an obligation on the directors to answer questions poised by stockbroking and
institutional analysts and portfolio managers and also the financial media. Without a well thought
out communications plan the entrepreneur will be in trouble. This is set out in Part Three.
Therefore, a communication plan:
is a deliberate and targeted approach to transmitting information with the overall goal of
influencing an audience about the companys products and/or services.
delivers a balanced message.
provides a unified message between communication tools (brochures, web site, sales
presentations and press release etc).
increases awareness and builds a positive image.
saves money over the long term.
Financials: Prepare detailed financial documents that include historic and projected information for
at least three years in respect of income statement, balance sheet and cash flow. The cash flow
and income statement forecasts should be per month for the first year. AltX regulations have
specific requirements (see Chapter XXX).
Include:
A summary of key ratios (see Appendices)
An analysis of all notable variations from previous performance
Cash flow and profit break-even turnovers
A sensitivity analysis for turnover rise and falls, overheads increasing and lower than budgeted
gross margins being achieved
Include effects of seasonality and business cycles; all assumptions relating to own contribution,
amounts of loans required, repayment periods, interest rates, purchasing and sales terms, what
facilities are available and what security is offered. In other words, set out all assumptions to
the financials. It is easier if you place a Note Number next to each item in these financial
statements and discuss each issue after the statements have been completed.
If need be, use an accountant or corporate advisor
Directors vision
A clear, compelling and exciting vision can make a substantial difference in achieving objectives. It
becomes the driving force behind the business. The following are some questions that could help
entrepreneurs assemble their vision:
As the owner of this business, what do you want to achieve?

How large or small do you want this business to be?
Do you want to include family in your business?
Staff: Do you want to provide employment, or perhaps, you might have a strong opinion on not
wanting to manage people.
Is there some cause that you want the business to address?
Describe the quality, quantity and/or service and customer satisfaction levels.
How would you describe your primary competitive advantage?
How do you see the business making a difference in the lives of your customers?
Take as much space as you need to describe your vision. Then edit it down to one or two
paragraphs.
Supporting documentation. These include:
Curriculum Vitae
Letters of intent
Quotes
- 72 -
Floor layouts, plans or diagrams

Organograms
Lease documents
Bond documents
Media cuttings
Census/market and industry reports
Diagrams/charts/tables/maps
Credit references
Personal balance sheets
Sales and marketing implementation programme
Using the plan

A business plan is a tool with three basic purposes:
Communication
Management
Planning
Communication: As a communication tool, it is used to attract investment capital, secure loans,

convince skilled people to join the firm and assist in attracting strategic business partners. The
development of a comprehensive business plan shows whether a business has the potential to
make a profit. It requires a realistic look at almost every phase of business and allows the
entrepreneur to show that he has worked out all the problems and decided on potential alternatives
before actually launching his business.
As a management tool, the business plan helps to track, monitor and evaluate progress. The
business plan is a living document that will be changed as the entrepreneur gains knowledge and
experience. By using a business plan to establish timelines and milestones, the entrepreneur can
gauge his (and other directors) progress and compare his projections with actual
accomplishments.
As a planning tool, the business plan guides him the various phases of his business. A thorough
plan will help identify roadblocks and obstacles so that he can avoid them and establish
alternatives. Many business owners share their business plans with their employees to foster a
broader understanding of where the business is going.
Advisory Board, board of directors - decision making & business development
A business plan is based on certain assumptions. Some of these assumptions will prove to be
correct and others will not. The key in any successful enterprise is the ability to learn and then
quickly apply that new knowledge. This will require making certain strategic and tactical decisions
to ensure success. It is always a good idea to get outside, independent feedback, which will help
offset the risk of making decisions, omissions and expensive errors. Outside consultants can assist
in reviewing important decisions and make suggestions. Anything that helps the entrepreneur to be
objective when assessing his current position and the future direction of the business will greatly
increase his odds for success.
The corporate profile

A summary of a company's products and operations
Once the entrepreneur has completed research, due diligence and a business plan, he has enough
information to draft a Corporate Profile. This is a document that can be used to market the
business to new clients, or to provide information to the media and analysts after listing.
The main difference between a business plan and this profile is that the business plan is a strategy
outline for the directors eyes only. It contains strategies that could put them at a competitive
disadvantage if it fell in the wrong hands.
- 73 -
So, a profile is essentially a marriage between an analytical report and a marketing document. It
provides clients, investors and the media with enough analysis and press coverage to bolster
interest in the company. Certainly enough to incur personal meetings and, in the case of potential
new clients, expedites negotiations in that the client has initial information about the company and
its directors; enough information to decide whether the would be interested in meeting in the first
place.
One significant addition, though, can be the inclusion of an application form if the company is a
franchise operation, or online supplier of products.
Remember that under AltX the entrepreneur is bound to continue the media/analytical reports on
an ongoing basis after listing. The profile is a simple and easy way to inform the public and
shareholders as to the history, structure, markets and future prospects of the company.
The prospectus
Definition: A legal document offering securities (shares) for sale, required and stipulated by a
stock exchange act. It must explain the offer, including the terms, issuer, objectives or planned
use of the money (if securities), historic and pro-forma financial statements and other
information that could help an individual decide whether the investment is appropriate. Future
corporate finance deals would be called circulars.
During the prospectus phase, the company, its sponsoring broker, financial advisors and attorneys
will focus on the registration statement. This phase will require the company to thoroughly review
its business and to substantiate all claims in the registration statement. For example, if a company
claims that it "will have significant first-mover and time-to-market advantages as a software-based
solution in the Internet postage market?" the company must be able to back up that claim. Indeed,
the stock exchange may ask for such information. In fact, if the entrepreneur has conducted a
thorough research and due diligence and has completed a solid business plan, there would be no
need to revisit and review all operations before completing a Prospectus; also called an Offering
Circular.
In other words, there would not be a fear of uncovering additional information that would need to
be addressed or disclosed, which could delay the listing process.
Besides inspecting the registration statement, the sponsor and attorney should also question
company officers and key employees. This will include a thorough discussion of the company's
business and marketing plans, revenue projections, product development and intellectual property,
with an emphasis on identifying potential pitfalls. If the entrepreneur has not conducted a due
diligence, the sponsors team will speak with third parties, such as customers, retailers, and
suppliers. After all, problems with partners in the supply and distribution chain can cascade back to
the company itself. For example, a financially troubled customer may tie up a company's inventory
in a bankruptcy court proceeding. However, if a due diligence has already been undertaken by the
companys independent corporate advisor, the sponsor would usually accept these findings. This
would expedite the process of producing the listing document.
This attention to detail is required for any type of company, whether the company is a New
Economy company, or one that is steeped in tradition and history. One of the most important
issues that is reviewed by the sponsor would be the companys audited financial records. Again,
the team will be looking for hidden problems in the company's corporate documents, licenses, and
material contracts. Finally, the company and its employees should be sensitive to personal matters
that may affect an initial public offering. For example, a confidential settlement between a senior
executive and a plaintiff for a fraud-related case, even if it had no merits, may affect public
perception of the company and its leadership. Accordingly, a frank discussion with advisors is
encouraged.
- 74 -
The main categories of information in the pre-listing statement are the following:
General information regarding the company and its capital.
Information regarding the directors and management of the company and the company's
advisors.
Information regarding the securities to be listed.
Information on the company's activities.
Information on the company's financial position and profits and losses.
A sample Prospectus Contents Page is outlined in the Appendices.
Note: While a pre-listing statement may promote investment in the company's shares, it is not an
invitation to the public to subscribe for shares. Rather, it is aimed at helping potential investors to
make an informed investment decision regarding the company's shares. If the pre-listing statement
contains a public offer, it will also have to comply with the prospectus provisions contained in
Section 148 and Schedule 3 of the Companies Act.
Although the pre-listing statement will largely be drafted by the corporate advisor, the directors of
the company accept full responsibility for the accuracy of its content.
Introduction to the JSE Securities Exchange

The following general factors and rules apply to all companies listing on the JSE,
whether main board or AltX. The specifics of AltX are outlined in the following
chapter.
The JSE Securities Exchange South Africa (JSE) is not unlike any other work place. There are
clerks, secretaries, messengers, directors, researchers and so on. Many entrepreneurs still seem
to be mystified by the exchange, particularly when it comes to the mechanics of trading securities.
The public often confuses this position with that of the stockbroker, portfolio manager and analyst.
A full breakdown of the differences between these positions can be found in he Millionaire
Portfolio. I am more concerned in this book with providing an explanation of the JSE, to place the
exchange in the context of a company that is coming to list.
The JSE was founded in 1887 out of necessity and not simply out of a desire to have a South
African stock exchange. Gold mining fever had gripped the country and eventually the miners
needed capital for equipment et al to expand and continue operations. The exchange provided
these companies with a market place to raise the necessary capital to continue mining.
The mechanism is relatively basic. A company that needs funds goes to the exchange and asks
the public for money to help it in its venture. To obtain funds, the owner effectively sells a part of
his company to the investors. They do not actually break-up the company, but supply the investor
with share certificates, which today are no longer in paper form, but in electronic numbers. This
certifies that he owns a stated number of shares. Investors then own a portion of the company to
the extent of the shares they hold, e.g. if Jones buys 10% of all shares issued by the company, he
then owns 10% of that company. For his part ownership he receives, at the directors' discretion, an
annual dividend payment (compared to a bank interest rate).
As markets developed, investors were able to sell these shares to other investors and thus the
exchange has a dual purpose. Not only were companies able to acquire funds, but the public has
another means of investing cash. Another way of looking at stock markets is as an indicator of
general economic activity. A system that permits the public to participate in the decision-making
process of corporations listed on the JSE, through their share ownership, is one which effectively
provides businessmen with guidance and therefore better utilization of national resources.
- 75 -
Essentially, demand and supply for shares reflects the public's sentiment towards a particular
company, different sectors and thus the market as a whole. In this manner the JSE is thus a
leading indicator of the overall economy in South Africa. The JSE was established by an Act of
Parliament, called the Stock Exchange Control Act. The act provides for the internal monitoring of
all activities by a committee.
The JSE is the largest stock exchange in Africa and in 1996 was 16th largest (by capitalization)
among the 42 Exchanges of the Federation of International Stock Exchanges.
Equity vs. debt financing: reasons to list?
The entrepreneur who has gone through the entire process of conducting research, due diligence
and drafting a business plan, does sometimes stumble at this last stage. The question that
sometimes comes into their minds is whether they actually need to face the public and investors.
Do they REALLY need to list after all, surely the funds can come from Venture Capitalists or
Equity Funds.
The simple answer is Yes. They can approach these funds and my advice is to do both. Approach
these funds and find out what it is that they would want for their investment in the company. S it a
percentage of the company, higher interest rates or board representation. Whichever way the
entrepreneur finally decides to go, he will have to give up something. It is here that the corporate
advisor becomes beneficial. He can advise on the pros and cons of each deal and the implications
for the company in the long term.
Having said that, there are a number of benefits associated with listing on the JSE.
Funding: While many bankers will say it is cheaper to raise equity capital than to rely on debt
finance, there is a strong school of thought which states that equity financing is the more expensive
option. After all, once the entrepreneur has repaid the capital (plus interest), his company is his. In
the equity option, the shares could rise to such a degree that it becomes prohibitive to repurchase.
In addition, equity financing enables the entrepreneur to raise more funds in future when additional
cash is required for new corporate deals. It is, thus, a means to raise funds without continually
approaching bankers, venture capitalists and so on.
Having said that equity is better than financing, let me stress that once listed, banks become more
willing to provide credit lines. So, a combination of both debt and equity becomes possible once
listed. In addition becoming public provides the entrepreneur with a status that certainly places him
above that of directors of private companies.
Exit strategy: One question that I am continually asked when approaching investors is what is my
exit strategy? They effectively mean how will they get their funds back in future. With a listing, they
can sell their shares directly into the market, which provides them with a sense of security. In
addition, they know that if the company does well, the share price should rise, providing them with
higher investment returns than with loan equity. A listing will thus provide the company with a
broader shareholder base and certainly increase its options of raising cash in future.
It can also be stated with certainty that entrepreneurs can better attract skilled labour if their
company is listed, in that they can offer share incentive schemes and so on.
What are the disadvantages of listing?
Cost of Listing: In addition to the cost of paying advisors and sponsors to take the company
through to listing, the entrepreneur will have to pay an annual listing fee to maintain its status as a
listed company. This cost depends on whether the company is a main board or AltX listing. See
Appendices for a price list. The cost of listing your company depends on a number of factors and
will be influenced by the entrepreneurs objectives. Typical costs to consider include the costs of
the designated adviser, attorneys, auditors, transfer secretary, printing of prospectus and/or other
- 76 -
documentation, marketing and advertising. There is an once off JSE Listing Fee and an annual
JSE Listings Fee.
Once listed, the company will be required to meet all JSE Securities Exchange laws and to comply
with them. The law is quiet clear on such matters. If you fail to comply, you can get fined and/or
jailed and the company will be suspended as a listed entity. The is bound to comply with the
listings requirements of the JSE. These requirements are in addition to those imposed by the
Companies Act. The full list of requirements can be found in the Securities Exchange South Africa
Listing Requirements Sections one through to 20. AltX requirements include these and have an
additional section, namely Section 21.
The listings process
The first step in the listing process is the appointment of a number of advisors. My suggestion is
that such appointments should be staggered, starting with a corporate and research advisor, who
take you through the process of research, due diligence and business plan. He can then assist you
to find a stockbroker who will best suit your needs, both personal and company.
It is appropriate to consult a competent and experienced professional advisor before deciding to
undertake the process of listing. Find an advisor who has experience in undertaking both industrial
analysis and corporate finance deals. Entrepreneurs who find it difficult to find such an advisor can
approach the corporate finance divisions of stockbrokers, merchant banks or auditing firms.
However, it is crucial that they have experience as industrial analysts. This means that they would
have undertaken competitor analysis, market research, trend analysis and other fundamental
assessments that will become important to the company before, during and after the listing has
been granted.
Many stockbrokers will tell entrepreneurs that many of the duties or functions of the sponsor are
the same as the advisor and that they can do all this work for the businessman. So, why hire an
advisor and sponsor? The answer is that there have been many times when the advisor has
recommended that a company not be listed as it did not show viability during either the research or
due diligence phases as outlined in Part One.
The corporate advisor
There are many reasons for a delay in listing. It may just not be the right time to go public. An
advisor who has undertaken all the research and due diligence has become familiar with the
company and its directors. His advice is therefore based on an in-depth understanding of the
entrepreneurs objectives and also what he does not want. The corporate advisors main
responsibilities include:
Providing the directors with sound knowledge as to their role as directors of a listed company,
including fiduciary, responsibilities and obligations to clients, shareholders, staff, public and
investors.
Advising on the best manner to list the company, including media and investor road shows,
method of listing, marketing and advertising, size and terms of the offer, timing and pricing of
offer, based on company valuations.
Updating the directors on an on-going basis on factors that could affect the listing, share price
and company. This is done by updating the environmental factors on Politics, Economics,
Business and Technology as set out in PART ONE. Essentially, advising on market
conditions that could potentially influence supply and demand for the company's shares.
The advisor should be the middleman between sponsor and entrepreneur, i.e. coordinating the
listing process.
While many stockbrokers will insist on drafting the prospectus (listings documentation), there is
no reason that the advisor cannot do this. After all, he has drafted the companys business
- 77 -
plan. The sponsor may have specific issues that he wants discussed in the prospectus and
there may thus be a need to get help from a legal advisor, accountant and the sponsoring
broker. This still does not mean that the advisor should be excluded from the process.
It should also be the responsibility of the advisor to coordinate the pre-issue of shares on behalf
of the company. Having conducted the due diligence, the advisor would have undertaken
discussions with the companys suppliers, marketers, sales divisions and so on. These are
potential targets for pre-issues. The remaining investment community can be targeted by both
advisor and sponsor.
Determining the correct price at which to issue shares is a delicate exercise that involves
estimating the market price. There are various methods of valuing securities, including the
potential dividend yield, the PE ratio, discounted cash flow analysis and net asset value
(discussed in Chapters XX).
The corporate advisor will also recommend that the listing price be at least 15% lower than the
estimated value. This ensures that there is an incentive for investors to buy the share when the
company becomes public. This, in turn, usually provides a short term resistance level for the
share.
Sponsor: The appointment of a sponsor is a JSE-stipulated requirement. A list of sponsors is set

out in the appendices. Note that for an AltX listing, these sponsors are called Designated
Advisors which must not be confused with corporate advisor.
The main function of the sponsor is to ensure that the company and its directors have not only met
the criteria for listing, but that is suitable to list. Ultimately, the main role of the sponsor is to guide
the listing process and to ensure that the directors understand the nature of their responsibilities
and obligations as directors of a listed company. Once all documentation has been completed, it is
his task to submit these to the JSE. After listing, the sponsors role is to liaise between the JSE and
the company.
Consequently, the date of entering the market will largely be determined by industry conditions and
the state of the company. The JSE may be static, bullish of bearish, and it is generally more risky
to list in a declining market. However, if the company is in a sound financial position, has a solid
prospectus and has the systems in place to comply with the JSE's financial disclosure
requirements, it is ready to list. However, the sponsor is the one who is best suited to tell the
entrepreneur when that date would be.
The post-listing role of the sponsor and the advisor needs to be discussed with the entrepreneur to
avoid duplication of roles and costs. The role of the advisor in AltX companies is discussed in Part
Three.
Underwriters: Although it is not a requirement that an offer be underwritten, an underwriting has
some advantages. The company is assured of raising the desired amount of capital and it creates
a good impression if a prominent institution is prepared to underwrite the offer. In other words, Big
Brother is considered by many investors as providing a share with a safety net. After all, would an
institution allow a share to fall?
Transfer secretaries: The responsibility for setting up the company's register of members, the
issuing of share certificates (electronic certificates, called STRATE, applies in South Africa), the
registration of transfers and the mailing of company circulars.
Legal advisor: Corporate attorneys responsibilities include assisting with the drafting of the
prospectus to ensure that all legal requirements of the Companies Act and JSE Listing
Requirements are met. Attorneys are also needed if there is an underwriting or a placing of shares
needed. He will draft the necessary agreements and prepare share option schemes for the
company.
- 78 -
Accountant: An accountant is needed in the drafting of a companys financial statements. These

statements can be used (usually in abridged form) in the prospectus. The amount of information is
dependant on whether the company intends to list on the Main Board or on AltX. For instance,
Main Board listings have to include profits over the previous three years and the financial position
of the company for the next three years. AltX companies need to furnish one past and pro-forma
profit year. See next section.
Technical advisor: In the case of mineral companies, the JSE requires the prospectus to contain
a technical advisor's report on the company and its exploration and/or mining activities.
Listing time frame: The listing time frame normally covers between nine and 14 weeks,
depending on the method of listing, the competence of the professional advisors and the
complexity of the listing. AltX companies should list within a 10-week framework.
Public relations consultant: Public relations consultants are frequently used to assist with
promoting a positive image of the company before a listing. However, lack of information on a
company after listing can be detrimental to its share price. The corporate advisor should continue
to provide the market (public and investment community) with both analytical reports and press
releases. Here the Corporate Profile discussed in a previous section becomes crucial to promote
the company. His document has to be continually updated and promoted.
Which market should the entrepreneur chose?

Listed companies vary from mining and industrial concerns through to textiles, furniture, fishing and
telecommunication. There are about 500 listed companies on the JSE and they all have public
limited liability, which means that a shareholder's liability is limited to the purchase price of their
shares. The market for trading shares excludes closed corporations, partnerships, sole
proprietorships and proprietary limited companies.
Currently the JSE has four markets, namely the Main Board, Venture Capital Market (VCM),
Development Capital Market (DCM) and The Alternative Exchange (AltX). However, the JSE has
indicated that both the VCM and DCM will be dismantled during the next 18 months.
An investor has the option of buying shares in four main equity listing divisions and also warrants,
which are traded on the equity market. The divisions are described below.
The Main Board
The following is set by the JSE Listing Requirements. While not the norm, the JSE at times permits
a variation of the following requirements.
This consists of companies that have at least 25 million subscribed shares in issue, which are
worth at least R25 million. The subscribed capital includes reserves, but excludes minority interests
and revaluations of assets and intangible assets that are not supported by a valuation undertaken
an independent professional expert acceptable to the Committee. These must have been prepared
within the last six months prior to listing.
The company must have achieved a satisfactory (audited) profit history for the preceding three
financial years and the last year must have reported an audited pre-tax profit of at least R8 million.
In addition, at least 20% of each class of equity shares must be held by the public, with a minimum
of 500 equity shareholders. Where a company issues preference shares, there must be at least 50
holders and, in the case of debentures, at least 25 holders.
The Main Board is further split into a number of sub-headings, which differ between periodicals.
However, some of the main headings are Mining Resources, Non-mining Resources, Financial,
Banks, Industrial Consumer, Cyclical and Property. Mining is divided into types of minerals and
names of mines, Financial highlights types of finance companies and Industrial companies are
categorized by sectors.
- 79 -
To promote socio-economic development in South Africa, the JSE introduced the Redevelopment
sector to the Main Board and to promote industrial development, introduced the Development
Stage sector.
o
Redevelopment: Companies that are deemed to need financial assistance

because they have been disadvantaged by past socio-economic issues, can ask the
JSE for assistance. The sponsor would advise the client about such assistance.
Development: The JSE may list the securities of substantial industrial companies
that are in a developmental stage, but which do not have a profit history needed to
meet a Main Board listing. The applicant should have a subscribed permanent
capital, prior to the offering of securities to the public, of at least R100 million, and
will have to provide a forecast of future profits/losses during and at least one year
after the development stage.
The Development Capital Market (DCM)

There are 15 listed companies listed on this board, with each requiring at least one million shares
in issue, worth at least R1 million. A satisfactory profit history for the past two financial years, the
latest of which reported an audited pre-tax profit of R500,000. In addition, a minimum of 10% of
each class of equity share shall be held by the public.
In 1984, the JSE recognized a dire need to encourage growth of small to medium size businesses
and companies that were not able to list on the Main Board. Consequently, the JSE created the
DCM, but the low numbers of listings in this sector (and on the VCM) lead the JSE to re-consider
its position of such a listing section for small-to-medium sized companies.
The Venture Capital Market (VCM)
This sector is for companies which specialize in venture capital projects and are generally
considered to be highly speculative risks. Requirements for a DCM and VCM listing are less
rigorous than the Main Board and this is often used by smaller companies as a vehicle to finance
their expansion.
Such companies must have drawn up an analysis of prospects, based on market segment growth,
competitive analysis and market share. From this, it should present a three year business plan with
forecast balance sheets, profit and loss accounts and cash flows. It does not need to have a
prospectus.
Remember that a business plan is far more comprehensive than a prospectus and thus must show
adequate research into the management strength and commercial viability of each of its underlying
ventures. The business plan must display growth prospects and pro-forma forecasts for a period of
three years in respect of each underlying venture and also a consolidated set of forecasts.
The principal requirements of a VCM listing include a subscribed capital of at least R500,000, at
least one million shares in issue, but a profit history is not necessary. The number of public
shareholders (excluding employees and their associates) must contain at least 75 equity, 25
preference shares and 10 debenture holders.
AltX
While the following chapters concentrate on AltX and the listing process, in deciding to use this
exchange the entrepreneur should consider the following questions:
What is the main focus of the business plan?

How are the strategies going to get the directors there?
If capital is needed, how will this be raised?
- 80 -
Will the company gain market share or at least maintain it without additional funding?
Will management and staff need to be improved and at what cost?
What outside advice and perspective - such as non-executive directors - does the board
have access to? Does it have a corporate advisor to undertake research and due diligence?
What will attract investors to the company?
Does the company have an agreement in place with an advisor to liaise between
management and investors and the public?
In addition to these questions, the entrepreneur must be made aware of the following:
A listing will result in some loss of control. The sale of equity in the company will involve
loss of control to outside shareholders, especially with regard to significant acquisitions.
Disclosure requirements and ongoing reporting can become restrictive in the minds of the
entrepreneur. A much higher degree of disclosure and reporting is required with a public
company than with a private or closed corporation. It also requires additional investment in
management information systems and more rigorous application of compliance controls.
Being in the public eye means loss of privacy. Greater accountability to outside
shareholders means that the directors lose much of the privacy and autonomy they may
have enjoyed while running an unlisted company.
The listing process and the continuing obligations after listing may require additional
management time and place some stress on management and staff.
The responsibilities and restrictions placed on directors are complex and include disclosure
of total remuneration packages, restrictions on share dealing and the communication of
price-sensitive information.
The companys heightened profile also means that any underperformance receives a
greater degree of media coverage which may have a direct effect on the share price.
Costs and fees of listing and maintaining the listing must be considered and understood
before embarking on the process.
AltX listing requirements are discussed in detail in Chapter XX.

Lets reiterate: Once the entrepreneur has decided to list on AltX, the process is as follows:
Obtain the services of a registered Designated Advisor.

o
o
o
o
o
o
The DA advises you on the different methods of listing and provides guidance as to
the best method for the company.
The DA assists in compiling an application letter for submission to the JSE Listing
Division.
Based on a presentation by the board of directors together with the DA to the AltX
Advisory Committee, a recommendation will be made to the JSE Listing Division.
Once the JSE Listing Division accepts the application, the DA will assist in compiling
all the documentation as stipulated by the AltX Listing Requirements and other
relevant legislation.
On successful verification of the content of the documentation, the JSE will provide
a formal letter of approval.
Depending on a number of factors, including the complexity of the method chosen
for the listing, this process may take between two and three months.
- 81 -
Chapter 9
An Introduction to AltX
All companies start small and we are committed to supporting the burgeoning SME
sector of the South African economy. Russell Loubser, chief executive of the JSE, at the
launch of AltX, October 2003.
When discussing AltX with foreign investors and entrepreneurs during the past year, I have
included the possibility of investing in AltX companies and, for entrepreneurs, listing their
companies on this new exchange. These businessmen and investors have repeatedly asked
similar questions.
Firstly, the question is often directed at what this acronym stands for despite the amount of
publicity that the JSE has given to its new venture. The second question, when I have explained
what AltX means, is a cry of understanding with Is this your version of AIM? AIM is the London
Stock Exchange's global market for smaller, growing companies and its acronym stands for
Alternative Investment Market. Good companies from different sectors and different countries are
welcome to list on AIM, which - since it opened in 1995 has seen more than 1200 companies
being admitted. Comparatively, the JSE current total number of companies listed stands at less
than 500.
Collectively, AIM companies have raised more than US$14 billion while listed on AIM.
There are no specific suitability criteria for companies to qualify for AIM. However, under the AIM
rules, all companies must produce an admission document making certain disclosures about such
matters as their directors' backgrounds, promoters, business activities and financial position.
The launch of AltX follows similar trends to AIM, like the appointment of a nominated advisor.
While AltX calls these sponsors Designated Advisors (DA) AIMs nominated advisors are
popularly known as a "nomad" from the register of such advisors published by the Exchange. This
nominated advisor is responsible, among other duties, for warranting to the Exchange that a
particular company is appropriate for AIM. This is an important quality control for AIM and a very
serious responsibility for the nominated advisor. AltX is exactly the same.
Once admitted to these small company alternative exchanges, its directors have certain ongoing
disclosure requirements and need to retain a nominated adviser at all times. In addition, once the
company has been listed on such an exchange for a period of time and it becomes appropriate to
move to the Main Board, the DA will advise the company that it has to seek admittance to the main
market.
An introduction to AltX
The Alternative Exchange, AltX, is a division of the JSE. One way of defining this the new
exchange - launched in October 2003 is as a Parallel Exchange because it operates alongside
the main board but targets small to medium and growing companies. It will offer entrepreneurs and
investors many new opportunities in the years to come. It has taken the JSE four years to design
an exchange that specifically targets young and fast-growing businesses, including startups. Other
areas of business that the JSE believes will benefit from listing are management buy-outs and buy
ins, family-owned businesses, black economic empowerment companies and junior mining
companies. Some of South Africas fast growing junior mines have already approached AIM for a
listing. Here is an opportunity to keep South African entrepreneurial skills from moving offshore in
search of cheaper capital.
- 82 -
At last, a SME Stock Exchange

Investors and entrepreneurs have something to look forward to with the October 2003 launch of
AltX - the JSEs and DTIs Exchange for SMEs. This long-awaited alternative market has been
touted to investors and entrepreneurs alike for four years. Anyway, at last small and medium
businesses will be able to list as a branded AltX company.
This market will form part of the JSE and function as a parallel market for smaller companies that
need to raise capital; or, for those currently on the VCM or DCM, which will ultimately have to apply
for a listing on AltX if they want to remain listed. The aim of the JSE is that listed AltX companies
will eventually move onto the main board; after being nurtured and promoted by a designated
advisor and research sponsor. This possible move to the Main Board is completely at the
discretion of the JSE.
One question asked on numerous occasions is whether investing in AltX companies is riskier than
investing in JSE Main Board listed companies? Being an exchange that targets SMEs must, by its
nature, mean that there will be an element of risk. Stockbrokers will tell you that there is always an
element of risk in any securities exchange. The objective of AltX is to provide a high quality
migratory platform to the Main Board. The JSE has considered this risk factor with due care and, to
minimize these risks, its listing requirements include a compulsory Directors Induction Programme
(DIP), the appointment of a Designated Advisor (DA) and an AltX Advisory Committee. These
controls are there to lessen the risk associated with SMEs.
In addition, the AltX team has stated its commitment to the success of this exchange and strives to
provide extraordinary support to all stakeholders. In order to achieve the objectives of exceptional
communication, ongoing education, marketing and relationship management with companies,
Designated Advisers and the investment community, AltX has created the Knowledge Exchange.
Knowledge Exchange initiatives include the partnership between AltX and the DTI. The
DTI supports AltX in the belief that it will help promote black economic empowerment and
encourage entrepreneurs in South Africa.
Another Knowledge Exchange initiative is the AltX collaboration with the Wits Business
School (WBS) and the Institute of Directors (IoD) to provide the Directors Induction
Programme (DIP). DIP is a compulsory education programme for all executive and nonexecutive directors of AltX companies. This programme, presented by market practitioners,
covers corporate governance, listing requirements, the Companies Act and other pertinent
issues.
Relationship management: In addition, AltX is built on a culture of relationship

management, which aims to enhance the quality of companies listed and ensure maximum
information dissemination for investors to make better informed investment decisions. AltX
will provide enabling assistance to maximize potential growth.
However, despite the JSEs proven rate of better than inflation returns over the long term (over
1000% rise in the All Share index between 1980 and 2002), it is crucial to remember that even blue
chips fail, markets collapse and cyclical conditions are a reality.
AltX, which is endorsed and supported by the department of trade and industry, is expected to
promote black empowerment and companies with solid forecasted results. Admittedly, it will be a
speculative type market, but hopefully one with some proper strategic planning. Among the host of
listing requirements to qualify for a listing on AltX, companies must have a subscribed capital base
of R2 million and a minimum of 100 public shareholders.
There are two distinct advantages for entrepreneurs and investors.
These small companies are expected to ultimately reach a stage where they comply
with the criteria for the Main Board and the JSE might transfer their listing to that board.
This would promote these companies as Big Boys and the share price is bound to rise.
- 83 -
Companies with higher net worth than share price that are listed on the DCM or VCM
and that do not want to be transferred to AltX would have to pay out minorities.
The JSE has indicated that once AltX is in full thrust, it will start focusing on cleaning up the main,
development capital and venture capital boards, with the last two eventually disappearing. In
addition, AltX will be marketed to investors by the JSE. The marketing project will be spearheaded
by Noah Greenhill, the manager of the new market. So, these companies will certainly have
profiles for investors to get to understand their businesses.
I am reinsured that companies wishing to list on AltX will have to pass a stringent review and
approval process, including a review and recommendation by the AltX advisory committee,
designed to weed out unwanted companies.
Advantages for companies listing on AltX
Companies that list on AltX will enjoy a number of cost-saving advantages, including reduced
listing fees, reduced Strate fees and a relaxation of the requirement to publish company
announcements in the media. The regulations governing corporate activity and the requirement for
circulars to shareholders and/or shareholder approvals have also been relaxed.
AltX is forecast to become the single most substantial source of corporate funding
in South Africa. There are extensive benefits to listing; from a financial company
shareholder, director and employee points of view.
This does not mean that such companies will be less supported by the full range of JSE services.
They will have access to the same trading platform, market surveillance, dissemination of company
information through the Stock Exchange News Service (SENS), settlement through Strate - the
JSE's electronic trading system - and compliance supervision by the listings division of the JSE.
So, investors have a security blanket.
It is well known that, with a few exceptions, the development capital and venture capital boards of
the JSE have been a dismal failure. Not only did the bourse struggle to attract quality companies
and investors, it became the hunting ground for opportunists and speculators. On the other hand,
AltX is meant for the serious entrepreneur and investor and there are distinct short and long term
advantages of this form of capital raising.
Flotation on a public market is first and foremost an opportunity to raise funds today and in the
future. There are many reasons why a company might consider going public on AltX:
To provide access to capital for growth, giving a company the opportunity to further
development - both at the time of flotation and later, through further capital issues.
To create a market for a company's shares, broadening the shareholder base and giving
existing shareholders the chance to exit. It is an investors Exit Strategy. Increased liquidity
is an attraction for shareholders, particularly in South Africa, where liquidity is a continued
problem.
The process of taking a company through to listing will result (at some stage) in a company
valuation. Essentially, it places an objective market value on a company's business.
To encourage employee commitment by making share schemes, which are an attractive

incentive for employees' long-term motivation.
To increase the company's ability to make acquisitions, using quoted shares as a means
of raising funds.
- 84 -
To create a heightened company profile, stemming from increased media coverage that
aim to maintain liquidity in a company's shares. This improved profile will benefit
shareholders, clients, staff and directors.
To enhance the companys status with customers and suppliers, who are reassured by
the regulations involved in the company's listing on AltX. It also acts as a conduit to
attracting new investors and investment.
The process of research, due diligence and business plan forces the company to
implement more professional reporting systems, which improves information
dissemination both internally and externally; his includes accounting, profile, analytical
reports and media communications.
AltX provides the benefits of being traded on a public market and also allows a company
to enter a less strict regulatory environment.
o
o
o
Easier entry criteria, giving a wide range of companies access to a public

market for development.
A less stringent regulatory regime, allowing businesses to learn to experience
life as a listed company without the full disciplines of the JSE Listing Authority's
rules.
Easier acquisition rules, facilitating growth through acquisition.
It is crucial that entrepreneurs and investors alike understand that AltX

investment has the full backing and support of the JSE, including its computer
systems, STRATE, security (market surveillance) and expertise. This is in
addition to the promotional programmes that AltX and the DTI have in place
for 2004.
In other words, trading of AltX shares will be on the same system as the Main
Board.
The listing requirements of AltX place great emphasis not just on initial, but
on ongoing disclosure of company information. There is also a focus on the
enhancement of the skills of directors of AltX companies.
The challenge for entrepreneurs

The obvious challenge will be for entrepreneurs to ensure that their companies are structured to
meet analysts expectations. Therefore, having a company that meets the listing requirements of
AltX is just the first step to successfully becoming listed. Once the entrepreneur has listed,
someone has to keep the momentum going; through proper research, due diligence and
implementation of core assets and business dealings and projects (See Part Three).
The importance of success then rests on two crucial elements:
Firstly, entrepreneurs have to understand what it is like to have the glare of the
investment public continuously on them.
Secondly, they have to understand how analysts will assess their companies. If they
can understand that, they can certainly better manage their companies to meet the
criteria that could make investor sentiment better, quicker and more profitable for the
company and shareholder.
The secret is to balance the amount of information being provided to the public and investment
community with listing requirements. For instance, publication of financial reports is not prescribed
by AltX except to submit an electronic version to AltX for publication on its web site. Yet AltX
suggests that, while not mandatory, it is highly recommended. In addition, all corporate
- 85 -
announcements that could affect the share price of the company (as defined in the Listings
Requirements), must be published through both SENS and the AltX website.
The company must submit all relevant company and price sensitive information to SENS as soon
as possible after authorization. The rule is that an announcement must first be sent to SENS
before it is published on the AltX website. It is a real time news service for the dissemination of
company announcements and price sensitive information.
Once published on SENS, these announcements must be published on the AltX website. SENS
announcements must be submitted to AltX in electronic format no later than one hour after the
announcement has been sent to SENS.
Clearly, there is a need for AltX
The profile of AltX, market liquidity, the ease with which investors can trade their shares and
transparency in the marketplace are other factors that will determine the success of the new
market. This market has the potential to be one of the most substantial sources of corporate
funding for small and medium businesses, hence the significant interest shown by government;
through the DTI. Ultimately, all parties want to see a market that has the potential to boost
economic growth in South Africa and assist in creating sustainable employment both within
industry and in related industries.
One such method of education outlined and prescribed by AltX is the Directors Induction
Programme (DIP), which a compulsory education programme for all executive and non-executive
directors of AltX companies. It is a collaboration between AltX, WBS and the IoD to ensure that
company directors are aware of the latest information related to the JSE Listings Requirements,
the principles and practices of Corporate Governance (as set out by King II), Companies Act and
other relevant topics. The programme is covered over four days and includes the following:
Day
One
Topics Covered
General overview
Rights, duties and liabilities of directors
Board composition, management and performance
Role of company secretary
Two
Listing requirements
Three
Investor relations
Media relations
Disclosure and insider trading
Trading
Auditor responsibilities and GAAP
Four
Financial analysis
Mergers and acquisitions
Committees
Risk management
Source: AltX, 2003
The next chapter outlines the regulations that must be fulfilled to list on AltX.
- 86 -
Chapter 10
AltX Listing Requirements
The listing requirements of AltX are set out under Section 21 of the JSE Securities
Exchange (South Africa) Listing Requirements.
It must be noted that Sections 1 to 20 still apply, unless otherwise stated.
This section assesses the AltX listings requirements as set out by Section 21 of the JSE Securities
Exchange (South Africa). In drafting these requirements, AltX recognized that the decision to invest
in the shares of AltX companies would be affected by confidence. This would in turn be influenced
by a companys willingness to abide by market rules and the ease with which investors could buy
and sell their shares.
Therefore, the experts concluded that the key to the success of the market is transparency and
liquidity. For this reason, there is an emphasis on the appointment of Designated Advisors and
director education. Furthermore, there is a dire need for the entrepreneur to understand that AltX
companies must have a programme for ongoing marketing to shareholders; through media
coverage and analytical reports to the investment community. This continuous relationship and
communication with shareholders and the public should enhance liquidity levels.
Therefore, the main focus of the AltX Section 21 is to include requirements that achieve these
aims, namely the appointment of a Designated Advisor and the compulsory directors induction
programme. I addition, no profit history is required and a share capital has been limited to
R2 million. Listing and annual JSE fees have been significantly reduced, but there is a greater level
of emphasis towards higher qualified expertise, transparency and corporate governance.
The following text follows the Section 21 Listing Requirements This section contains the
requirements that must be satisfied by issuers wishing to apply for, or which have a listing on, the
AltX.
The main headings of Section 21 are:
SECTIONS
21.1
21.2 to 21.4
21.5
21.6
21.7
21.8
21.9
21.10
21.11
21.12
21.13 to 21.35
21.36 to 21.39
21.40
CONTENT
General
Conditions for Listing
Publication
Corporate Governance
Public Shareholders
Issues for Cash
Pre-Listing Statements
Financial Information
Transactions
Related Party Transactions
Designated Advisor ("DA")
Documents to be submitted and published
Fees
- 87 -
SECTION 21.1: GENERAL. The section starts off with a general comment that, while AltX
concentrates on a new listing requirements section (namely 21), both entrepreneur and investor
must comply with ALL the JSE Securities Listings Requirements, i.e. Sections 1 to 21. To
complicate matters, there are exceptions, which are discussed below:
SECTIONS 21.2 TO 21.4: CONDITIONS FOR LISTING: These three sections concentrate on the
suitability of an entrepreneur being granted a listing on AltX.
Section 21.2 (a): A market for SMEs. ALTX is a market for SMEs, but not every
company that is in a growth phase will be granted a listing. For instance, SMEs that
meet the criteria for listing on the Main Board or any other sector will not necessarily be
granted a listing on AltX. The JSE reserves the right to request that these entrepreneurs
reroute their applications to other sectors of the JSE.
Section 21.2 (b): Timing issues. When the entrepreneurs AltX listed company
reaches the stage where they comply with the JSE Main Board criteria, the exchange
may require that the company transfers their listing to the Main Board.
SECTION 21.3: LISTING REQUIREMENTS. In addition to listing requirements set out by the JSE
Listing Requirements, entrepreneurs wishing to apply for a listing on AltX must comply (and after
the listing has been granted, on a continuing basis) with the following requirements:
Section 21.3 (a): Appoint a Designated Advisor. A DA must be appointed and the
terms of the appointment must be in accordance with paragraph 21.13, which sets out
the terms and conditions for DAs.
Section 21.3 (b): Share capital requirements. Applicants must have a share capital of
at least R2 million, which includes reserves, but excludes minority interests.
Revaluations of assets and intangible assets must be supported by a valuation
undertaken by an independent professional expert, who is acceptable to the JSE. In
addition, it has to have been prepared within the last six months.
Section 21.3 (c): Public interest in AltX companies. The public must hold a minimum
of 10% of each class of equity securities and there must be at least 100 public
shareholders.
Section 21.3 (d): Director education: The directors of an AltX company must complete
the AltX Directors Induction Programme (DIP) or must make arrangements to the
satisfaction of the JSE to complete it.
Section 21.3 (e): Appointment of a financial expert. The entrepreneur seeking an

AltX listing for his company must appoint an executive financial director and the DA
must be satisfied that the financial director has the appropriate expertise and experience
to fulfill the role. In addition, the DA must submit confirmation of such appointment in
writing to the JSE.
Section 21.3 (f): Financial forecasts. The entrepreneur must produce a profit forecast
for the remainder of the financial year during which it will list and one full financial year
thereafter.
Section 21.3 (g): Directors shareholding. The applicants auditors or attorneys must
hold in trust 50% of the shareholding of each director and, if the DA holds shares, 50%
of these as well. This has to be done from the date of listing and a certificate to that
effect must be lodged with the JSE by the auditors or attorneys. These securities,
whether new or existing, are to be held in trust until the publication of the audited results
for the periods outlined in Section 21.3 (f). Once the results have been announced, the
- 88 -
50% may be released and the balance one year thereafter. These securities may only
be released after notifying the JSE.
Section 21.3 (h): Non-executive directors. At least 25% of the directors must be nonexecutive.
SECTION 21.4: WARNING STATEMENTS ON DOCUMENTS. The front cover of all documents,
including announcements, circulars and annual reports, issued or published by the applicant must
contain an appropriate warning in bold. This warning relate to the following:
Risks of investing in an AltX company, particularly the company involved.
The JSE does not guarantee the viability or success of the applicant.
The importance of the DA. If the company fails to retain a DA, it faces suspension within
the specified time and subsequent termination without the prospect of an appropriate
offer.
SECTION 21.5: PUBLICATION: Corporate announcements must be published on the following

sites:
Stock Exchange News Service (SENS)
The companys web site (where one exists)
The AltX website.
This is only a minimum and the JSE would encourage voluntary publication in the
media.
SECTION 21.6: CORPORATE GOVERNANCE. All the provisions of the Listings Requirements
relating to corporate governance are applicable with the exception of paragraphs 3.84 (c) and (d)
of the King Code on Corporate Governance. Effectively, the exclusion of Section 3.84 (c) means
the entrepreneur does not have to state in his annual report that he complies with King II. And, the
exclusion of Section 3.84 (d) means that setting up a host of committees can now be avoided.
However, an audit committee must be appointed to fulfill the role as set out in the King Code. This
committee must comprise the non-executive directors and the DA as a minimum. The audit
committee may not include any of the executive directors.
King II: Section 3.84 (c) states that entrepreneurs must be in compliance with the King
Code o Corporate Governance and must, therefore, disclose such compliance in their
annual reports.
King II: Section 3.84 (d) states that entrepreneurs must, in compliance with the King
Code, appoint an audit committee and remuneration committee and if required, given
the nature of their business and composition of their board, a risk committee and
nomination committee. The composition of such committees, a brief description of their
mandates, the number of meetings held and other relevant information must be
disclosed in the annual report.
An outline of the King II Report is set out at the end of this chapter.
SECTION 21.7: PUBLIC SHAREHOLDERS. AltX provisions state that any shareholding that is
held beneficially, whether directly or indirectly, by the DA will not be regarded as being public.
SECTION 21.8: ISSUES FOR CASH. Entrepreneurs must comply with all the provisions of the
Listings Requirements relating to general share issues for cash with the following exceptions:
The percentage of shares for cash may not exceed 50% of the issue.
- 89 -
To issue 50% of the shares for cash, an approval is required by 75% of all shareholders.
This approval can be represented by proxy at the general meeting, but must exclude the
DA, controlling shareholders and associates.
SECTION 21.9: PRE-LISTING STATEMENTS. Issuers must comply with all the provisions of
Section 6 of the Listings Requirements, which sets out the legal requirements of pre-listing
statements. This includes requirements for pre-listing statements, responsibility of directors and
formal approval.
The exception for AltX is in the amount of new shares that can be issued within a three
month period.
Under the Listing Requirements, a new issue of shares that would increase the share
issued capital is limited to 30%. This is paragraph 6.19(g).
Under AltX, this percentage is 50%.
SECTION 21.10: FINANCIAL INFORMATION. All the provisions of section 8 of the Listing
Requirements are applicable to AltX companies. This Section outlines rules for financial
statements, including income statement, balance sheet, statement of changes in equity, cash flow
statement, accounting policies and financial notes.
The exception is found in paragraph 8.4, which states that three years of historic
financial information is required. AltX companies only need to submit one year of
financial information.
SECTION 21.11: TRANSACTIONS. Entrepreneurs must comply with all the provisions of Section
9 of the Listings Requirements when undertaking a transaction as a listed company. This section of
the Listing Requirements deals with transactions in relation to acquisitions and disposals by a
listed company. It describes how these are categorized, what the requirements are for
announcements and circulars and whether shareholder approval is required for such transactions.
Section 9 is critical to understand and is, therefore, set out on the next page.
Before Section 9 is outlined, mention of percentages under this section needs to be

explained. These ratios are the figures, expressed as a percentage, that result from
each of the following:
o
Market capitalization: The transaction being considered divided by the

aggregate market value of all the equity securities of the listed company.
Dilution: The number of securities issued by a listed company as

consideration for an acquisition compared with those in issue prior to the
transaction.
Transactions to be settled in part cash and part shares: The category

size for such a transaction is to be calculated by first assessing the cash to
market capitalization percentage and then adding this percentage to the
dilution percentage.
In circumstances where either of the above calculations produces an

anomalous result, or where the calculations are inappropriate to the sphere
of activity of the listed company, the JSE Committee may disregard the
calculation and may substitute other relevant indicators of size.
Remember: when calculating the transaction value:
Where all or part of the transaction is in the form of securities to be

listed, the transaction means the aggregate market value of those
- 90 -
securities based on the ruling price of these securities. The

calculation must be done at the time when the transaction is
announced.
SECTION
9.3
9.4
9.5
The transaction consideration is the amount paid to the

vendors, but the JSE Committee may require the inclusion of further
amounts. For instance, where the purchaser agrees to discharge any
liabilities, whether actual or contingent, of the vendors as part of the
terms of the transaction.
If the consideration is deferred or may be payable in the

future, the consideration is the maximum possible total
consideration payable under the agreement.
If the total consideration is not subject to any maximum the

transaction will normally be treated as Category 1, not
withstanding the category into which it otherwise falls.
REQUIREMENT
Any listed company considering a transaction must, at an early stage, consider
the transaction categories.
A transaction is categorized by assessing its size relative to that of the listed
company proposing to make it and the listed holding company of such listed
company, if applicable.
The different categories of transactions are:
Section 9.5 a: Category 4. A transaction where either of the percentage
ratios are less than 10, but more than 5.
Section 9.5 b: Category 3. A transaction where any percentage ratio is 10 or

more but each is less than 20.
Section 9.5 c: Category 2. A transaction where any percentage ratio is 20 or

more, but each is less than 30.
Section 9.5 d: Category 1. A transaction where any percentage ratio is 30 or

more.
Section 9.5 e: Reverse take-over. Any transaction, or series of transactions,

involving an acquisition by a listed company of a business, an unlisted
company or assets that would result in a fundamental change in the business
or in a de jure change in board or voting control (in terms of the SRP) of the
listed company, except in the circumstances outlined
In paragraph 9.11.
Source: JSE Securities Exchange (South Africa) Listing Requirements, Butterworths, 2002
Notwithstanding the provisions of paragraph 9.5, an AltX transaction will be

categorized as:
o
A Category 1 transaction where any percentage ratio is 50% or more
A Category 3 transaction where the percentage ratio is less than 50%.
SECTION 21.12: RELATED PARTY TRANSACTIONS. Entrepreneurs must comply with the
provisions of Section 10 of the Listings Requirements with some exceptions. Therefore, it is
important to describe what this section entails before setting out the exceptions.
- 91 -
Section 10 of the JSE Listing Requirements provides certain safeguards against

those shareholders, directors and other persons related to a listed company taking
advantage of their position within the company. Transactions with parties related to a
listed company are known as related party transactions.
Reference should also be made to the listings requirements regarding transactions set
out in Section 9. Where any transaction is proposed between a listed company (or any
of its subsidiaries) and a related party, a circular to shareholders and the approval of the
shareholders of the listed company in a general meeting will normally be required.
Any corporate finance-related issue is detailed in a circular to shareholders. This is

done in connection with a related party transaction and must provide sufficient
information to enable any recipient of the circular to evaluate the effects of the
transaction on the listed company.
AltX exemptions: The percentage in paragraph 10.6 (h) is equal to or less than 10%;
(b) paragraph 10.7 is not applicable;
Other important issues:

o
All related party transactions must be announced, irrespective of the size of

the transaction.
The fair and reasonable statement in respect of transactions that are greater
than 10%, but less than 50% may be given by the DA. In such a case, the
DA may not be a party to the transaction and he may also not have any
other vested interest in the transaction other than being a shareholder
SECTIONS 21.13 TO 21.39: DESIGNATED ADVISORS. AltX has created the role of the
Designated Advisor to help entrepreneurs through the fairly complex process of listing. The DA is
expected to play a key role in ensuring companies comply with the listing requirements. This
should provide investors with a level of confidence and reassurance that their investments are
based on transparency and solid corporate governance.
Although not the main focus of this book, it can be stated that if an entrepreneur wants to become
a DA, he would have to comply with all the listing requirements for a JSE Main Board Sponsor.
The main role of a DA is to competently, professionally and impartially advise an entrepreneur who
wishes to list his company on:
All his responsibilities during the application process

All his responsibilities after the listing process has been completed.
The DA must ensure the following:
The companys full compliance with the applicable JSE and AltX Listings requirements.
Submission of all relevant documentation, as stated in the Listings Requirements.
Suitability of listing a company on AltX.
- 92 -
Ensuring that each pre-listing statement meets the Listings Requirements and has been
completed accurately and fully, without omissions and/or without misleading or false
information.
Ensure that all directors of each company have the necessary expertise and experience
to run a listed company; particularly in relation to understanding the nature of their
responsibilities under the Listings Requirements, the Companies Act, the SRP Code and
GAAP.
The DA must ensure that directors have the necessary understanding and expertise to
prepare and publish all corporate finance and financial information, that directors
declarations have been confirmed and verified. The DA must review all periodical
financial information announcements with the directors prior to publication. This is done
to check accuracy and full disclosure.
The DA must ensure that all directors complete the Directors Induction Programme
within two months of their appointment (if newly appointed) or upon confirmation of
acceptance on AltX.
It is also the task of the DA to ensure that the directors of each company are timeously
informed of any amendment to the Listings Requirements or other regulations.
At least one DA must attend all company board meetings in an advisory capacity.
All approved DA executives must attend at least four annual DA forums hosted by AltX.
List of DA functions to be undertaken for companies listed on ALTX

The following list is important to understand and acts as a checklist for DAs when an initial
consultation is made with the entrepreneur.
Monitoring of directors, role of financial director, shares held in trust, share dealings of directors
within open/closed periods.
SENS approvals/publications.
Cautionary announcements.
Monitoring of share prices
Review and publication of results on SENS, AltX and companys web site.
Annual report including resolutions for AGM (at office) must be submitted to AltX in electronic
format.
Corporate Governance reviews.
Preparation for and attendance of audit committee meetings.
Announcement of all related party transaction matters announced.
Maintaining ongoing contact with client on changes/updates to Listings Requirements.
Regular review of trading performance and financial condition/position; monitoring management
accounts.
Preparation for and attendance of board meetings in advisory capacity.
Attendance of forums with/on behalf of clients.
Annual listings compliance review for JSE.
Quarterly meetings to address business conditions and strategy; and sundry discussions.
- 93 -
The sections relating to DAs are split into four; as follows:

Requirement
A: Appointment and eligibility of DAs
B: Responsibility of DAs
C: Shares held by the DA
D: Termination of contract
Section
21.13 to 21.16
21.17 to 21.26
21.27 to 21.31
21.32 to 21.35
A. SECTIONS RELATING THE APPOINTMENT OF DAs

SECTION 21.13. An entrepreneur who wishes to list his company on AltX must appoint a DA in
terms of a written contract and must ensure that it has a DA at all times.
SECTION 21.14 The DA must comply with and is subject to all the provisions of the Listings
Requirements as though they were a sponsor. In other words, he has to compl with Sections 1 to
20 of the JSE Listing Requirements plus Section 21 of the AltX requirements.
SECTION 21.15. All references in the Listings Requirements to sponsors apply mutatis mutandis
to DA for companies that are applying for or which have a listing on AltX.
SECTION 21.16 A DA must meet the requirements for a sponsor at the time of applying for and
being admitted to the list of DAs. Existing sponsors must apply to become a DA and must meet the
eligibility criteria in terms of all relevant schedules and sections.
B. RESPONSIBILITY OF DAs
SECTION 21.17 The DA's role is of particular importance to the successful operation of AltX, since
it is the expectation of the JSE that each issuer must, with the guidance and assistance of the DA,
comply with and discharge its responsibilities under the Listings Requirements. In this regard, the
DA is expected to be the entrepreneurs advisor in all matters pertaining to the listing.
SECTION 21.18 The DA must ensure at all times that their conduct or judgement does not impair
the integrity and reputation of AltX.
SECTION 21.19 The DA must immediately inform the JSE in writing, if the entrepreneur does not
comply with the applicable regulation as set out in Section 21.20 (f) set out in the following text.
SECTION 21.20 The DA must, prior to listing, confirm in writing to the JSE that the following have
been completed:
Section 21.20 (a): All the documents required by the Listings Requirements have been
submitted.
Section 21.20 (b): It considers the new applicant suitable for listing on AltX.
Section 21.20 (c): The new applicant complies with all the conditions for listing set out
in the Listings Requirements.
Section 21.20 (d): The pre-listing statement is in compliance with the Listings
Requirements and that the following has been undertaken:
o
o
The information contained in the pre-listing statement is accurate and

complete in all material respects and is not false or misleading.
There are no omissions that would make any pre-listing statement false or
misleading.
- 94 -
Statements of fact and opinion expressed by the directors in the pre-listing

statement have been arrived at after due and careful consideration on the
part of the directors and are founded on bases and assumptions that are fair
and reasonable.
The directors of the new applicant have made sufficient enquiries so as to
enable them to give the confirmations set out in the "responsibility statement"
contained in the pre-listing statement;
Section 21.20 (e): There are no matters other than those disclosed in the pre-listing
statement or otherwise in writing to the JSE which should have been disclosed to the
JSE in considering the application for listing of the relevant securities.
Section 21.20 (f): The DA has explained to the directors the nature of their
responsibilities under the Listings Requirements, the Companies Act, the SRP Code and
GAAP. In addition, the DA must be completely satisfied that:
o
The directors have the requisite expertise and experience.
The directors understand the nature of those responsibilities and can be

expected to honour their obligations under the Listings Requirements, and
other applicable regulations.
The directors can be expected to prepare and publish all information

necessary for an informed market to take place in the applicant issuer's
securities.
The information supplied on the Directors' declarations has been verified and
confirmed as true.
SECTION 21.21: The DA must take all reasonable steps to brief all new appointees to the
companys board of directors as to the nature of their responsibilities under all AltX and JSE Listing
Requirements. The DA must also ensure that the directors (current and future) have completed the
DIP prior to listing within two months of appointment.
SECTION 21.22: All future changes to listing requirements must be conveyed to the directors.
SECTION 21.23: The DA must assess and review all company publications, relating to financial
information, corporate announcements and other documentation. The aim is to ensuring that the
directors understand the importance of accurately disclosing all material information to
shareholders and the market.
SECTION 21.24: The DA must regularly review the issuer's actual trading performance and
financial condition to ensure that appropriate disclosure is made at all times.
SECTION 21.25: The DA, or one of its approved executives, must attend all board meetings in an
advisory capacity to ensure that all Listings Requirements and applicable regulations are complied
with.
SECTION 21.26: The DA must provide the JSE with confirmation that all of its approved
executives have attended at least four of the six annual DA forums hosted by AltX.
C. SHARES HELD BY DAs
SECTION 21.27: DAs may hold shares or other securities in the company that they represent.
SECTION 21.28: However, the DA may at no time hold more than 20% of the total issued
securities of the class of shares concerned.
- 95 -
SECTION 21.29: The DA's holding of such securities, as well as the contractual basis upon which
that holding arose, must be published in the pre-listing statement issued at the time of listing.
SECTION 21.30: All and any dealings by the DA in the companys securities must be disclosed
and published in the same manner that is required of the directors.
SECTION 21.31: Securities held by the DA are subject to the provisions of the JSE Listing and
AltX Requirements.
D. TERMINATION OF CONTRACT
SECTION 21.32: If an entrepreneur and DA wish to terminate a contract between them, the DA
must submit a report, with reasons for the termination, to the JSE within 48 hours of the
termination.
SECTION 21.33: If a contract is terminated, the entrepreneur has to immediately publish an
announcement stating why the contract was terminated. He also has to state that unless another
DA is appointed within 10 days, the companys listing could be under threat of being suspended
and possibly terminated. The company must also inform the JSE and publish a further
announcement immediately after a new appointment has been made.
SECTION 21.34: The replacement DA must ensure, before accepting the appointment that he has
requested the report referred to in Section 21.32 from the outgoing DA. The outgoing DA must
supply this report to the replacement DA within two business days and the replacement DA must
take account of the reasons for the termination before accepting the appointment.
SECTION 21.35: If no DA has been appointed within the prescribed period, the JSE may suspend
trading in the companys securities. If, after a further one month the issuer has failed to appoint a
replacement DA, the issuer's listing may be terminated.
E. OTHER SECTIONS
SECTION 21.36: APPLICATION FOR TRANSFER. Issuers that wish to apply for a transfer to AltX
from another sector must complete and submit the following to the JSE for approval and for
presentation to the AltX Advisory Committee:
Section 21.36 (a): The application letter as set out in this chapter on page XX.
Section 21.36 (b): A memorandum containing all the information required in terms of
Section 21.3 as set out on Page XX.
Section 21.36 (c): The latest audited annual report and the latest interim report.
Section 21.36 (d): A draft announcement that must contain the warning statement as
required by Section 21.4 (see Page XX) and a statement that the entrepreneur has
been granted a transfer by the JSE to another sector.
Section 21.36 (e): Documentation proving compliance in relation to an audited list and
analysis of the companys shareholders.
Section 21.36 (f): A declaration by all the directors of the company seeking a listing.
Section 21.37: If the JSE grants approval, the company must publish on SENS and in
the media on the day prior to the transfer date.
- 96 -
SECTION 21.38: NEW APPLICANTS. Entrepreneurs who wish to apply for a listing on AltX must
comply with all the Listings Requirements as stipulated in this section. Applicants must submit all
the documents as set out in this chapter.
SECTION 21.39: The company directors, together with the DA, must personally present the prelisting statement and prospectus to the AltX Advisory Committee prior to being granted a listing.
Subsequently, the AltX Advisory Committee shall advise the JSE as to the eligibility of the
company. The JSE shall consider the Committee's advice and exercise its discretion as to whether
to grant the issuer a listing.
F. TWO SETS OF FEES
SECTION 21.40: ISSUERS. The fees for listing of securities are set out in the table below. These
fees are payable to the JSE on the initial listing date of he securities.
Monetary Value of Securities Listed
< R2 million
< R10 million
< R50 million
< R100 million
> R150 million
Listing Fee (Including VAT)

R800
R5,000
R10,000
R15,000
R20,000
SECTION 21.41. The documentation fee payable on initial listing is equivalent to the Main
Board listing fee.
SECTION 21.42. In respect of each class of security listed, an annual listing fee shall be
paid in February of each year, which shall be R20,000 (including VAT).
SECTION 21.43 The fees for listing additional securities are set out in the Listing
Requirements Section 17.
SECTION 21.44: DESIGNATED ADVISORS. DAs will be required to pay an initial, nonrefundable, application fee of R15,000 (including VAT) in order to act as a DA, unless such party is
already an approved sponsor. This fee is to be submitted with the application to become a DA.
SECTION 21.45 DAs will be required to pay a non-refundable annual fee of R15 000
(including VAT) per annum.
Application for transfer to AltX from another sector/market/board

The JSE has already made it clear that the DCM and VCM will ultimately be closed down.
Companies currently listed on these boards will have to apply to transfer to AltX. In an Appendix to
Section 21, the JSE and AltX sets out the rules for a transfer.
APPENDIX 1.1 THE APPLICATION MUST CONTAIN THE FOLLOWING:
APPENDIX 1.1 (a): A statement from the company stating: "It is understood that this
application shall constitute a contract between this company and the JSE Securities
Exchange South Africa and also between the directors on a continuing basis, of the
company and the JSE, and that in giving the General Undertaking referred to in
paragraph 16.10 (s) of the Listings Requirements of the JSE and the company and its
directors undertake to comply with the Listings Requirements as they may exist from
time to time."
- 97 -
APPENDIX 1.1 (b): The companys full name.
APPENDIX 1.1 (c): The addresses of the registered and transfer offices of the
applicant in the Republic of South Africa.
APPENDIX 1.1 (d): Information regarding the applicant's share capital:

o
o
APPENDIX 1.1. (e): The nominal amount and number of securities of each class:
o
o
o
1.1.(d) (i): The amount of the authorised share capital of each class of
share, and the nominal value and number of securities in each class.
1.1.(d) (ii): The number and amount of the share capital issued and to be
issued with respect to each class of share, and the number of securities in
each class for which a listing is applied for.
1.1. (e) (i): The amount of shares offered to the public for subscription, by
the applicant and the date the offer opened.
1.1 (e) (ii): The amount of shares applied for in terms of the offer, and the
date the offer closed
1.1 (e) (iii): The amount of shares issued and/or allotted, and the date of
issue and/or allotment pursuant to the offer.
APPENDIX 1.1 (f): The abbreviated name of the company. Such abbreviated name
must not exceed nine characters, which includes spaces.
APPENDIX 1.2: The application must be signed by the secretary and a director, or equivalent, of
the applicant and by the DA.
APPENDIX 1.3: The application must be accompanied by a resolution of the directors of the
applicant authorizing the application for the transfer of listing.
Corporate Governance
There are literally hundreds of codes and standards on corporate governance in First World
countries. Their emphasis is almost always on satisfying society's expectations of governance
systems to protect the interests of employees and shareholders. Other systems stress the primacy
of ownership, property rights and maximizing shareholder interests. Other codes have been issued
by an array of government institutions, business organizations with differences of emphasis, but
there are always common themes to all of them. In South Africa, AltX has the same concerns and
as such, decided to adopt most of the King II Report principles but not all of them. These are
briefly outlined in this chapter.
The advantages of good governance
For the SME business, good governance makes all the difference. Family firms with practices are
more likely to carry out strategic and succession planning. Other changes that corporate
governance would bring include:
Special teams would be set up to better manage growth.

Promoting the right members of the family not just because they of family.
Providing attractive opportunities for managers from outside the family.
Demonstrable even-handedness in training, promoting and compensation.
Formal structure. If family firms are to manage growth successfully, they have to adopt sound
structures that would include an effective board thats concentrates on policy and strategy and
a logical management with clear lines of authority and responsibility.
- 98 -
Keys to Success
A clear and understood structure separating governance of the firm.
An effective board with competent, independent, outside directors.
Logical structure of the firm with clear chain of command and decision-making.
Recruitment, promotion and compensation policies must be written and respected.
South Africa and King II

In 2002, I attended a private function where Mervin King spoke about the effects on SMEs of the
King II Report on Corporate Governance. At the start of the presentation, there were numerous
irate entrepreneurs asking about the viability of SMEs having to implement the recommendations
of the King Report.
It did not take King long to allayed their fears.
At the outset of the presentation King said:
To legislate the recommendations of the Report would be tantamount to corporate
suicide. The report is merely a set of guidelines and small cap companies need not be
afraid of implementation.
However, he warned that global trends were towards business being conducted only where a
company had sound and transparent corporate governance principles in place. At the briefing, King
stressed that the aim of King II was to delineate the role of directors, and the procedures and
structures to be instated for proper transparency and accountability within a company.
A number of stockbrokers raised the question of whether, given the tone of the complex Report,
government would not step in and legislate these recommendations, which many small companies
simply could not afford.
Kings response was:
I believe that the Reports set of guidelines are important to adhere to, but I would
resist any attempt to have these recommendations legislated. Global market forces
will sort out those companies that do not have sound corporate governance.
The King II Report, which has been issued to ensure transparency and accountability within
companies, sets certain guidelines that should be implemented by all companies. It also highlights
the role and responsibilities of directors.
In the presentation, King spoke avidly about non-financial matters. It has been proposed that a
company should report at least annually on the nature and extent of its social, transformation,
ethical, safety, health and environmental management policies and practices. This is also called
the triple bottom line of a company.
However, King firmly allayed fears that these non-financial factors would increase a companys
cost base as companies need only implement guidelines that are applicable to their size and
circumstance. For instance, it would not be reasonable to force entrepreneurs with small private
companies to have an audit committee. This would be too expensive, but as the company grows
so too would the directors responsibility grow towards governance and transparency for all the
companys stakeholders.
To give small market caps what he termed take home value and demonstrate that implementing
King II need not be intimidating, King suggested that, for companies to apply sound governance
together with a triple bottom line, directors should ask themselves four questions, use two
guidelines and establish one foundation before making any decision that could affect the future of
the company.
- 99 -
First, a director should ask himself whether he has a conflict of interest in making a decision;
secondly, whether he has all the facts to make a decision; and, thirdly, when he does make the
decision, whether it is rational and in the best interests of the company.
As regards the two guidelines he recommended, a director must ensure that sound and stringent
guidelines are used to communicate with all interested parties (shareholders, staff, suppliers,
media and the community at large), and ensure that all directors, staff and related parties act in a
socially responsible manner in all business dealings.
King concluded with advice on a sound foundation for good corporate governance. He stressed:
All board decisions should be based on the foundation of integrity.
The King II Report does, in fact, contain some recommendations that require statutory
amendments. The report contains a total of 27 proposed amendments, mainly to the Companies
Act, which include assistance to the State to enforce criminal breaches by delinquent directors and
officers, the promotion of the use of contingency fees as a way to promote easier access to the law
for minority shareholders, the establishment of a register of delinquent directors and amendment of
the Companies Act to prescribe a minimum threshhold of 25% for the passing of ordinary
resolutions to encourage companies to solicit attendance at meetings.
The presentation clearly indicated a need for the implementation of a code of conduct for directors.
It is thus vital that all companies take cognisance of King II and consider its effects and how to
implement it.
The JSE and AltX have done just that.
As discussed in previous chapters, AltX has regulated that appointed directors of AltX listed
companies attend a full-time four-day Directors Induction Programme, which will be run by the
South African Institute of Directors and the Wits Business School. This will be funded by the
Department of Trade and Industry.
Noah Greenwell, manager of AltX, says that the exchange will be proactive in searching for
companies, and then inform them of their corporate governance responsibilities. The new listing
requirements on the senior exchange, the JSE, are expected to include a new independent
directors class that will exclude immediate family members.
Corporate governance self assessment

The following questions can be used by company managers, board members, as well as others to
assess corporate governance practices within their company. These questions are not intended to
be an in-depth analysis, but rather give a simple first-round screening of some principal corporate
governance issues.
1. Do members of your Board of Directors have a clear understanding of the company's goals
and does their board participation serve to meet those objectives?
2. Do members of your board possess "board skills and characteristics"- knowledge of
research factors that affect the firm, judgement, vision, integrity?
3. Does your board have independent directors, sufficient in number and independence to be
effective on the board?
4. Does your board have a governance committee to help the board perform at its best to
achieve its objectives?
5. Does your board engage in self-evaluation of the board as a whole and individual members
for the long-term success of the company?
- 100 -
6. Does your board have a code of ethics to prevent conflicts of interest and to ensure that
ethics are followed in word and deed?
7. Does your board have standards and procedures to ensure equitable treatment of all
shareholders and public access to information and the ability of the shareholders to
exercise their rights?
8. Does your board have an independent audit committee with terms of reference that seek
reports to the board and the identification and management of company risk?
9. Do you have procedures in place to disclose all material information - information that could
influence the decisions taken by management, shareholders, creditors, etc?
10. If you are a family business, do you have a clear structure separating governance of the
family? Does your board have "outside directors"?
Part three looks at post IPO communications and programmes set to complete the circle of
information.
- 101 -
PART 3:
AFTER LISTING WHAT NOW?
It is up to you to take the actions and be
responsible for their consequences. Our
responsibility: every opportunity, an
obligation; every possession, a duty." - John D.
Rockefeller, Jr.
Including:
PHASE FOUR: IMPLEMENTATION
SETTING UP AN INSOURCED ANALYSTS DIVISION
SEVEN KEY ELEMENTS TO DYNAMIC SUCCESS
POST IPO PUBLIC RELATIONS
ASSESSING SHAREHOLDER EXPECTATIONS
THE ANALYSTS REPORT
- 102 -
Chapter 11
The Implementation Phase
We believe that the success of AltX will be based on a philosophy which emphasises
relationship marketing and continuous education. Noah Greenhill, manager of AltX.
The JSE and AltX have stressed on numerous occasions, during conferences, in the media and in
personal interviews, that the process of documentation and ultimately listing an enterprise is not
the final phase for the entrepreneur.
Three phases have been outlined so far. If it is assumed that this entrepreneur has undertaken all
the necessary research, due diligence and documentation (business plan, corporate profile and
prospectus) the next step is the implementation of the listing and subsequent strategies to maintain
shareholder interest, respect and wealth.
- 103 -
The implementation of the strategies outlined in Phase 3 is set out in this chapter. Post IPO
strategies are set out in subsequent chapters.
Implementation forms part of the company
A well thought out implementation plan will make the entrepreneur nothing but money. Without it,
however, the entrepreneur might as well not do any business planning. The trick is to think ahead
to the implementation phase while the business plan is being written. The entrepreneur must
decide how he will actually implement and use the ideas, concepts and strategies that have been
set out in the business plan, corporate profile and prospectus. After all, if it was important enough
to write such strategies into the plan, it must be important enough to track, manage and implement.
Remember, it is not just important for the entrepreneur, but also for the investing public to
understand the rationale of these strategies.
Perhaps this seems a little too obvious. Yet, I have personally seeing well intentioned
entrepreneurs fail because they did not implement, test and execute well thought out strategies.
That being said, it is so easy to get distracted and forget about the commitments made to
shareholders, staff and clients in the business plan.
There are two ways to prevent this from happening:
Re-read the business plan and compare achievements to milestones set out in the
plan.
Create an implementation plan. Assign deadlines, priorities and people to the

implementation plan.
The secret is to integrate the business plan into the day-to-day management of the business. If
tasks are set to a timeline delays in specific tasks will be immediately highlighted. Tasks not
assigned could fall between the cracks and forgotten until it is possibly too late. There are
essentially three main parts to an Implementation Plan:
Create an action plan: For instance:

o
Have a set of deadlines to achieve certain tasks within the first 30 days
following the completion of Phase 1 and 2.
o
Set deadlines and tasks for the 60 to 90 days following the completion of the
prospectus (Phase 3).
o
Set general and specific objectives for the first year after listing.
o
Have longer term plans, i.e. growth via acquisitions, expand into new
markets and so on.
Identify tools required: Brochures, web site, press releases, direct mail and e-mail are
examples of such tools.
o
Identify the correct media contacts (set out in Chapter XX)
o
Identify analysts associated with the company in question. Not all
companies operate in the same sector and analysts do not cover all
companies. For instance, there are different analysts specializing in
diamonds, retail, property or technology.
o
The intention is to build up a database of contacts. When a company
launches a new product, for instance, such a database could be used to
identify who would be interested in attending a presentation.
Identify systems & strategies: Examples are staff training, human resource systems
and customer service. The important thing is to identify, develop and then implement
strategies.
- 104 -
Why planning for the future is crucial

Staggering changes have occurred in South Africa in the last 15 years and future changes are
forecast to be as dramatic during the next three decades; both locally and globally. In addition,
changes are accelerating in every direction and in every environmental sphere. This will affect the
production and distribution of goods through development of new materials, power sources and
automated equipment. There will be a significant impact on working hours, leisure time,
educational requirements, longevity, government services and ultimately every aspect of an
individuals private and working life. In turn, businesses will also be affected. Therefore, while it is
professional to have strategies, if these are not implemented, or if such strategies (and the result of
action) are not conveyed to the investment community and general public, the entire process of
research through to implementation has just been an expensive waste of time.
One entrepreneur, certainly well known in Johannesburg, told me that he doesnt have the time to
continually strategize and certainly does not intend to deal with the media and analysts if he takes
his company through to an AltX listing. How could I help him?
I developed a system for him that takes into account all four phases outlined in this book. This
system, which I called The Insourced Analyst Division, gave him the freedom to concentrate on his
company, while knowing that the media, investment community and clients are continually
informed about changes to his company. In addition, strategic sessions every quarter highlighted
programmes achieved and tasks not completed.
The focus of the insourced division is to maintain the independence of the analyst to avoid conflict
of interest from occurring, while the company can have a corporate advisor that has gone through
the grindingly difficult task of getting to know the company in great and intimate detail.
I use the word insourced because the company introduces the analyst/corporate advisor as part
of the team employed by the company as their watchdog; fulfilling the role of PR, analyst and
development advisor. All new projects are handed to the advisor for research and due diligence
before a final Yes or No is given for the acceptance or rejection of the project.
For instance, if a company decides to investigate the potential of expanding its X-TEC product into
a new area, the insourced analyst would be required to undertake:
Research into the viability of the selling the product into such an area.
Undertake a due diligence on the effects (operational and financial) on the company of
moving into such an area.
Update the companys business plan to account for the target area.
Update the Corporate Profile.
Write a prospectus to raise funds for such a venture.
Implement the targets set out in the research and due diligence.
The process is difficult enough without having to find the right people (skilled analysts) every time a
project is undertaken. Experience shows that setting up an insourced division would expedite plans
of implementing a listing on AltX and the follow through as set out in the following chapters.
The insourced analyst division
The proposed use of an Insourced Division is based on successfully implemented
strategies and experience that I have gained in the past 15 years. However, tasks set out in
the following text can be conducted by managers assigned to such projects.
For assistance in setting up (or further explanation) such a division contact me on
bci@magliolo.com)
- 105 -
The most successful entrepreneur is usually one with foresight. Telling yourself that you dont have
all the expertise necessary to succeed, knowing it is easy to lose sight of the overall picture and
understanding how easy it is to get embroiled in everyday operational problems takes sound
business perception. In other words, get professional help. What better help than the corporate
advisor who conducted the research, due diligence and drafted the business plan and other listing
documents?
There is a way to do this, particularly in SMEs that will become larger (size, staff, directors etc) and
more professional as a listed entity. In 1991, I was hired as a business consultant by a Cape Townbased textile company to undertake an investigation into how to conduct a hostile takeover of a
competitor. Part of the report dealt with the management of the target company. They had lost
focus, the company's activities had become too diversified and the directors were so
geographically divorced from the factories that the entire group had become ripe for a takeover.
In the report, I suggested a different form of management structure. Instead of having a full board
of directors at head office, with each member sitting on a host of other boards of subsidiary
companies, I recommended that a separate division be created. This would be the analytical
division run by the corporate advisor, at arms length and controlling the analytical reporting of the
company and the PR function.
The Insourced Analysts Division would consist of the chairman, MD, financial director and
corporate advisor/analyst. These three people are the driving force behind any organization. They
see to the overall target objectives of the group, look to new markets, negotiate corporate finance
deals and focus on expansion, profitability and generally policy-making.
The fewer people, the easier it is to expedite decisions and to carry out proposals.
The expansion of the company, after listing on AltX, should not result in the Insourced Division
being complicated by employing additional staff. When a company expands to the point where it
owns various companies, it would be time to create a full board of directors for each subsidiary and
for each to run as if it were completely separate from the holding company. The MD of each of
these boards would report back to the Insourced Division at the strategy meeting every quarter.
Now, for the new entrepreneur the situation is the same. He needs to have focus and this can be
achieved by using the Insourced Division principle. Find two partners, each with specific skills.
Preferably, one should be a financial accountant and the other an expert on economics, market
trends or analysis or a corporate financier.
Implementing the business plan
Once this team has been assembled, discuss each part of the business plan and decide who will
carry out which sections. The team members should be responsible for all aspects of their
sections, including finding expert help to fulfill those functions that cannot be sorted out by the
corporate advisor, i.e. legal advice. At the first meeting of the members of the division, the following
factors should be assessed:
The insourced analysts division - first meeting
Set up management structure. Decide on the functions of the chairman, MD, financial
director and corporate advisor.
Establish the focus of the Insourced Division, when it will meet and parameters for the
advisor, i.e. how many hours he must be present at the company, duties for PR and
analysis etc.
Prioritize the business plan/prospectus. State main objectives and time frames.
Decide on a short, medium and long term strategy, i.e. road shows, press releases,
analytical reports creating databases. To whom will this service be provided and how will it
be undertaken.
What information is needed to draw up the implementation plan.
Draw up a working schedule to assess progress, i.e. meetings should be weekly or at
most fortnightly.
- 106 -
If some team members are new, they will need to get up to speed on the research, due diligence
and business plan. This is in addition to general data about the business environment, such as
who customers are, how many there are, products and services already being provided, whether
there is room for an additional service, level of availability of skilled labour and what the factor
costs of production are. Of course, if you product is unique, a number of the above facts are not
needed, but replaced with potential consumer demand for such a product. Always remember that
walls have ears and that a secret today could become someone elses business tomorrow. The
bottom line is not to waste time. Gather the information quickly, assess the data and move on.
As the implementation plan takes shape, it will often necessitate changes in initial market and
customer perceptions. This is normal and means that drafting a plan has worked. It has given the
team new insight into their intended target markets and a sense of realistic expectation will take
hold of the team. It is useless for the advisor to do all the work, and be under unrealistic pressure
to complete a task.
What are the prospects for the business?
How will future changes affect the entrepreneurs business? Has the Insourced analytical work
identified future opportunities and is it prepared to cope with the threats which such changes will
present?
Corporation casualties are high in South Africa and are likely to increase in future. Although it is
usually tougher for a smaller business to survive, size is actually no assurance of continued
profitability. Nor has anyone yet devised a magic formula that can guarantee prosperity. Theodore
Levitt, from the American Business Association, put it clearly in 1960 when he wrote:
There is no such thing as a growth industry. There are only companies organized
and operated to create and capitalize on growth opportunities. Industries that assume
themselves to be riding some automatic growth escalator invariably descend into
stagnation. The history of every dead and dying growth industry shows a selfdeceiving cycle of a bountiful expansion and undetected decay.
While there are many reasons for a business to fail, here are four conditions that entrepreneurs
listing on AltX could take as a guarantee that their business is decaying:
The belief that growth is assured by an expanding and more affluent population.
The belief that there is no competitive substitute for the entrepreneurs major product.
Too much faith in mass production and in the advantages of rapidly declining unit costs as
output rises.
Preoccupation with a product that lends itself to carefully controlled scientific experimentation,
improvement and manufacturing cost reduction.
Characteristics of Success
Back in the late 1980s, I headed a study of over 90 companies that had a successful history of
profit growth after listing. These five common characteristics were highlighted:
Organized programmes to seek and promote new business opportunities.

Organized research and due diligence in potential growth markets.
Courageous and energetic management, willing to take carefully considered risks; based on an
understanding and information.
Proven competitive abilities to succeed in their new ventures.
Continued and updated information to clients, investors and staff.
- 107 -
Investors attach considerable importance to such factors. Other studies made of companies whose
shares are traded on main boards (larger market caps) concluded that those with high PE multiples
possessed similar characteristics:
Cohesive business direction, research and other information easily accessible to staff, investors
and clients.
Operations in growth markets.
Above average return on equity.
Recognized end products.
Leadership position in these fields.
Record of new product development.
With change coming so quickly and constantly, these factors will become even more vital in the
future for any company wishing to improve its position. Indeed, they are prerequisites for survival.
Manage the process
Many businessmen, diverted by the daily battle with mediocre issues, often fail to realize that the
managers major preoccupation has changed during the past decade from short-term trading to
long-term planning. At one time, to be a successful manager one had to be a capable trader and
be able to make sound, intuitive decisions based on past experience. Then, the practitioners of
scientific management began to concentrate on operational efficiency and devised many valuable
management techniques for their purpose. Today, good management means leading a business
enterprise through successive radical changes; out of obsolete activities and into new
opportunities, in order to keep pace with accelerating technology and shifting social and economic
forces.
As famous business author Peter Drucker has continually pointed out, managers need to
concentrate more on effectiveness (doing the right things) than on efficiency (doing things right).
Management has become much more difficult than ever before. It demands an ability to recognize
the forces of change and to establish a favourable climate for introducing change, despite the
normal resistance of people. Taking a company through to listing means conveying to staff and
clients how this will be done, the effects that such a listing will have on them and the benefits.
Unfortunately, too frequently one finds senior managers who close their minds to change or give lip
service to long-range planning of change. There are perhaps two reasons for this:
Failure to accept the inevitability of change. Anyone can easily recognize and accept the
changes that have occurred during the past 10 and 15 year. The flaw is in thinking that such
changes will not affect the future or that they will continue to occur. They somehow feel that the
latest change is the final change and that there will be no more.
Failure to comprehend the accelerating rate of change. This shortcoming is perhaps due to
the fact that a heavy proportion of senior management jobs are occupied by administrators
rather than innovators, i.e. men whose inclinations are to operate the business tidily for today
rather than to imagine what tomorrow might bring. This is where communication of analytical
reports and media public relations (PR) comes into play See Chapters XX.
Whether or not top managers are receptive to change, they are continuously under pressure to do
something, either to move in some new direction or to halt movement in another direction.
Therefore, often the problem is one of time. If the manager does not have the time, then hire
someone who will be the specialist in undertaking reports and communications with the
shareholders.
AltX demands it. Experience shows that it is better to take the time to do it right before listing than
to scramble after going public. The Insourced Analysts Division offers many advantages over a
manger trying to manage his daily duties with PR.
- 108 -
The inevitability of change, the reactions it provokes, and the accompanying pressures, present a
serious dilemma to top management. On the one hand, there is the danger of doing nothing or of
discounting the forces at work. On the other hand, there is the problem of changing too quickly or
without the resources needed to succeed. The path of progress is littered with the skeletons of
pioneers who failed to appreciate the enormity of their task. Statistics in South Africa suggest that
six out of 10 new ventures fail because of lack of planning, resources and skills.
Regardless of which course is adopted, no matter how well the plans are made and implemented,
the risks are great and the stakes are high. However, if the entrepreneur has completed the Three
Phases with due care, there is no reason why failure should even be considered. Implementation
should be a matter of course, rather than a headache that could turn into a heart attack.
How business planning can help
To stay in business and prosper, a company must have managers who are capable of competing
under rapidly shifting conditions. To do this successfully, the managers need to be able to do three
things:
Forecast the major changes that are likely to affect the business.
Make intelligent choices as to the future direction and dimensions of the business.
Plan the deployment of resources needed to attain the goals selected.
Essentially, these are all the tasks that can be fulfilled by a corporate advisor. Meeting these
requirements should be one of the principle objectives of a comprehensive business
implementation planning system. Very simply, business planning is a process of:
Assessing the companys position and the opportunities and threats it faces.
Setting goals, establishing priorities, and developing strategies.
Making plans for each business activity.
Ensuring that plans are carried out.
It is a complete and continuous process directed towards improving business results. It is a

systematic and logical process that does not have to be scientific to building characteristics that will
help ensure the success of the enterprise after listing.
It deals with the questions:
Where are we going?
How are we going to get there?
How are we going to remain successful when we get there?
It calls for dynamic, imaginative thinking. It means probing the future. It requires an attitude of
flexibility and the capacity to change. It calls for making long and short-range plans and
implementing them in thorough programmes designed for specific needs. The objective is to put
the company into a leadership position in every respect; product, profit, growth.
In the final analysis, these business results are expressed in terms of profit. It is
always well to remember that profit comes not only from operating efficiently in
present activities but also from exploiting opportunities; that is finding worthwhile
new things to do and developing them to their full potential.
Profit is then translated into EPS, which is converted by the investing public into a
share price. Without knowledge and understanding of the companys objectives even
higher profits will often not boost a share price.
Profit is not by any means the only objective of the business, but it is an essential one, and
therefore merits emphasis.
- 109 -
Over the past 15 years, I have found than most entrepreneurs recognize that a modern business
enterprise has a variety of responsibilities, including those to its shareholders, customers and
employees, to the community and to government. These responsibilities, however, can be met only
by a profitable business; a business which fails to make a profit, or barely avoids a loss, will be
unable to fulfill them, and will often cease to exist. The crucial measure of effective performance in
business, therefore, is profit, which is really a measure of how well the business performs
economically. It is also the way that shareholders see a company.
In an environment of competition and change, continuing profit is dependant on both improving
what exists and developing new opportunities. The amount of profit is largely contingent on how
effectively and efficiently resources are used. Resources are inevitably limitedall demands for
manpower, money and plant can never be satisfied. A key part of business planning lies in
determining how resources should be allocated to secure the best long-term results. It forces
entrepreneurs to choose alternatives and to convey these reasons to the investing public.
Why business planning is a must
Managers have always planned. However, methods that were successful in the past will not
necessarily be suitable for meeting the challenges in the future. The accelerating rate of change is
making todays products and services rapidly obsolete. The financial implications of major
decisions, both the magnitude and degree of risk, are becoming greater. Decisions must therefore
be based on a full assessment of what the future is likely to bring and of alternative courses of
action.
For instance, in 1990 South Africa saw the released of Mr. Nelson Mandela from prison. At the
time many entrepreneurs were saying that this heralded a whole new way of business. Times
ahead, they said, would be easier as sanctions would be lifted and business would become
internationally accepted. These businessmen were right but it took almost a decade for stability
to become a way of life; essentially, accepted as the norm. The first six years of the 1990s saw
volatility and instability in business even after 1994s historic elections. The following table
highlights how the All Share index moved in relation to events in those years.
Year
Political event
All Share Index movement
1990
Announcement that Mr. Mandela would be

released from prison and that certain political
parties were to be unbanned.
1991
National Peace Accord signed and multi-party

talks start (Codesa).
1992
Last white referendum.
1993
Assassination of SACP general secretary

Chris Hani, sanctions lifted and interim
constitution finalised.
1994
IFP withdraws from election, then rejoins, right

wing bombs, general election takes place.
1995
Local elections take place.
1996
Completion of Final Constitution, departure of

National Party from GNU, interest rate
increases.
Index fell from 2795 (Jan.) to 2640

(Oct.) on political unrest. Markets
recover strongly after Mandela was
released; to above 3500 by year-end.
Index moves to 4047 in July from the
3500 mark and continues to climb to
4500 at year-end.
As talks slow down, the index slides to
4031.
Resumption of talks and renewed focus
on SA negate the death of Hani - and
the markets boom - from 4359 to 5742
by year-end.
Markets volatile moving from 5596 in
January to 6140 in March, but falling to
5617 in April. Only to recover by yearend to 6977.
Markets strong, increasing by over
1000 points - from 6975 in January to
7987 by year-end.
Markets volatile - moving from 8009 in
January to 8794 back to 8528, down to
8123. Climbing to 8611 and back down
to 8037.
Of course, 1997/8 saw emerging market volatility and a stock market crash. Despite these volatile
times, the All Share Index is today over 9500 a climb of over 230%. Yet many businesses failed
- 110 -
during this period, many South Africans emigrate and the stock market has changed. The latest is,
of course, the launch of AltX.
All these factors mean that the director who refused to accept that change is inevitable, faces
financial suicide. To compound matters, the entrepreneur who lists his company and who refuses
to accept that the public need to know about these changes, will face JSE disciplines of being
suspended or delisted.
The companys future and, therefore, future profits cannot be left to chance. Profit opportunities
must be aggressively pursued, evaluated and then organized to secure their full potential. Every
action taken regarding markets, materials, staff, machinery and money has a bearing on profit.
Making the right decisions at the right time, keeping resources in balance with opportunities means
achieving optimum profit. Business planning is the practice of seeking to do this continuously,
methodically and with due care.
The project managers task
Managers are employed for one reason only - to get results that positively contribute to securing
the objectives of the business. It follows that one of the essential functions of managers is to
establish the real objectives, to implement these objectives and to define in specific terms the
results to which their efforts achieved these tasks.
For the MD to follow up every existing and new task could become a nightmare once listed.
Remember that there are he added tasks of analysis and PR, to inform AltX, the JSE, the investing
and general public on all corporate issues once the company becomes listed.
The Insourced Division provides the MD with a means to control events through a specific division
that reports to the board on tasks, progress and implementation. Once the tasks have been
completed and accepted by the board, the division conducts the PR and analytical functions, which
are conveyed to shareholders and general public.
For the purposes of implementation strategy, six elements of managing projects are used, namely
assessing the viability of a project, undertaking strategic planning, establishing operational plans,
assessing financial implications, reporting back on findings and implementation. Once these
elements have been outlined, the next chapter describes the process of business planning and
demonstrates how it can provide a systematic means for the directors to perform their jobs in a
rapidly changing environment.
- 111 -
The project managers planning process
Brief from Insourced Division
6. Implementation
`
PROJECT
MANAGER
5. REPORT
BACK
1. Business
assessment
2. Strategic
planning
4. Financial
planning
3. Operational
planning
Based on the objectives of management (board of directors), which are conveyed to the Insourced
Division, the project manager would plan a process to deliver a specific result. These are divided
into a number phases.
Business assessment: Gathering facts, undertaking analysis and forecasts in order to assess
the companys current position, prospects, opportunities and threats in relation to a specific
brief. This must include both a quantitative and qualitative assessment.
Strategic planning: Determining the grand design of the enterprise and the allocation of
resources to opportunities, i.e. how does this project fit into the company as a whole and how
will it affect its future profitability? The process of strategic planning is usually an agonizing and
lengthy process, but it leads to alternative ways of achieving goals. Examples include:
o
o
o
o
Organic growth or acquisition.

Entry into new markets.
Increasing market share of those already served.
Buying assets or leasing them.
From this, strategy is determined, priorities established and decisions reached on the best reallocation of resources. It is also important to relay these strategies to analysts/media when
drafting corporate strategies for communication purposes. While the process is under way,
plans can be made and implementation action can begin to improve immediate profitability.
These are based on the initial assessment of the companys performance, which invariably
reveals opportunities for increasing profit or reducing cost.
Operational planning: Determining the form and content of major functions and activities and
how they should be timed and interrelated. This usually involves making plans for each major
activity of the business for the short to long term. The plans fall into a number of groups:
o Organization
o Product and market development
o Marketing
o Resource development
- 112 -
Manufacturing.
The planning in each of these areas should spell out what must be done annually in order to
fulfill the objectives set out in the business plan, prospectus and project-related strategies.
There must be a careful integration of all plans, which is facilitated by converting them into
monetary terms and preparing projected financial statements for each year of the planning
period.
This helps to reveal whether:

o
o
o
Plans are realistic.

Desired results are obtainable.
Financial resources are adequate.
Many adjustments are usually required to get a proper fit. A long-range planning document
should then be prepared to incorporate the component parts of the strategic and operational
plans.
Financial planning: Determine the potential financial impact of the project on the company as
a whole. Can the company afford to take on a project if it will cause financial stress, i.e. push
gearing to heights considered unacceptable to shareholders? Or, if financed via a share issue,
will the additional shares dilute EPS to an extent that it, too, will result in investor
dissatisfaction?
Financial planning should cover the action to be taken and the results to be achieved within the
next fiscal year and should be broken down to identify:
o
o
Influence on cash flow, income statement and balance sheet.

Contribution of each manager to such tasks.
The annual company budgets have to be altered to take into account the cash requirements for
the tasks being planned. Thus, the planned tasks are reflected in the plans for the years
activities, based on price and input costs. The budget should also reflect the results of action to
be taken to increase immediate profitability, identified during the course of the business
assessment.
Implementation: Action undertaken by managers, who are assigned responsibility for specific
activities, to carry out task. At this junction, short-term plans can be made. The project manager
has reported back to the corporate advisor who has relayed the strategy, conclusions and
recommendations to the Board of Directors. If the project viability is confirmed, the Insourced
Division can move ahead with implementation.
Report back: To corporate advisor who in turn outlines the plans to the board of directors, the
public and shareholders. Tied in with all the above must be of a system of feedback reporting
that permits periodic comparison of actual results with budget, performance standards, or
managers priority plans. Out of feedback comes corrective action, desirably based on
management by exception.
The circle of planning and implementation never ends

The planning process is continuous. The strategic and operational plans must be updated
annually, modified where required to meet new circumstances and projected changes to the
market; based on the environmental factors set out in Part One. There must be a clear link
between the grand design for the enterprise for the years ahead and realistic implementation
action programmes for the short-term that have meaning for the individual project manager. Thus,
there can be no separation of long and short-term planning although each has its special role and
characteristics.
- 113 -
The continuous inter-relationship of research, planning and implementation can be illustrated as

follows:
Implementation should primarily be directed to effectiveness, i.e. doing the right things by
seeking out suitable opportunities and allocating resources to exploit them.
Operational and annual planning should concentrate on efficiency, i.e. performing

selected activities properly.
To be effective, business implementation must get down to and include the planning of results to
be achieved by individual directors, managers and staff.
A perceptive companys forward plan, may be rich with potential profit growth, remains useless
until managers at all levels implement such a plan. Their competence, judgment and enthusiasm
will determine whether or not the company objectives are met. Thus, the annual planning and
implementation of desired targets include working out with each manager an understanding of his
key tasks and priorities that will enable him to concentrate on the really important profit-influencing
tasks that measurably contribute to the achievement of his units objectives and hence the
company goals.
It is therefore up to the Insourced Divisions corporate analyst to ensure that the result of the
assessment meets with the standards set by the board of directors. If it does, implementation is
undertaken. Remember that this relates to projects in future, i.e. after listing.
The next chapter looks at the elements that make up dynamic success.
- 114 -
Chapter 12
Seven Key Elements to Dynamic Success
The elements of managing are common to everyone who can manage people. A chief executive
spends more time managing and covers a wider area than a factory foreman, but the common
denominator is that they both accomplish their managing work by means of the elements of
managing. These elements are, therefore, also pertinent to project managers, who will be handling
extremely important projects that could affect the profitability of companies in future. With this
responsibility comes the influence that project managers could have on the share price.
Therefore, in addition to the ability to undertake industry and market research, analysis and
conduct due diligence on new projects, these managers need to have a sound understanding on
JSE Regulations. A lack of such knowledge could land the company in hot water, even if
inadvertently, insider information was revealed. To achieve the desired state of being in a position
to implement projects, managers have to undertake a number of important steps. These are
discussed below:
At the risk of simplification, a good deal of research and some experience in business planning can
be boiled down to seven vital points which demand recognition if planning and implementation is to
be successful and dynamic.
The seven key elements to dynamic success
This book is mostly about the mechanics of a total planning process to take a company through the
phases to an AltX listing. Equally important, however, is the involvement and commitment of
managers at every level in the complete process; i.e. from Phase One through to Phase Four. One
is not much use without the other.
At the risk of simplification, a good deal of research and some experience in business planning can
be boiled down to seven vital key elements that demand recognition if planning and
implementation of an AltX listing is to be introduced successfully.
Strategic planning, resource commitment and implementation
Resources are the means available to, or obtainable by the company to achieve its objectives, i.e.
money, people and physical assets. Strategic planning involves allocating resources to capitalize
on opportunities. It goes far beyond extrapolating the results of current operations into the future or
finding ways to solve present problems. A resource commitment made in a strategic plan should
be distinguished from an investment decision. The strategic plan is developed to determine the
best utilization of resources and thus to narrow down areas of interest. The search for or selection
of specific opportunities and the actual decisions thereon are phases of the action programmes of
implementation.
Planning is a management responsibility
Strategic planning is a major part of top management's job. Resources can be committed only by
those with the requisite authority. Planning decisions cannot therefore be delegated to staff
specialists. The Insourced Analysts Division sets structure to such issues.
Good planning requires a top down approach
The planning system must differentiate clearly between strategic and operating decisions so that
action can be taken at the appropriate level of management. The strategic plan includes objectives,
strategies and resource allocation. Operational plans are evolved from these. Operational plans
are intended to serve the purposes of operating managers and should be developed from strategic
- 115 -
plans. Although there should be involvement in planning at all levels of management, consolidation
of the plans of all units will not produce a strategic plan.
Good planning requires a planning system
A planning system is a means for channelling information to and from managers to enable them to
set objectives and make resource commitments. With an AltX listing, these decisions are
complicated by share capital, decisions on future rights issues, corporate governance and so on.
The planning system should therefore also be used to identify and evaluate alternative means of
achieving objectives.
The relationship between the planning function and the planning system is analogous to that of the
control function and the control system. The controller who runs the control system arranges for
the preparation of information that the line manager uses to exercise control; the planning officer
acts in a similar capacity, producing information needed by top management to decide the
companys future direction. Similarly, the Insourced corporate analyst controls his project
managers, who control teams of analysts.
The management task determines the form of the planning system
The scope and structure of the planning system are determined by the nature of the management
tasks which are essential for the fulfilment of the companys mission. That is, the planning system
must be tailored to the needs of good management.
As a corollary, the planning is most effective when it is naturally integrated with the existing
management process and practices. It should not be set up as a separate routine.
The process of planning is more important than the planning documents
Planning should result in decisions that permit resources to be effectively allocated to exploit
opportunities. Therefore, the planning system must be directed towards providing the vital criteria
and information which make possible intelligent decisions. The preparation of planning documents
is a necessary by-product of the system but these are much less important than the process of
arriving at the right decisions.
Good planning requires gradual development
The planning system should be introduced gradually, recognizing the time available and particular
capabilities of the directors/managers concerned. It should evolve naturally from existing
management practices in order to facilitate implementation.
The significance of these elements should emerge as the process and problems of research,
planning, evaluating and implementation are undertaken by the entrepreneur.
The next chapter discusses how to set up a post PO PR function.
- 116 -
Chapter 13
Post IPO Public Relations
Once the IPO is complete, attention turns to finalizing an investor relations programme, which
includes two distinct groups:
The analysts and portfolio managers, who represent large groups of shareholders, i.e.
pension funds.
The media, who represent the minority shareholders, public and prospective investors.
AltX requires that four analytical reports a year, media releases and all corporate finance changes
are sent to the JSE, AltX, companys web sites, the media, and analysts. This section deals with
media (includes press) communications, while Chapter 15 deals with the analysts report.
Post IPO communications
After the IPO, the company takes on the responsibility for building relationships with the investment
community and for supporting and ensuring that the share price reflects fair market value. The
momentum created in the after-market offers an excellent launch for a continuing programme.
The job of investor relations is to market the company. The method is the communication of
messages, strategies, corporate announcements, cautionary statements, financials and
accomplishments effectively and in an appropriate fashion to prime audiences (see Chapter 14).
To achieve this goal, investor relations should:
Be aware of market perceptions of the company and industry sector.

Ensure the companys objectives, messages and strategies are consistent with the
expectations of the investment community.
Understand and take heed that investors expectations can change with the ebb and flow of the
market (See Chapter 14). An astute management keeps tabs on these regularly, in addition to the
following elements that make up a Communication Plan:
Audience: Define the targeted audience. List their characteristics, demographics, preferences
and behaviour.
Message: What is the message that is intended to go out? Does it relate to products, services,
shares or overall company strategy, financials or other corporate finance issues?
Purpose: Why is the communication being undertaken? Define goals. What is the aim of this
communication and what is it intended to accomplish?
Tools: Which tools will be used to get the message across?
Test for success: Define how success will be measured? A communication plan is dynamic
and feedback will be received. It is thus essential to learn from this feedback so it is important
to determine in advance how success will be defined. If the communication is not successful,
what plans and correction methods will be made?
Mining databases
The quiet period during the drafting of the prospectus is a good time for the Corporate Advisor to
work on setting up a plan and refining target lists of analysts and potential institutional investors..
Fro instance, specific analysts dealing in the sector that is about to be listed can be targeted. The
quiet period is also an excellent time to begin hammering out how the company is going to talk
about two critical issues:
The companys growth strategies.

- 117 -
The companys investment rationale.
Many executives find this seemingly straightforward task of communication is more complicated
than it seems. Usually, the road show presentation pushes companies to come to grips with this
issue. However, road show presentations need to be sharper and, in certain respects, more
aggressive when they are adapted as a post-offering investor presentation.
Growth strategy
The management premises behind growth and profitability should be distilled to five or six distinct
points, which should be highlighted on in the body of the presentation.
Investment merits
While demographic data about a company (e.g., background on products/services, customers,
facilities locations, etc.) is important, these must be presented in the context of why should I invest
in this company? A clear statement of investment merits, again presented in concise form, should
open and close every presentation.
The period between drafting final prospectus and listing is a quiet period. It is also a time to begin
specific communication planning. For instance, how many investment meetings does the company
intend to hold? The norm in South Africa is to have a road show to present companys year end
financial results. Some companies also have an interim (half-year) road show. Where should these
presentations take place, i.e. at the companys head office or hotel conference centre?
Many CEOs are not prepared for the time demands of being a public company. This is why a yearlong plan with a schedule of activities set in advance (one-on-one and group meetings) is
important. After an IPO, it is hard to sustain momentum and shareholder interest. The company
becomes just one of hundreds of other publicly-held companies. This is why time spent before the
public share offer is critical to provide the company with an advantage to get its corporate profile to
investors.
Objectives and messages
Corporate objectives and messages should focus on shareholders and potential investors;
expressed needs, based on research, road show feedback and the market response to the IPO.
The objectives, for example, might include garnering more institutional shareholders. Depending
on the criteria that institutional and retail shareholders presented to researchers, the PR message
might include:
A good outline of the business and its place in the industry; emphasis on the consistency of
earnings growth among other companies in the industry. In other words, the Corporate Profile.
Identification of and response to specific company challenges.
Means of gaining market share.
Longer term goals for the investor relations programme should include:
Introducing the company to a wider range of investors.
Continuing to build a strong market for the companys share. One issue that is continually
debated in South Africa is the level of liquidity of a companys share. It is pointless having road
shows and a full communications programme if the companys shares cannot be bought
because 90% is held by a few investors. Therefore, expanding the number and mix of
shareholders adjusting liquidity is yet anther important long term strategy.
Building the share price to reflect present and future value. This is done through the Corporate
Profile and continued analytical reports.
- 118 -
Getting & keeping attention

Once a company has been public for a year or so, investors will want to see clear evidence of:
Goals accurately set and met. Management doing what it says it will do.
Consistency in earnings and growth and with company predictions of earnings and revenue
growth. Management needs to be seen to understand the business well enough to grow the
business steadily, as well as to anticipate what will happen every six months. Nobody likes
surprises
A strategic plan for growth. Management must be perceived as having a realistic expansion
plan for the future.
Minimal risk. Investors are gamblers, but they are smart gamblers. They want to reduce risk
as much as possible. Investors expect management to recognize that they are working with
other peoples money, and to speak convincingly about why they are using the funds the way
they are.
Investors want solid management, with depth of experience, a strong coherent corporate vision
and the kind of innovations that will grow market share and penetrate new markets. They also
want intelligent strategies that will propel the company towards an increasingly profitable
future. For a newly listed company, the credibility of its strategy and management team often
becomes the major factors in investment decisions. This is also key to the post-listing investor
relations initiatives.
Ongoing Programme
Once the IPO is complete, and the PR objectives and messages are refined, the company will be
ready to begin building its ongoing investor relations programme. The components usually fall into
the following categories:
Presentation material: This includes corporate presentations and accompanying handouts,

fact sheets and a corporate profiles.
Events scheduling: Such as investor meetings and conferences about earnings releases and
other corporate finance issues.
Publications: Including investor newsletters, timely press releases and marketing material.
This will include the companys web site, the JSEs SENS and AltX.
Regulatory undertakings: Planning for annual general meetings, annual reports

information circulars.
and
Evaluating the programme

After the PR programme is in place and the market has become aware of new public company, it
should consider an evaluation study to confirm the direction of its investor relations.
The study should provide answers to the following:
Have the companys investor relations objectives been met?
Have the companys investor messages been clearly articulated?
Have the concerns of target audiences been met?
Are the programmes priorities proving appropriate?
The programme is then adjusted to ensure that it is continuing to meet both the needs and
objectives of the company and the expectations of the investment community. As such, assessing
stakeholders perceptions and expectations of the communications programme has to be
undertaken see next chapter.
- 119 -
Chapter 14
Assessing stakeholder expectations
Who are the stakeholders?
In South Africa many employees believe that the directors of a company are also the owners. It is a
common misconception in emerging markets, which must be dispelled if AltX targets SMEs. In fact,
it is also incorrect to state that only shareholders have an interest in the current and future
wellbeing of a company. A number of other groups have an important interest in its welfare and
prosperity, including:
Employees.
Unions.
Customers.
Creditors: bankers, underwriters and other lenders.
Suppliers.
Government and the community.
Each of these groups has its own special goals and is, therefore, primarily concerned with those
characteristics of the company that affect its particular interests. Some of the legitimate aspirations
of groups can be in opposition, some may be reinforcing, while with others there may be little
interaction.
For example, a price increase may benefit those who share in the profit at the expense of the
customers. Stable and continuous operation, on the other hand, is generally beneficial to
customers, employees, financial sources and suppliers alike. The desire of employees for nonmonetary recognition of accomplishment can be independent of the interest of suppliers and
lenders.
An important task of directors (through the Insourced Division) is to keep all stakeholder interests
in a balance which best suits the companys short and long-term requirements. To do this, it is
necessary to gain an appreciation of each groups attitudes and expectations. Once such an
understanding has been achieved, the appropriate press releases, corporate profiles, analytical
reports and announcements can be made.
Conflict and owner expectations
It is an important lesson to understand that not only could there be conflicting interests between
groups of stakeholders, but also within groups. This can be particularly prevalent with the
shareholders of closely held companies. When a shareholder in a company whose shares are
traded on the stock market finds that his personal interests are opposed to the companys apparent
direction, he can always sell. However, the owners of shares in smaller or unlisted companies can
often find themselves with divided purposes and with limited opportunities to opt out. The following
are some examples of such situations:
Some shareholders wish to receive regular income; others do not require income and prefer to
wait for a capital gain on selling or listing the company.
Some shareholders wish to keep control in the family and are unable or unwilling to provide
additional capital; others accept the need for new capital and are prepared to dilute their equity
through a private or public listing to further the overall corporate growth.
Some shareholders require security of capital; others want the company to take bigger risks in
the expectation of accelerated profit.
- 120 -
Some shareholders feel the company as a family enterprise should provide jobs for family
members; others believe that competent management must take precedence over nepotism.
These are real situations and are not invented.

They present obvious difficulties to management and, unless a clear consensus of the owners
aspirations can be developed, management will find itself hamstrung in its effort to secure
agreement on the companys objectives and strategy. It is also wise for management to test the
owners attitudes before going too far in the planning process. Instances are not uncommon where
managements well-developed growth plans have been torpedoed because they turned out to be in
conflict with some of the shareholders expectations.
Assessing attitudes
Attitudes and expectations are not easy to evaluate. So much depends on who is doing the
evaluation, who is affected and how it is done. Nevertheless, with careful preparation and
selection, it is possible to obtain an indication of what the stakeholders expect from the company.
Some areas for exploration are set out in the following table:
STAKEHOLDERS
Directors and major
owners
Bankers and other

financial
sources
Key managers
Employees and unions
Customers
Suppliers
Local government
EXPECTATIONS OR ATTITUDES ON:

Dividends
Growth of earnings
Retention of ownership vs. selling
Providing additional capital
Going public
New business activities
Acquisitions
Risks
Growth of earnings
Providing additional financing: type, terms, cost, security
Acquisitions
Risks
Growth of earnings
Personal opportunity, challenge, security and advancement
Risks
Acquisitions
Monetary rewards
Working conditions
Stability and continuity of employment
Opportunity and challenge
Security, obsolescence, redundancy etc
Monetary rewards
Other rewards: holidays, fringe benefits, etc
Advancement
Working conditions
Product quality, price, service
Product improvement
Business reliability
Continuity of demand for product
Availability and price of materials or services sold to company
Quality and service demands by company
Stability and continuity of materials and services
Expansion or phase out of company's local facilities
New government programmes and their impact on the company
(transportation, housing, pollution, redevelopment etc.)
Availability of labour
Tax rates
- 121 -
The results obtained from interviewing representatives of these various groups should be regarded
as an initial impression of opinion and not necessarily as a valid expression of the true feelings of
each group.
Since the responses have been given and interpreted by people who have a stake in the
companys performance and progress, objectivity is bound to be absent. It is therefore dangerous
to rely too heavily on these opinions in the planning process. Obviously, respondents may well
change their minds or react differently when confronted with a real, rather than a hypothetical,
situation. For example, the shareholders may say they are prepared to vote for a listing to take
place, but when the moment of decision arrives, dont be surprised if some of them have a change
of heart.
Notwithstanding the need for a cautious approach in using the information, assessing stakeholders
expectations is a necessary and important step in the preparation of a public relations
communications programe.
The final chapter provides an important outline of an analysts report.
- 122 -
Chapter 15
The Analysts Report
In the US, there is a mandated quiet period immediately following an initial public offering. The
USs Securities and Exchange Commission (SEC) rules prevent issuers and analysts from
releasing forward-looking projections or commenting on the company or its stock value. Issuers
may still release factual statements on business activities such as new contracts, product
announcements, and staffing changes.
Taking advantage of this quiet communication period can provide a company with a highly
beneficial opportunity. Interestingly, companies releasing positive news at the end of the quiet
period enjoy a bigger boost in share price than those remaining silent. Yet, the more significant
factor in boosting stock price seems to be analyst coverage, which AltX has also mandated local
companies to undertake.
Coverage increases price
Although analyst attention and share price clearly show a correlation, the increase in share price
actually starts a few days before the end of the quiet period and then continues upwards, giving a
five-day abnormal increase of 4% for all firms with immediate analyst coverage. The market
apparently anticipates the coverage and rewards companies that have analysts covering these
shares. The lack of information on VCM and DCM companies, and the resultant lack of interest by
investors in these sectors highlights that this fact applies to South African IPOs as well.
One explanation is that information leaks from investment houses. Since analysts cover some
industries more heavily than others, the type of company may also help to predict the coverage.
Particularly strong recommendations will give the stock an additional boost, so investors must
believe that the analysts reports contain new and useful information.
Multiple analysts maximize price
Issuers garnering immediate coverage by more than one analyst will usually experience a share
price increase greater than those with coverage by only one analyst. Where just a single analyst
covers a company, the analyst usually comes from the lead underwriter or sponsor; hardly an
unbiased source. Again, the Insourced Divisions arms length analysis provides the company with
a unbiased source of analysis.
The Analysts Report
A number of objectives have to be fulfilled and outlined in an analysts report. These include:
Aim: While it may seem obvious what the aim of an analysts report is, it has to be spelt out. This
is done for a number of reasons, namely to identify particular information to different groups of
people (stakeholders), i.e. financial information, specific effect of economic or political trends on a
company or future forecast
Layout: The layout should follow a logical approach to analysis, which will enable the reader to
quickly access information and provide him with easy understanding of the analyst's
recommendation. It should also be seen as a reference document, which can be used for other
similar future projects.
The process of analysis (not the mechanics) must be outlined and the variables (and how such
factors could affect the venture), must be pointed out. This can include fundamental, ratio and
- 123 -
technical analysis. In addition, the contents must (depending on the nature and complexity of the
analysis) be outlined to facilitate easy reading and be easy for directors to understand.
Contents: This will usually include:
Title page: This should consist of a number of elements:

o
o
o
o
o
o
The name of the company being analyzed, i.e. Combined Furniture Group Ltd.
A subtitle, i.e. "Analysis of a company listed under the Furniture & Household
sector of AltX."
Market statistics, such as the company's share price, NAV, issued share capital,
market capitalization and the average monthly number of shares traded. This
enables the reader to immediately determine the size and nature of the firm.
Financial data to show turnover, EPS and DPS. A two-year forecast should be
included.
The analyst's recommendation as to whether investors should buy, sell,
accumulate or hold the share.
The analysts' names and date that the report is submitted.
Body of the report: This should consist of:

o
o
o
o
o
A table of contents. This facilitates easy access to various sections of the report.
An executive summary should follow the table of contents. This provides the
reader with a quick reference to its contents.
Introduction, which outlines who the principal players are, the nature of the report
and the peculiarities involved in producing the report.
Each section should end off with a summary.
Reports should be bound before submission.
It should be noted that the structure of the report is aimed at providing various parties with
specific information. The title page enables dealers to see, at a glance, the nature, viability and
profitability of the firm. He can thus quickly advise clients (telephonically) on the future
prospects of the company involved. An executive summary enables directors and particularly
institutions to obtain a quick understanding of the analyst's recommendation without having to
read the entire document.
Structure of the report: This is usually split up into two main parts. In effect no matte how a
report is split, it has to show recent performance and how such factors will affect the companys
future prospects, both financially and share price.
o
Recent performance. This should outline the firm's last published performance.
Salient points should be discussed, such as turnover, attributable profits, major
asset purchases or sales etc.
Forecast: A variety of factors are assessed to achieve a recommendation .
Other factors that are assessed in deriving at a forecast include:
Description of business
Divisional break-down
Contribution of divisions to overall and specific financials
Profit drivers
Analysis of cash flow (discounted free cash flow)
EVA (economic value added)
When the company is a global player, and a full analysis has to be undertaken of the global and
regional markets as set out in Chapter XX a more comprehensive analytical report is required. I
- 124 -
have set out the contents page of a research conducted in 1997 on the global petroleum Industry
as an example of the information that would be require in an analysts report.
Finally, the report should include all other relevant documentation accumulated during the
research. This can, among other, be legal documents, bank statements, organizational charts,
graphs and annual financial statements.
It must be understood that information is an ongoing process and does not stop
after the above data has been assimilated.
One's initial impression of a company may change over time.
However, the analyst needs a starting point and collating information creates a
solid foundation for better recommendation decisions.
An outline of the analysts' task and the structure of his report has been outlined,
but it must be noted that the focus of a report will determine the size of the report,
its function and target markets.
- 125 -
Appendices
1. References
A Guide to Investing in IPOs, Renaissance Capital Corporation, 2003
Aharony, J:
Initial public offerings, accounting choices, and earnings management.
Contemporary Accounting Research 10, 1989
Alford, A: The Effects of the set of comparable firms on the accuracy of the price earnings
valuation method. Journal of Accounting Research 30, 1993.
Baker Tilly: Guide to AIM, Baker Tilly International, 2002
Britzius, O: South African Company Secretarial Practice, Juta & Co, 1988
Ducharme, l: Earnings management: IPO valuation and subsequent performance, University of

Washington School of Business, 2000
DuCharme, L: Earnings management, stock issues and shareholder lawsuits. Working paper,
University of Washington, 2000.
Ernst & Whinney: Preparing a Business Plan: A Guide for the Emerging Company Ernst &
Whinney, 1982.
Fowler, B: What do Venture Capital Pricing Methods Tell About Valuation of Closely Held
Firms, Business Valuation Review, 1989
Gough, L: How the stock market really works, Prentice Hall, 1997
JSE Securities Exchange South Africa Listing Requirements, Butterworths, 2002
King, M: King report on Corporate Governance for South Africa, Institute of Directors in
Southern Africa, 2002
Macfie, D: Measuring share performance, Pitman Publishing, 1994
Magliolo, J: Jungle Tactics: Global Research, Investment & Portfolio Strategy, Heinemann,
2003.
Magliolo, J: Share Analysis And Company Forecasting, Struik Zebra Press, 1995.
Magliolo, J: The Business Plan: A Manual for South African Entrepreneurs, Struik Zebra Press,
1996.
Magliolo, J: The Millionaire Portfolio, Struik Zebra Press, 2002.
Pacelle, M: Venture Firms Dethroning Buyout Kings, Wall Street Journal, 7, June 1999.
Reilly, F & Brown K: Investment Analysis & Portfolio management, Harcourt, 2000
Section 21: Alternative Exchange Listing Requirements, AltX, 2003
The JSE Securities Exchange (South Africa) Listing Requirements, Butterworths, 2002
- 126 -
2. Ratio analysis information
AREA
RATIOS
General solvency check
Solvency
Liquidity
Profitability
Efficiency
Leverage
Stock to working capital ratio

Defensive interval ratio
Profit margins
Return on shareholders' equity
Return on net assets
Return on capital employed
Stock turn
Accounts receivable days
Accounts payable days
Debt:equity (gearing)
Proportional debt ratio
Ordinary shareholders' interest
Long term debt

employed
Interest cover
Average Interest Rate
Gross cash flow to total debt

ratio
Cash Flow to Assets
Earnings per share
Dividend per share
Dividend cover
Earnings yield
Dividend yield
Dividend Payout Ratio
Price:earnings ratio
Price earnings Growth (PEG)
Book Value Per Share
Debt / Asset Ratio
Investment
Performance
Ratios
Current asset ratio

Quick ratio (Acid test)
to
capital
- 127 -
CALCULATION OF RATIO
[(Fixed assets + investments + current
assets) (Long term loans + current
liabilities)] 100
Current assets current liabilities
(Current assets - stock) current
liabilities
(Stock net current assets) 100
Defensive assets projected daily
operating expenses
(Any profit figure turnover) 100
(Attributable profits shareholders'
funds) 100
(Attributable profits net assets) 100
(Operating income capital employed)
100
Group turnover average stock
Accounts receivable (turnover 365)
Accounts payable (turnover 365)
[(long and short term loans + overdraft cash) Ordinary shareholders' funds]
100
Long term loans total assets
(Ordinary shareholders' funds loans)
100
(Long term loans capital employed)
100
Pre-tax income interest paid
(Interest Expense - Accounts Payable)
liabilities
[Gross cash flow (prior dividends) loan]
100
Cash from Operations Total Assets
(Attributable profit issued ords) 100
(Dividends payable issued ords) 100
Earnings per share dividend per share
(Earnings per share share price) 100
(Dividend per share share price) 100
Yearly Dividend per Share EPS
Inverse of earnings yield
Price:earnings companys projected
year-over-year earnings growth rate
(Shareholders Equity - Preferred Stock)
Average Outstanding Shares
Total Liabilities Total Assets
3. Sample business plan contents page

Contents
Page
Initial Start-up Information
Capital required
General information
Nature of Business
Business & Corporate Objectives
Abbreviations used in this Report
Group Growth Strategies
Brief Research Conclusions
Foreword
Business Plan Highlights: Executive Summary
Overview
Introduction
Origins
Company Ownership
Company Locations & Facilities
Business Overview
Company Profile
Company Structure
Description of Operations
Key Manufacturing Processes
Description & Details of Technology
Other operation
Shareholder & Management Profile
Products, Services, Sales and Pricing Strategies
Revenue Overview
Forecast
Proof of revenue
Competitor Profile
Competitors
o Profile 1
o Profile 2
o Profile 3
o Profile 4
Overview of the industry in which the company competes and operates
The African & South African Industries
Breakdown of COMPANYS Objectives
Return on Investment
Companys Competitive Edge
Market Targets
Industry Analysis
Strategic Direction
SWOT Analysis
Strategy & Implementation
Mission statement & company philosophy
Financial Requirements
APPENDICES
- 128 -
4. Sample prospectus contents page

Contents
Page
Prospectus Summary
Risk Factors
Special Note Regarding Forward-Looking Statements
Use of Proceeds
Dividends and Dividend Policy
Exchange Rates
Capitalization
Selected Historical Consolidated Financial and Other Data of the Telkom Group
Managements Discussion and Analysis of Financial Condition and Results of
Operations
The South African Industry
Business
Legal Proceedings
Regulation and License Requirements
Management
Relationship with Major Shareholders and Related Transactions
Description of Shares
Nature of the South African Trading Market
Taxation
Exchange Controls
The Global Offering
Underwriting
Legal Matters
Experts
Expenses Relating to the Global Offering
Enforcement of Civil Liabilities
Registration of Prospectus
Documents Available for Inspection
Additional Information
Index to Financial Statements
Republic of South Africa
- 129 -
5. List of designated advisors

Approved Designated Adviser in terms of JSE listing requirements (as at November 2003)
NAME
Contact
Arcay Group Limited
Tel: (011) 480-8570

Fax: (011) 480-8556
Bridge Capital Group Limited
Tel. : (011) 802-5271

Fax. : (011) 802-5275
Exchange Sponsors(Pty) Limited
Tel. : (011) 537-3839

Fax. : (011) 327-3003
Imara Corporate Finance South Africa(Pty)
Fax. : (011) 484-6608
Limited
Tel. : (011) 484-6220
Investec Bank Limited
Tel. : (011) 286-7326

Fax. : (011) 286-9986
Java Capital Limited (Pty) Limited
Tel: (011) 283- 0042

Fax: (011) 283- 0065
LPC Manhattan Sponsors (Pty) Limited
Tel. : (011) 325-6008

Fax. : (011) 325-6337
PSG Capital Limited
Tel. : (011) 797-8400

Fax : (011) 797-8435
Sasfin Corporate Finance
Tel: 011-809-7574
Fax:011-809-7627
Standard Corporate & Merchant Bank
Tel: (011) 631-6123

Fax: (011) 636-4212
- 130 -
6. JSE & AltX listing price lists

1. JSE Fees: The costs of listing will depend upon the method of listing adopted and the complexity
of the listing. The listing fees (excluding VAT of 14%) of the JSE, are:
Monetary value of securities listed
not exceeding
ditto
"
"
"
"
"
"
"
"
"
"
"
"
"
"
exceeding
Rands
500 000
2 500 000
5 000 000
25 000 000
50 000 000
125 000 000
250 000 000
375 000 000
500 000 000
750 000 000
1 000 000 000
1 250 000 000
2 500 000 000
3 750 000 000
5 000 000 000
7 500 000 000
10 000 000 000
10 000 000 000
Listing Fee(excl. VAT)
Rands
752-40
3 980-88
7 746-30
23 993-58
32 707-74
49 169-34
71 979-60
89 410-20
111 681-24
138 365-22
167 630-16
200 553-36
240 578-76
284 261-28
328 050-96
349 569-60
415 632-60
503 321-40
Source: JSE Securities Exchange, 20
2. AltX Fees:
Monetary Value of Securities Listed

< R2 million
< R10 million
< R50 million
< R100 million
> R150 million
Listing Fee (Including VAT)

R800
R5,000
R10,000
R15,000
R20,000
Source: AltX, 2003
The above fees exclude the cost of advisors, sponsors, accountants, attorneys and other.
- 131 -
7. South Africa Stock Exchange listing requirements

Listing
Requirements
Share Capital
Main Board
VCM
DCM
AltX
R25 million
R0.5 million
R1 million
R2 million
Profit history
3 Years
None
1 Year
None
Pre-tax Profit
R8 million
N/A
N/A
N/A
Shareholder
spread
20%
10%
10%
10%
Number of
Shareholders
500
75
75
100
Sponsor/DA
Sponsor
Sponsor
Sponsor
Designated
Adviser
Publication in
the press
Compulsory
Compulsory
Compulsory
Voluntary
Special
Requirements
N/A
N/A
N/A
Financial
Director
Annual listing
fee
0.04% of average
market
capitalisation with
a minimum of
R26 334 and a
maximum of
R121 700
(including VAT).
0.04% of average
market
capitalisation with
a minimum of
R26 334 and a
maximum of
R121 700
(including VAT).
0.04% of average
market
capitalisation with
a minimum of
R26 334 and a
maximum of
R121 700
(including VAT).
R20 000
(including VAT)
Education
Requirements
N/A
N/A
NA
All directors to
attend Directors
Induction
Programme
Number of
transaction
categories
Source: JSE Securities Exchange, 2003
- 132 -
8. Sample global analytical research report

Contents
Page
EXECUTIVE SUMMARY
INTRODUCTION
PART ONE: THE GLOBAL ARENA
Speculation still moves markets
Growth in oil demand
> OECD countries
> Non-OECD countries
Worldwide production & reserves
Factors that affect crude oil prices
> Political issues
> The primary role of Iraq
> Volatility, capacity & limited resources
> Technology & Recovery factors
World oil price projections
Outcome of forecast price increase on petroleum industries
Summary & final note
PART TWO: AFRICA & THE SOUTHERN REGION
Overview of Africa
> Upstream & Downstream Operations
Southern African fuel supply and demand outlook
> Refinery and synfuel capacity
> Demand for liquid fuel products
> Future supply and demand
Increases in refinery capacity
> The local market
> Developing the SADC member states
Summary and final note
PART THREE: THE SA PETROLEUM INDUSTRY
General issues
> A leading economic force
> Transformation & Retrenchments
Industry problems
> Marketing margin increases
> Distribution and marketing
> Mossgas
Environmental issues
Oil industry regulations
Benefits to the South African economy of a State listed oil company
Other factors taken into account
> Refining and synfuel production
> Petronet and Sasol Gas
> Demand for more storage
> Fuel price
> Upstream operations
> Growth of downstream market players
> Strategic stocks
Summary and final note
PART FOUR: FINANCIAL PERFORMANCE
Sector performance
> Product breakdown
Future capex investment
The oil and chemical sector
Sasol Ltd, Engen & Energy Africa
Competitors:
PART FIVE: APPENDICES

- 133 -
9. Glossary
Acceptance Date: Time limit given to a prospective shareholder to accept an offer of shares in
a "rights" issue.
Account: A trading period whose dates are fixed by the stock exchange authorities.
Accounts Payable: Bills which have to be paid as part of the normal course of business
Accounts Receivable: Debt owed to your company from credit sales
Accumulated Depreciation: Total accumulated depreciation reduces the book value (formal
accounting value) of assets. The value of an asset is reduced each month by a predetermined
amount and time frame. An asset worth R100, depreciated by R10 per month, would be written
off over 10 months.
Acid Test: A ratio used to determine how liquid a company is. It is determined by subtracting
short-term assets from accounts receivable and inventory, which is then divided by short-term
liabilities.
Aftermarket Performance: A term typically referring to the difference between a stock's
Offering Price and its current market price.
Agent: where a member acts on behalf of a client and has no personal interest in the order.
AIM: The UK-based AltX version, called the Alternative Investment market.
All or Nothing: means the full order must be executed immediately or, if it is not possible to do
so, the order must be routed to the special terms order book.
Allotment Letter: Formal letter sent by a company to the investor to confirm that it will allocate
him shares in a new issue.
AltX: The new Alternative Exchange launched in South Africa in October 2003.
American Depositary Receipts (ADRs): These are offered by non-US companies who want
to list on a US exchange. Rather than constituting an actual share ADRs represent a certain
number of a company's regular shares.
Arbitrage: a purchase or sale by a member on his/her own account of securities on one stock
exchange with the intent to sell or buy those securities on another stock exchange to profit by
the difference between the prices of those securities on such stock exchanges.
Asset Swap: a transaction which complies with all the requirements of the South African
Reserve Bank in respect of an asset swap.
Asset Turnover: Sales divided by total assets. Important for comparison over time and to
other companies of the same industry.
At Best: An order to be transacted in a manner that will, in the discretion of the member
executing the order, achieve the best price for the client.
At Market: an order to be transacted immediately against the best opposite order in the order
book at the time of making such entry.
Authorized/Issued Share Capital: While the authorized share capital is the maximum number
of shares a company is permitted to issue over time, the issued share capital is the actual
number of shares in issue. These figures are specified in pre-incorporation agreements
(memorandum and articles of association). Investors can find these figures in a company's
annual report.
Bad Debts: An amount payable by debtors, which the firm determines is irrecoverable.
Balance Sheet: A statement that shows a company's financial position on a particular date.
Bear Sales: the sale of listed securities of which the seller is not the owner at the date of sale.
Bear Trend: When supply of shares outstrips demand and prices start to fall. If this trend
continues for a number of weeks, the general sentiment becomes bearish and prices continue
to fall.
Best Efforts: This term is used to describe a deal in which underwriters only agree to "do their
best" in selling shares to the public. An IPO is more commonly done on a Bought or Firm
Commitment basis in which the Underwriters are obligated to sell the allotted shares.
Bid (Buyer's Price): offer to buy a number of securities at a certain stated price.
Bid, Not Offered: When shares are sought, but none are available. The opposite would be
"offered, not bid."
- 134 -
Blank Cheque: A company that indicates no specific industry, business or venture when its
securities are publicly offered for sale and the proceeds of the offering are not specifically
allocated.
Book Value: The net amount of an asset shown in the books of a company, i.e. the cost of
purchasing a fixed asset less the depreciation on that asset.
Break-Even Point: The unit sales volumes or actual sales amounts that a company needs to
equal its running expenses rate and not lose or make money in a given month. Break-even can
either be based on regular running expenses, which is different from the standard accounting
formula based on technical fixed expenses.
Broker: The name given to a natural person recognised by the official stock exchange.
Institutions will, from 1995, be able to become corporate members.
Brokerage: commission charged by a member for the purchase or sale of securities.
Broker's Note: a note which a member is required to send to a client recording the details of a
purchase or sale of securities.
Bull Trend: When demand for shares outstrips supply and prices start to rise. If this trend
continues for a number of weeks, the general sentiment becomes bullish and prices continue to
rise.
Burden Rate: Refers to personnel burden, the sum of employer costs over and above salaries,
including employer taxes and benefits
Capital Assets: Long-term assets, also known as Fixed Assets (plant and equipment).
Capital Expenditure: Spending on capital asset (also called plant and equipment, or fixed
asset).
Capital Input: New money being invested in the business. New capital will increase your cash,
and will also increase the total amount of paid-in capital.
Capital Structure: Usually refers to the structure of ordinary and preference shares and long
term liabilities.
Capital: This is also known as total shares in issue, owner's equity or shareholders' funds.
Cash Flow: A statement which shows the net difference between cash received and paid
during the company's operating cycle.
Cash: The bank balance, or checking account balance, or real cash in bills and coins.
Closing Price: the last sale price or a higher bid or lower offer price for a particular security.
Collection Period (Days): The average number of days that pass between delivering an
invoice and receiving the money.
Collections Days: See Collection period
Commission: The brokers charge a fee for buying and selling shares, which is brokerage or
commission earned on a deal.
Commissions Percent: An assumed percentage used to calculate commissions expense as
the product of this percentage multiplied by gross margin.
Convertible & Redeemable - Preference Shares: An alternative mechanism to ordinary
shares. It enables companies to issue other shares, which can either be bought back from
investors or converted into ordinary shares at a latter date.
Corporate Finance Transaction: a transaction which is entered into in writing and requires
public notification in the press in terms of the listings requirements of the JSE.
Cost of Sales: The costs associated with producing the sales. In a standard manufacturing or
distribution company, this is about the same as the costs for people delivering the service, or
subcontracting costs.
Creditors: People or companies that you owe money to. This is the old name for accounts
payable.
Crossed Market: where a bid price is higher than the offer price for a security
Cum Or Ex-Dividend: After a company has declared a dividend, it would close its books to
start paying dividends. The share will be marked ex-div, which means that any new shareholder
will be omitted from the past year's dividend pay out. Before the company declares a dividend
payout, the share will be assumed to include possible dividends or to be cum-div.
Current Assets: Those assets which can be quickly converted into cash and include accounts
receivable, stock and debtors book. These are often called liquid assets.
Current Debt: Short-term debt, short-term liabilities.
Current Liabilities: A company's short term debt, which must be paid within the firm's
operating cycle, i.e. less than one year.
- 135 -
Debentures: A bond which is not secured by fixed assets.

Debt And Equity: The sum of liabilities and capital. This should always be equal to total asset.
Debtors: People or companies that owe your company money. It is the old name for accounts
receivable.
Depreciation: An accounting and tax concept used to estimate the loss of value of assets over
time. For example, cars depreciate with use.
Dividend Yield: ratio of the latest dividend to the cost or market price of a security expressed
as a percentage.
Dividends: Money distributed to the owners of a business as profits.
Double Top: This technical assessment is formed when a stock advances to a certain price
level only to retreat from that level, and then rally again back to that level. The up moves are
accompanied by high volume and the recession from the top comes on receding volume.
Due Diligence: A reasonable investigation conducted by the parties involved in preparing a
disclosure document to form a basis for believing that the statements contained therein are true
and that no material facts are omitted.
Earnings Yield: ratio of net earnings per security to the market price expressed as a
percentage.
Earnings: Also called income or profits, earnings are the famous "bottom line": sales less costs
of sales and expenses.
EBIT: Earnings before interest and taxes.
Equity: Business ownership; capital. Equity can be calculated as the difference between
assets and liabilities.
Fill Or Kill: the full order must be executed immediately or otherwise cancelled
Financial Notes: Information explaining financial figures (balance sheet, income statement and
cash flow).
Fiscal Costs: Running costs that take time to wind down: usually rent, overhead, some
salaries. Technically, fixed costs are those that the business would continue to pay even if it
went bankrupt. In practice, fixed costs are usually considered the running costs.
Fiscal Year: Standard accounting practice allows the accounting year to begin in any month.
Fiscal years are numbered according to the year in which they end. For example, a fiscal year
ending in February of 1992 is Fiscal year 1992., even though most of the year takes place in
1991
Fixed Assets: Includes all fixed (immovable) assets, namely property, vehicles, machinery and
equipment. It cannot usually be converted into cash within the firm's operating cycle.
Flipping: This is when an investor has acquired an IPO at its Offering Price and sells it
immediately for a quick gain soon after it starts trading on the open market. A practice
discouraged by underwriters, that can lead such investors to unfavourable relationships with
their underwriters with future IPOs.
Going Concern: A company which is operating, i.e. has not stopped producing goods or
providing a service and one which has not been placed under liquidation or curatorship.
Goodwill: An intangible asset reflected in balance sheets, which indicate an excess over
market value for assets paid by the firm.
Gross Geographic Product: A statistic which shows the remuneration received by the
production factors (land, labour, capital and entrepreneurship) for their participation in
production of goods and services in a defined area.
Gross Margin Percent: Gross margin divided by sales, displayed as a percentage.
Acceptable levels depend on the nature of the business.
Gross Margin: Sales less cost of sales.
Head and Shoulders: This technical pattern is typically characterised by one intermediate top
(left shoulder), followed by a second top higher than the previous top (head), and a third rally
that fails to exceed the head (right shoulder). The neckline is drawn connecting the reaction
lows (support). The pattern is completed when prices break below the neckline and the sell
signal is given.
Immediate Deal: a transaction in a listed security where settlement is to take place the next
business day.
Income Statement: A statement showing net income or loss for a specified period.
Interest Expense: Interest is paid on debts, and interest expense is deducted from profit as
expenses
- 136 -
Inventory Turnover: Sales divided by inventory. Usually calculated using the average
inventory over an accounting period, not an ending-inventory value.
Inventory Turns: Inventory turnover (above).
Inventory: This is another name for stock. Goods in stock, either finished goods or materials to
be used to manufacture goods.
Jobbers: These are the market's share merchants. They deal only with brokers and other
jobbers (i.e. not with dealers) and their main function is to maintain a market by quoting a price.
Labour: In Business Plans the word "labour" often refers to the labour costs associated with
making goods to be sold. This labour is part of the cost of sales, part of the manufacturing and
assembly. In economic terms, labour often denotes the sale of a skill to produce a good or
service.
Letter Of Acceptance: The investor may receive such a letter if the company accepts his
application for shares.
Liabilities: Debts; money that must be paid. Usually debt on terms of less than five years is
called short-term liabilities, and debt for longer than five years in long-term liabilities.
Limit Order: an order which may only be effected at prices equal to or better than the price on
the order.
Liquidity: A company's ability to pay short-term debt with short-term assets
Listing: official granting of a listing of a company's shares on the JSE.
Local Counter-party Transaction: a transaction where a member trades as a principal with a
person in South Africa other than a member.
Long Term Assets: Assets like plant and equipment that are depreciated over terms of more
than five years, and are likely to last that long too.
Long Term Interest Rate: The interest rate charged on long-term debt. This is usually higher
than the rate on short-term debt.
Long Term Liabilities: This is the same as long-term loans. Most companies call a debt long
term when it is on terms of five years or more.
Management Of Investments: the management of investments on behalf of a client, by a
member or an approved person.
Market Capitalisation: Used to denote a company's size and is calculated by multiplying a
company's issued share capital by its current share price.
Market Indicators: statistics that give an overall picture of how the market is performing.
Market Maker: a member which negotiates dealings in blocks of securities
Marketable Securities Tax (MST): the tax imposed in terms of the Marketable Securities Act
of 1948 in respect of every purchase of marketable securities through the agency of or from a
member at the rate of 0.25% of the consideration for which the securities are purchased.
Marketable Securities: All instruments legally permitted to trade on the JSE. These include
shares (ordinary and preference), gilts, futures and options.
Materials: Included in the cost of sales. These are not just any materials, but materials
involved in the assembly or manufactured of goods for sale.
Monopoly: When one company controls and dominates a particular company.
Net Cash Flow: This is the projected change in cash position, an increase or decrease in cash
balance.
Net Profit: The operating income less taxes and interest. The same as earnings, or net
income.
Net Worth: This is the same as assets minus liabilities, and the same as total equity.
Odd Lot: any quantity of securities which is less than a round lot (Krugerrands do not have odd
lots).
Offer (Seller's Price): price at which a dealer is prepared to sell securities on the market.
Offering Price: This is the price set by the sponsor, at which the company's stock is sold to the
first round of investors.
Offering Range: This is the price range which the company expects to sell its stock. This can
be found on the front page of the Prospectus. As with everything traded, market conditions and
demand dictate the final Offering Price.
Oligopoly: When a few companies controls and dominates a particular market.
Opening Price: This is the fist price that the company's stock trades on its first day of trading.
Order: an instruction to buy or sell a specified quantity of a security.
- 137 -
Ordinary Shares: Commercial paper issued to investors to raise capital. Investors hold these
shares as part owners in the firm.
Other Short-Term Assets: These are securities and business equipment .
Other ST Liabilities: These are short-term debts that don't cause interest expenses. For
example, they might be loans from founders or accrued taxes (taxes owed, already incurred,
but not yet paid)
Overheads: Running expenses not directly associated with specific goods or services sold, but
with the general running of the business
Over-the-Counter Market (OTC): A market made up of dealers who make a market for those
securities not listed on an exchange. The over-the-counter market is made between buyers and
sellers over the telephone, rather than the electronic market found on the JSE.
Paid-In Capital: Real money paid into the company as investments. This is not to be confused
with par value of stock, or market value of stock. This is actual money paid into the money as
equity investments by owners.
Paper Profit: A surplus income over expense, which has not yet been released, i.e. share
prices which have increased above the price at which they were bought, but not yet sold.
Par Value: The nominal value of a share and is an arbitrary amount placed on the share by the
company.
Payment Days: The average number of days that pass between receiving an invoice and
paying it
Payroll Burden: Payroll burden includes payroll taxes and benefits. It is calculated using a
percentage assumption that is applied to payroll. For example, if payroll is R1,000 and the
burden rate 10 percent, then the burden is and extra R100. Acceptable payroll burden rates
vary by market, by industry and by company.
Plant and Equipment: This is the same as long-term assets, or fixed assets, or capital assets.
Portfolio: a schedule, normally computer generated, listing the relevant details in respect of the
securities held by an investor.
Price Earnings (P/E) Ratio: the market price of securities divided by its earnings. It expresses
the number of years' earnings (at the current rate) which a buyer is prepared to pay for a
security.
Primary Market: Where shares are distributed at the Offering Price to investors.
Principal Transaction: a member trades with a counterparty or another member.
Private Placement: An offering of a limited amount of shares or units, in which the recipients
receive restricted stock from the issuer.
Product Development: Expenses incurred in development of new products; salaries,
laboratory equipment, test equipment, prototypes, research and development, etc.
Profit Before Interest & Taxes: This is also be called EBIT, for Earnings Before Interest and
Taxes. It is gross margin minus operating expenses
Prospectus: This document is an integral part of a documentation that must be filed with the
JSE. It defines, among many things, the company's type of business, use of proceeds,
competitive landscape, financial information, risk factors, strategy for future growth, and lists its
directors and executive officers.
Receivable Turnover: Sales on credit for an accounting period divided by the average
accounts receivable balance.
Registration: A new shareholder is registered when his name is placed on the role of
shareholders for that specific company.
Renunciation Date: The company sets a date by which the shareholder has to decide whether
he will take up the rights issue.
Resistance: When stocks go up, they tend to reach a point where investors think they are
overvalued and sellers of the stock outnumber buyers. This causes the price of the stock to
stop dead in its tracks. It cannot go higher because there are no buyers. This point is called
resistance.
Retained Earnings: A figure which shows the sum of a company's net profit less dividends
paid to shareholders.
Return On Assets: Net profit dividend by total assets. A measure of profitability.
Return On Investment: Net profits dividend by net worth or total equity, yet another measure
of profitability. Also called ROI.
Return On Sales: Net profits dividend by sales, another measure of profitability.
- 138 -
Reverse Head and Shoulders: This is the same pattern as a head and shoulders except that
it has turned upside down and indicates a trend change from down to up. A buy signal is given
when prices carry up through the neckline.
Rights Issues: There are a number of methods which a company can use to increase the size
of it share capital. If it decides to offer its existing shareholders first option on the issue, it is
called a "rights" issue. The dealers would note that such an issue is in progress as it would be
quoted as cum-capitalisation and after completion of the issue it would be noted as excapitalisation.
ROI: Return on investment; net profits dividend by net worth or total equity, yet another
measure of profitability.
Round Lot: the standard unit of trade - in all equities : one hundred shares
Sales Break-Even: This sales volume at which costs are exactly equal to sales
Sales On Credit: Sales on credit are sales made on account, shipments against invoices to be
paid later.
Scrape Value: An amount left after an asset has been fully depreciated, i.e. If an asset of R115
is depreciated by R10 per month over 11 months, the scrape value would be R5
Secondary Market: Better known as the Stock Market, where shares are openly traded.
Securities: includes stocks, shares, debentures (issued by a company having a share capital),
notes, units of stock issued in place of shares, options on stocks or shares or on such
debentures, notes or units, and rights thereto, and options on indices of information as issued
by a stock exchange on prices of any of the aforementioned instruments.
Settlement: Procedure for brokers to close off their books on a particular transaction. The
client is expected to pay for his new shares on or before the settlement date and he, in turn,
can expect to be paid (on selling shares) within the same period. (also called the Settlement
Period).
Short Term Assets: Cash, securities, bank accounts, accounts receivable, inventory, business
equipment, assets that last less than five years or are depreciated over terms of less than five
years.
Short Term Notes: This is the same as short-term loans. These are debts on terms of five
years or less.
Short Term: Normally used to distinguish between short-term and long-term, when referring to
assets or liabilities. Definitions vary because different companies and accountants handle this
in different ways. Accounts payable is always short-term assets. Most companies call any
debt of less than five-year terms short-term debt. Assets that depreciate over more than five
years (e.g. plant and equipment) are usually long-term assets.
Splitting Of Shares: At times a share could become too expensive for the private investor, at
which time the company may decide to split or sub-divide the shares into smaller
denominations. The aim is often to make the shares more tradeable and, at times, this
increases the share price on positive sentiment.
Spread: the differential between a bid and an offer price.
Stag: An investor who buys shares in a pre-listing or rights offer with the intention of selling
those shares at a profit as soon as trading starts.
Starting Year: A term to denote the year that a company started operations
Stock Exchanges Control Act Of 1985 (As Amended): an Act of Parliament in terms of
which stock exchanges in South Africa are governed. The Act is administered by the Financial
Services Board.
Support: Over time, a stock tends to become attractive to investors at specific prices. When a
stock starts to decline to one of these prices, investors tend to come in and purchase the stock,
thereby halting its decline. When buyers outnumber sellers, the price of the stock tends to go
up. This point at which buyers enter the market is called "support."
Tax Rate Percent: As assumed percentage applied against pre-tax income to determine
taxes.
Taxes Incurred: Taxes owed but not yet paid.
Tick Size: the specified parameter or its multiple by which the price of a security may vary
when trading at a different price from the last price, whether the movement is up or down from
the last price.
Unit Variable Cost: The specific labour and materials associated with single unit of goods
sold. Does not include general overhead.
- 139 -
Units Break-Even: The unit sales volume at which the fixed and variable costs are exactly
equal to sales
Withdrawn/Postponed: From time to time a company will decide that market conditions are
out of favour and not conducive to a successful IPO. There are many reasons why a company
will decide to Withdraw its IPO. Among these reasons are: a simple lack of willing investors at
that time, market volatility, or the emergence of a bear market.
Write-Off: Debt that cannot be collected and finally written-off as bad. The debt is a loss to the
company, and the greater the level of bad debts, the less likely an entrepreneur will be able to
obtain bank financing. Maintaining bad debts to a minimum is seen as the ability of a company
to run efficiently and to have efficient systems in place.
- 140 -

tmp9BF TMP

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

tmp9BF TMP

Uploaded by

Copyright:

Available Formats

About The Author

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

Foreword By Noah Greehill

the AltX Advisory Committee mandated to recommend new listings on AltX to

Noah Greenhill, AltX manager

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

By AltX manager Noah Greenhill

How the book works

PART 1: BEFORE LISTING FACTORS TO CONSIDER

PHASE ONE: RESEARCH

What is fundamental analysis?

Chapter 2: How much is your company worth?

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

Chapter 3: Valuing Start-up Companies

Chapter 4: Nine Steps to Determining Investment Value

Fair market value vs. investment value

Chapter 5: Due Diligence - The Final Stage of Preparation

PHASE TWO: UNDERTAKING DUE DILIGENCE

PART 2: LISTING REQUIREMENTS & OTHER REGULATIONS

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

Chapter 7: Overview of the Alternative Investment Market

Suited for SMEs

Chapter 8: The South African Listing Process

PHASE THREE: BUSINESS PLAN, CORPORATE PROFILE & PROSPECTUS

Chapter 9: An Introduction to AltX

Chapter 10: AltX Listing Requirements

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

List of DA Functions to be undertaken for companies listed on AltX

PART 3: AFTER LISTING WHAT NOW?

Implementation forms part of the company

Chapter 12: Seven Key Elements to Dynamic Success

The seven key elements to dynamic success

Chapter 13: Post IPO Public Relations

Post IPO communications

Chapter 14: Assessing stakeholder expectations

Who are the stakeholders?

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

Conflict and owner expectation

Chapter 15: The Analysts Report

Coverage increases price

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

During the listing process

After becoming a public company

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

PHASE 1: RESEARCH. Global, regional and domestic research is crucial to identify

PHASE 4: IMPLEMENTATION. OK, now everything is in place to list. What now?

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

Essence of the four phases

In effect, this book is a three-step approach to listing on AltX.

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

PHASE ONE: RESEARCH

PHASE TWO: DUE DILIGENCE

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

An understanding of the philosophy and principles of strategy in business, with specific

An appreciation of the inter-relationship between external research, internal business

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

PHASE ONE: RESEARCH

Measure of solvency: Debt-to-equity ratio (also called gearing) provides a measure of a

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS

Why bother with market research?

AltX: PREPARATION, IMPLEMENTATION & FUTURE SUCCESS