Why you shouldn’t use your pension fund to start a business

TUMISANG NDLOVU: In this week’s SME Feature we speak to Kagisho Mahura of Gradidge-Mahura Investments. Kagisho, take us through the journey of starting such a business.

KAGISHO MAHURA: Starting this business was a very difficult process. Being a wealth management, financial advice business, it was quite unfortunate I think in one sense that we started right in the middle of the worst recession we’d seen in 80 years, this was in 2008/2009. So it was incredibly difficult to start the business right then, but I think one of the greatest lessons about that is there is never a perfect moment to start the business. I think it’s one of those things where if you’re ready to do it you need to get out there and you need to get it done because while that seemed like a terrible disadvantage, the biggest advantage for us has been that all the clients whose investments we’ve invested since then have started at the bottom of the market and, therefore, have seen very good returns since they’ve become our clients.

TUMISANG NDLOVU: That brings me to my next point of the nature of the business. How has it been received so far, given the culture of entrepreneurs in South Africa that somehow don’t necessarily have that much money for such a type of service?

KAGISHO MAHURA: One of our greatest challenges when we started this business was that we were going to run it very differently from the way traditional wealth management or advice businesses had been run. Traditionally, what people have done is that they’ve gotten their clients to pay for their business, in other words, they’ve marketed products to their clients where they were paid commissions or fees into the future for services they hadn’t actually rendered to the clients, but a lot of those products were actually quite detrimental to the clients.

The way we started the business is that we were going to say, “we are going to run this thing as a business, we are going to go out like proper businesses and raise money, and put money into the business, so that we have working capital, instead of using our clients to pay for our business by marketing products that didn’t make sense to them.” So that in itself was a fairly big risk, but the way it has worked so wonderfully for us has been quite amazing because our clients have bought into that philosophy because it has come through in the returns that we have generated for them, it has come through in the service that we have been able to provide for them, because we raised the money we were able to staff the business properly. So we’ve got a very strong service team, we’ve got a lot more people actually in the back office, servicing our clients, than we do with people who are actually seeing the clients and providing advice to the clients.

One of the biggest problems with wealth management or financial advice businesses is that clients have always complained that the guy comes to see you, he sells you some sort of product but you never really get to see them. So the way we’ve created the business is that because our service team is so strong there is constant communication with our clients, the clients feel that they are connected with the business, so it’s been received incredibly well because of the way we structured the business. It was a huge risk, it was quite painful in the first few years, but it has come through quite nicely in the sense that since we started the business we haven’t actually lost any client.

TUMISANG NDLOVU: That’s amazing.

KAGISHO MAHURA: All the clients that we’ve lost have either been due to death or one or two we didn’t actually want as clients ourselves.

TUMISANG NDLOVU: The current SME space in South Africa, what are your views on that, given that your service is quite a specialised one and a niche-based business?

KAGISHO MAHURA: I’m going to answer that question in two parts. The first part is SMEs currently are really struggling to raise finance and that was a huge struggle for us when we started our business. One, because it’s a space that was quite saturated at the time, although we were bringing a very different angle to it. So it was quite difficult to convince people to lend us the capital that we were actually looking for. So we went to the traditional banks, the banks looked at our business plan and they wanted to charge us prime plus 5% and at the time prime was 10%, so that was 15%. That’s a 15% payback before you make a cent, that was just going to kill us. So what we were able to do was think outside the box, think outside the traditional lenders of money. We actually went up our value chain and spoke to the suppliers who could see the value in us creating a distribution for them and that’s where we got our money. So the first point I’m trying to make for SMEs today is don’t think of just a traditional way of raising money, don’t just go to the traditional places where you can get money, think outside the box, think about the people who could benefit from the service you are providing, who may have a vested interest, while they are not owners of your business they may be willing to lend you money because you could provide some sort of distribution to them that might actually benefit them. So the state of the SMEs as I find now is that the guys are really struggling to raise money because they’re not thinking outside the box, they’re not thinking outside the traditional ways of trying to find people who can lend them money, that’s the first problem.

The second problem is people get married to their own ideas because it’s my idea I don’t want to share the benefits of that idea with anybody else. So if I come to you I want you to lend me money, which I’m going to pay back to you over a certain period of time. If the investor says, “no, I don’t want to put debt into the business, I want to put equity, so I’ll give you money, but give me 30% of your business” and the guys are not willing to be flexible enough. The thing you need to think about as an entrepreneur is sometimes it’s better to own 70% of something than to own 100% of zero. So the guys need to think a little bit outside the box when it comes to how do they raise money, how do you mix debt and equity and which is the most optimal combination that you can find with those two. That’s the kind of advice that we try to give our clients when they’re trying to start their businesses.

TUMISANG NDLOVU: Now you guys give bitter truths about a business. What are some of the stories that you’ve had to endure or hear of when small businesses are trying to make a living, are trying to make the business successful, but at the same time you are running this thing from your own pocket, which is a story that many can relate to in South Africa?

KAGISHO MAHURA: The saddest part about the way a lot of people start their businesses is you find that some entrepreneurs, particularly the older ones, they started working at the age of 24, 25, they are now in their mid-30s and they want to go out and start their own businesses. The first place they often go is their retirement money. So somebody finds out they’ve got R800 000 or R1 million in their pension fund, now that’s going to be the money they’re going to use to start their own business. Firstly, they don’t realise, one, if you’ve got R1 million in your pension fund you’re not going to get R1 million out. They get the shock of their lives when they lose 30% to 36% of their money through tax. But now they’ve already made the decision, SARS has already taken their money, so they’re already 30% short of what they thought they had in their pocket in the first place.

The second problem is that they then underestimate the amount of time it’s going to take before the business actually starts making money. We’ve seen guys who’ve been incredibly successful as executives, move out of executive positions, take their retirement money, pump it all into their business and then a year or two later have absolutely nothing. At the age of 30 to 40 a lot of them have got young families, suddenly there’s a family of young kids who used to be in expensive private schools, and the cash is not coming through to support that particular lifestyle. The strife it causes the family, the strife it causes the children, the strife it causes the entrepreneur themselves has actually been horrendous. So we’ve seen a lot of horror stories in the time that we’ve been (operating) and trying to advise people.

The other one, which is actually quite interesting, is people who get close to retirement … who suddenly want to become entrepreneurs and it’s the same issue. They look at their pension fund statement and they think “there’s a lot of money here, I can leave now and start my own business, and I’m sick and tired of this 30- or 40-year-old manager, who doesn’t know what they are doing and why do I have to report to them when I’ve got a lot of experience.” I often say to them, anger with your manager in itself is not a reason to go and start your business. At the age of 60 you’ve never run a business in your life, now suddenly you’re going to take your life savings and plug that into a business that you haven’t even thought about?

I’ll give you a classic example, there was a gentleman who was in Durban who said to me, he was 61 at the time, the retirement age of the fund he was sitting on was 63. He said to me, “I’m going to take my money and I’m going to start a business.” I asked him what business are you going to start? he was going to start a property development business of some sort. In simple terms he was going to buy properties, renovate them and put them back on the market. Has he got a business plan? He doesn’t have a business plan. It’s actually quite simple, there are houses in the township, in Umlazi. As he says, “I’m going to buy a property for R350 000, I’m going to renovate it and then I’m going to sell it for R450 000. I’m going to make R100 000 per property and that’s how I’m going to make my money.”

In itself when you listen to it there’s really nothing wrong with it, but the beauty of putting a business plan together is that it helps you ask yourself the difficult questions. So I started asking him how long it takes to buy a property? He was not sure. I said to him it will take you two to three months with transfers and everything that needs to happen. How long does it take to renovate the property? Of course it depends on what’s wrong with it. It will take you between three to five months to renovate and I said to him have you ever met a contractor who’s ever finished any job on time and then it rains, and then they steal the cement that they’re supposed to be using. Let’s say it takes you three to four months to do that, then how long does it take you to sell the property? Well, it’s probably going to take you as long to sell as it took you to buy because it takes the buyer the same amount of time, three to four months. Then suddenly we are talking about three plus four plus three, we’re talking ten to 12 months and you haven’t earned a cent from your business. You’ve paid tax on your money, you’ve taken your cash, you’ve put it into this business and you haven’t earned a cent a year later.

Now the most important part, which is where business plan helps, you’ve got a property of R450 000 in an area where properties are R350 000, who is going to buy a property that is so much more than what the going rate in that particular area is? So finding a buyer in itself is now going to become a problem. So these are the types of questions that we try and take our clients through when they talk about starting their own business.

TUMISANG NDLOVU: Having said that, in your view is there enough education around financial wellness for a business?

KAGISHO MAHURA: Nowhere near. I think entrepreneurship in this country is probably one of the most underrated professions or career moves, both by those who do it and those who should be encouraging it. By those who should be encouraging it I mean, for instance, the government and the business sector. Just not enough credit is given to people who take the risk of starting a business and I don’t think the government gives enough incentives for those people. In other words, we were having the same fights with SARS when we were two years old, as they have with businesses that are 100 years old and they were fighting us for R20 000, which meant a whole lot more to us than it did to them at the time but we faced the same rules as everybody else and that in itself could have brought us down had we not acceded to SARS.

Then the people who start a business actually underestimate the amount of work they have to do and the amount of sacrifice they have to put in to make their business successful. So there is not enough education about the risks that people take and support that they need from the government and the government infrastructure to help people to succeed. But even more important, there’s not enough education for people who leave formal employment or who are just going to go out and make some sort of living, of what it takes to actually make a business successful. A lot of people are allured by this idea of being your own employer, being able to do what you want when you want. They’ve got no idea that the moment you start working for yourself, you’re going to work two, three, if not four times harder than you did when you were actually working for somebody else. When that reality hits them it depresses a lot of people, that’s why we have a good 50% to 60% failure rate in new businesses starting up. It’s not because people don’t know what they’re doing, they just have not spent enough time being educated about what it takes. You may be good at what you do, but running a business is a completely different story.

TUMISANG NDLOVU: Lastly, where to for Gradidge-Mahura Investments? What can SMEs out there expect and can they come knocking on your door?

KAGISHO MAHURA: It’s been an incredible journey of now seven to eight years. It’s been a journey of a lot of tears, a lot of fighting, a lot of sacrifices that we’ve made, but we definitely feel like the business is on a very good footing. We’ve had a lot of people who have helped us along the way and luckily we were not shy or too arrogant to ask for help when we actually needed it. When I talk about knocking on doors of suppliers, we literally went to old relationships that we had in the industry, people who knew who we were, people who looked at our business plan, gave us feedback and then were happy to put the money where their mouths were and they backed us. The business has benefited from the financial support and the moral support that we’ve received. So we’re actually quite grateful for that.

So your listeners can definitely come knocking on our door. I think we’re at a point where we really believe that our investment philosophy, our advice processes are definitely in the top 5%, 10% in the country in terms of the quality of advice that we provide. More importantly… our business is a corporate wealth management business, you’re not dealing with a one-man-show, with somebody who is sitting with all their stuff in their boot somewhere else. When you come to us you are definitely getting a Gradidge-Mahura Investments experience … whether you are being advised by me or Craig or Virath or anybody in the business, you should be getting the same quality of advice and service no matter who is servicing you in the business.

TUMISANG NDLOVU: That was Kagisho Mahura of Gradidge-Mahura Investments in this week’s SME Feature.