CRISIS? WHAT CRISIS?
When the economy takes a downward turn you must look for opportunities to succeed, not assume you will fail, explains Peter Savage
The trade press has been rife recently with stories of doom and gloom. Speculation abounds about more post houses hitting the wall as the economy continues to slide. So I thought it was timely to give advice on what to do when the economy is going backwards rather than forwards.
It has been said, by many, that it is easy making money in a booming economy. And, of course, it can be. However you can make more money in a declining market. Surprised?
I was looking at the Sunday Times, recently, at an article by James Caan, one of the Dragon’s Den dragons. He shares the same view – that there are many opportunities in a declining market.
Although he was talking primarily about property, all industries are governed by the same rules: markets are cyclical. As the saying goes, what goes up must, at some stage, come down. But history shows us that these reversions are normally smaller than previous down turns and that, eventually, any investment should be worth more.
So what does this all mean for you, running a business in a slowing economy?
Plan for survival
Well, the first step is to plan for survival. Make sure your business has good liquidity – and that it is not overstaffed.
We recently advised a small engineering company whose owner thought his company would collapse within days. We helped him see the wood from the trees, advised him on liquidity planning and showed where he could make savings.
It’s not easy shedding staff but when they are effectively doing nothing, except waiting to be busy after the expected up turn, it is something that businesses must consider – if they want to reach that upturn. Five months later the company is far leaner and meaner – and doing very well. The owner sees that, for the moment at least, freelancers can cover any surplus work (and that, if nothing else, shows how different industries can be so similar!).
Increase your market share
If liquidity is good, and you can see a future in your market, then look around to see if there is any way of increasing your market share.
At the moment, in all industries, there will be business owners who want to leave the market for whatever reason (it might be economic, age, or … you’ve thought it, they are thinking it).
These people are, currently, feeling the heat and know that they will receive hardly any coupon for their business. With good advice – and this is key – you should be able to negotiate a deal with them that may bring you increased turnover that might just fall happily to your bottom line – without carrying the other company or incurring more costs for you.
The most important point is to be realistic. Look at a deal that is on offer and see if you can make a deal where it looks as though there isn’t one.
Say, for instance, that the seller wants £300,000 asset sale for the business, but the company is only generating £100,000 cash a year. One has to assume that you need to finance the transaction; the cost of repaying £300,000 over three years is at least £120,000. This means that the business you are buying will struggle to fund the cost of its acquisition through its normal activities so putting a strain on your existing business. So, ask the seller to take an element of deferred payment, say £100,000 for 3 years
This will reduce the amount that you need to fund initially to £200,000 which costs on the same basis £80,000 a year so you’ll now make, in effect, a cash benefit of £20,000 a year from the purchase. The increased size will increase your profile and, hopefully, make super profit in the future (if you make sure you work your new clients harder than the seller did). And the seller will get his eventual price – but without ruining your cash flow.
Borrow against your reputation
Finally, be prepared to put your reputation on the line.
Now is the time when, if you want to borrow, offering the bank a realistic guarantee for more debt may be the key to acquiring the business that might, when things improve, make the difference between your company being the strongest in the pack and it being just another suit.
But on this, as with everything, be realistic. Don’t bet everything on something that might be pure speculation. Now is the time to bolt businesses on to good, sound companies. It is not the time to buy more fresh air.
So, what’s my conclusion? Now is as good a time as any other to acquire – but only on your terms. And if you are not sure what those terms should be then call us and … happy hunting!
If you would like to comment on this article, write to email@example.com or contribute to the blog at www.azule.co.uk/articles.asp where you can also read previous articles in this series.