My communications over the last few weeks have shown me that several buyers are currently on the market with the aim of buying businesses at a discount. It is a classic. All bad economic times cause people to search for bargains with the help of an M&A advisor. Buying a business is a difficult exercise when everything is going well, integrating one when the economy is uncertain makes the exercise much more perilous. To all of you bargain hunters, here are some tips to consider before you hit the sales.
To begin, let’s eliminate from the list the companies that will not be in the market for discount sales:
– Companies that were doing extremely well before the disaster
– Those that were well managed
– Those that will bounce back once the storm has passed
These companies will find support from organizations in San Diego, subsidies, and bankers. In general, they will look for more favorable conditions before going to the market or will only do so if they think they will not be penalized. This does not mean that it will be impossible to carry out a transaction with this type of target. On the contrary, these companies represent the best growth opportunities, but they will not sell at a discount.
Companies available at a discount are companies with an uncertain future. Some will be in a precarious situation because they have made a large investment recently or because they will have been founded recently. For others, they were already in a difficult situation before the crisis. Most of these opportunities will have to go through a turnaround process. However, making an acquisition and a turnaround at the same time is very demanding. It requires knowledge and experience.
A study on the subject was conducted between 2005 and 2018 on more than 1,400 acquisitions of public companies in recovery. Published in the MIT Sloan management review (Vol. 60 No 4), this study produced by Martin Reeves, Lars Faeste, Danny Friedman, and Hen Lotan teaches us some amazing facts:
1 in 3 companies will need a turnaround in their lifetime;
Only 1 out of 4 straightening programs work;
Acquisitions of businesses in recovery represent 50% of the total volume of business transactions;
61% of acquisitions of companies in turnaround do not bring any additional value to shareholders;
On the other hand, the remaining 39% generates strong earnings growth.
Much closer to the SME, the show “The Profit” (CNBC), with host Marcus Lemonis. Gives us a good idea of the challenges involved in acquiring a business in turnaround. Mr. Lemonis, the owner of Camping World, an American chain, invests in struggling companies that have good potential. Its goal is to straighten them out and make them more profitable. Over the programs, we discover that the main obstacle to profitability is rarely the price paid. But above all the human factor.
And that is exactly what will thwart the plans of many bargain hunters. Unlike an investment in equipment or real estate, a business transaction is accompanied by employees, customers. And suppliers who each come in their way to make things more complex.
For those who want to try the adventure. Here are some things you will need to improve your chances of success:
– Time: The decision maker should expect to invest a lot of time in the project. Depending on the steps and the accompanying team. The decision maker will possibly have to invest full time in the acquisition project. For integration, the turnaround company will require much more man-hours after the transaction is completed. The duration of the integration depends on several factors specific and unique to each transaction. The question to ask yourself: is this the best project to make the investment of your time profitable?
– A transaction team:
To carry out a transaction, it takes at least an accountant and a lawyer. Ideally, you will need someone who understands all phases of a transaction (planning, negotiation, set-up, and integration). Since each acquisition is different from the other and the number of variables to consider is very large, it becomes difficult to make a science of it and to teach it through M&A advisory. Knowledge in this area comes with experience. A BDC study has shown that the more transactions an acquirer make, the higher his success rate;
– Means: “Bargains” are often difficult to finance. The buyer of bargains must have the money available or excellent relations with his financiers, or a mixture of both;
– An integration team: This is where profitability is achieved and things get complicated. The integration team can be made up of different members of the deal team. But those who had the responsibility of making the negotiation successful. Should be also responsible for making the integration successful.
In a business transaction, the search for bargains generally does not yield good results. Galion Conseil favors an approach based on a growth strategy rather than on the search for opportunities. To succeed in a business acquisition, we encourage our clients to have a vision, a mission. A strategy, and to structure themselves in such a way as to make it a success. Once these ingredients are in place. If the economic circumstances make it possible to find a good opportunity, success will be facilitated.
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