Could Buying a Business be the Best Covid-19 Strategy?
As we emerge from lockdown, there will be many business owners still intent on growth. Doing so, through acquisition of another business, remains a viable option. The question is, how do you go about buying a business in the current climate?
The business landscape might be completely different but the approach remains the same. First ensure stability in your own business and protect your balance sheet. This will give you the necessary resources to take an objective, pragmatic approach to buying another. Planning and diligence will get you closer to meeting your objectives whatever the prevailing economic circumstances.
Where are the opportunities?
Covid-19 and the resulting lockdown has impacted badly on certain sectors such as leisure, entertainment, aerospace and travel. If the business models are seriously flawed and / or consumer spending is not forthcoming, they’ll not bounce back. For others businesses, however, the disruption of Covid-19 creates an opportunity for the buyer prepared to take a long term view.
These and other so-called ‘zombie’ firms are where the opportunities lie. Businesses that have been running successfully for many years but, with too much debt or borrowings, their ability to borrow or invest in the future is limited. It is likely they will have taken on more debt (CIBILs or BBLs), furloughed staff, deferred taxation and other liabilities during lockdown. A lack of working capital – let alone growth capital – means they may not have the resources to operate much longer. Enter the entrepreneurs who recognises an opportunity, albeit longer term.
Technology is the make-or-break factor in all of this. Covid-19 has simply accelerated working, shopping, training and communicating online. Efficiency, speed and agility are all wrapped up in technology – that’s where both opportunities and challenges lie for every single sector.
Some guiding lights to buying a business.
In deciding to explore the option of buying a business, you need to assess all of your revenue streams first. Know exactly what is coming n, from where and is it making you any money. I sthere a competitor out there who can enhance those streams taht are making you money?
Look at becoming tech savvy as a long term objective. This will not only take out costs but make your business more scalable for the future and able to accommodate another business. research what is technically right for you, your customers and, most importantly, your employees.Is there a competitor who can provide you with such systems which you could use?
Your business’s finances
You must ensure your business’s financial position is secure. Do not assume your bank manager will fund part of the purchase. When making an approach ensure your business is viable going forward and you have the management skills to manage the integration of the two businesses after the sale.
Due diligence and Synergies
Calculating synergies is much more complicated now than it was five months ago. For example the impact on businesses of the new staff structures will not be understood until furloughing support is withdrawn. So, beware the ability to conduct a proper due diligence process is essentially on hold during Covid-19. Thereafter these structures may not have been properly tested..The structure of the transaction will need to reflect this having regard to the speed the transaction has to be completed.
What’s happening with the economy?
Two key things will impact on your plans for buying a business:
- The journey the virus is taking (eg the rate of infection fatality drops)
- The type of recession we’re entering
Whilst I am in no position to second-guess the infection rate, I feel safe speculating that in general we will follow a general V-shaped recession-recovery model. Briefly, this means a sharp downturn with Quarter 2 being extremely difficult. Relative recovery follows in Quarter 3 then a better outlook in Quarter 4.
In many ways we are mirroring the recession of 9/11 (external cause, short and intense) rather than the financial crisis of 2008-9 (system errors, prolonged effect).
The UK economy was robust until a few weeks ago. However, banks are much better funded than they were in 2008 and the government has offered exceptional support measures. Moreover investment companies still have a huge arsenal of funds waiting to be invested. All the signs, I feel, for a painful but relatively short recession.
So, a business that was fundamentally sound leading up to Covid-19 is likely to be so in the medium term. Any debt that’s hindering a viable business can be managed by financial restructuring while working capital requirements are secured.
Key considerations for buying a business
In mapping out what kind of business might be a good fit, I offer the following as a guide to get the ball rolling:
- What kind of sector are you interested in? Exactly the same as your own or an allied business?
- What are you missing: Patents and copyrights, procedures and systems, established customer base, premises and machinery…
- Services or products: Will the services or goods of a competitor assist you in selling yours?
- Location: Does the location of a like-business help you grow your business?
- Volume: Can a competitor’s revenue combined with yours achieve cost and other efficiencies?
Buying a business – plan now for later
It’ll be a challenge buying a business – you’ll need lots of energy and staying power. Get your own business in shape first – secure, viable and generating cash in its own right. In a slow growing economy, where buying consumer buying patterns have and will be changing, organic growth will be equally slow. However, growing by acquisition could get you to where you want to be in the time scale you might originally have planned.
Looking for a business to buy now then being ready to transact in the later part of the year could provide the pathway to your future.
More reading, help and advice from Assynt Corporate Finance
Below you'll find links to other articles that offer help and advice about selling your business, what to look for, considerations and recommendations.
If you would like further help, contact us, we'd be only to happy to discuss your sale and can help if we can.