Anthony Holmes

Published: Financial Times April 14 2009 22:11

 

In 'Judgement Call' The Financial Times asks a selection of specialists to answer a topical question.

The Question…

 

In search of bargain businesses

 

Many struggling businesses will be on the hunt for buyers during the next few months. For a lucky few with good turnround skills, such bargain businesses may turn into lucrative opportunities. But with so many business owners desperate to sell, how can you tell whether you are about to get a good deal or a turkey?

 

 

THE TURNROUND EXPERT

Anthony Holmes

 

Assets that seem inexpensive are damaged and represent an investment risk rather than a bargain. Most are illiquid and their shareholders are unable or unwilling to provide the necessary funds.

 

Discriminating between the worthwhile acquisitions and the dogs requires careful due diligence and negotiating skills, but time is often short.

Structure the transaction to balance the risks inherent in a rushed deal.

 

One such risk is financial. This may be finding concealed or contingent liabilities, or the risk of the funds you invest being claimed immediately by lenders or other dominant creditors. Moderate this risk by deferring payment to existing shareholders but also negotiate a standstill agreement with the larger creditors.

 

A more immediate risk is managerial. In turbulent times the management task changes significantly. Turning a business round is a specialist skill and you should consider employing someone who has this expertise.

 

Also worth considering is the future managerial risk of having the incorrect person in charge as the business recovers. To develop profitably, the acquired business will probably require additional investment and need a different management skill to take the business forward.

 

The writer is a corporate turnround specialist and author of Managing Through Turbulent Times

 

THE EXECUTIVE

Stuart Rose

 

In the past, entrepreneurs have bought businesses on gut instinct alone. This is no longer an option. Now, prospective buyers must go through the slog of old-fashioned due diligence. However, the current tumultuous market conditions mean that even due diligence may not detect all of a business’s problems. Buyers need to be on guard.

 

If the reason for the sale is cash problems the buyer must assume there is little bank support or the company’s suppliers may be refusing credit. Cash flow forecasts are not reliable in today’s market. As conditions worsen, buyers should expect to dig deep into their own pockets.

 

There are some very good businesses overburdened with debt. But this debt will have to go before anyone can think about acquiring them.

 

If the issue is bad management then a buyer should run a mile. Bad management is difficult to replace. Private equity experience shows that buying a business and installing the buyers’ management team as happens in a management buy-in is rarely a success.

 

So, in short, my advice is to go for a cash-hungry business with a strong market position and management team. Replace their finance director and be prepared to spend a lot of money.

 

The writer is chair of Agent Provocateur, The Rug Company, MKM Group, Bronnley and Tom Davies Bespoke

THE CONSULTANT

Steve Frobisher

You can separate the bargains from the turkeys by seeing whether they fit into one of three categories.

 

First, fundamentally sound businesses that have been overburdened with debt.

There’s no real turnround required here – just the ability to capitalise the business properly.

 

Second, fundamentally sound businesses with poor sales. The buyer will need the financial strength to survive the downturn in demand and the knowhow to restructure the business to refocus on valuable markets.

 

Third, organisations with long-term value potential and a compelling offering but sub-standard operations. The buyer will need the financial strength to fund the turnround period, but also the ability to drive the organisational and operational changes. This is the toughest (and longest) challenge but is also usually where the best bargains are to be found.

 

However, an acquisition is about more than spotting a bargain. It has to fit strategically and culturally as well. If not it could be a turkey.

 

The writer is head of turnround services at PA Consulting

 

THE ACCOUNTANT

Oliver Colling

Now is not the time for an emotional or vanity purchase. The economic climate requires that buyers remain objective. Be very clear on how a target fits into your strategy and concentrate on the business’s fundamentals.

 

Seek out cash-generative businesses. Even if it is currently lossmaking, the fact that it generates cash gives hope for turning the situation round. Be wary of taking on too much debt unless you have a very clear view on how the business might be restructured to release working capital.

 

Look for a business that has assets with underlying value. Selling the assets could help turn your new acquisition round.

 

Examining the supply chain is also important. Make sure your business can continue to be supplied in the downturn.

 

Finally, do your due diligence. Understand the real reason the business is for sale and do not be afraid to exert pressure on the purchase price. It’s a buyer’s market.

 

The writer is head of financial management and effectiveness at Grant Thornton