Buy your old competitor!
The exit strategy for many of Fordham’s business owner clients was suddenly brought forward by the exuberance and greed displayed during the period up to the credit crisis. Businesses which would normally be valued on a capitalisation rate (or multiple) of say four, were selling for ridiculous figures…like up to ten!
And so many of our clients prematurely realised their retirement dreams. Unfortunately for some, it was just a little too early and frankly now that they are retired (early), they are bored. What they seek is a little more meaning back in their lives. So they look at their former competitor’s businesses (now that their own restraint of trade has expired) and ponder the opportunities.
Similarly, those who chose not to sell are also looking over the fence at their competitor’s business. As exit options dry up, prices paid are falling well below the normal cap rates. In other words, a bargain!
For retired business owners, next time is usually approached a little differently. Invariably, the new business may be:
- currently underperforming, even in Administration or receivership;
- involves only a portion of the investor’s wealth;
- is often a syndicated purchase with other similar investors or former owners;
- is firewalled tightly for risk contagion, and usually
- with the investor running the business “hands off”.
Where an insolvency is involved, timeframes can be critical. Prospective investors need to have already considered the ideal opportunity, their personal involvement, desired investment, risk and structure, likely syndicate partners and their intended business strategy. Invariably these factors need to be planned long before the target acquisition is identified.
For existing business owners, there are different considerations. Our clients have typically enjoyed nearly two decades of profitable growth, are conservative and have little debt. They are also risk averse.
But the opportunity to acquire a compatible business is compelling. The right fit will:
- Be absorbed into the existing overhead structure and bring only revenue and variable costs. The unnecessary fixed costs are left behind.
- See the price paid relate to the old structure. If currently unprofitable, it could be purchased for next to nothing, irrespective of the value to you.
- Not add significantly to your debt, fit within your resource and capacity constraints and increase your profit.
Again, it pays to plan ahead. Being ready to buy the right opportunity is important. Being pro-active and seeking our opportunities can yield excellent results. Plenty of those who were buying a few years ago are now eager to bail out. You just need to wave a little cash!
As always, we encourage Fordham clients (and prospective Fordham clients or referrers) to talk to us early. With the right strategy, a market downturn can still see a substantial increase in capacity utilisation, a big increase in net profit and a bigger market share. When the economy picks up, the true benefits really arise with a multiplier effect.
Our most successful clients remember the last recession with a big smile.