Posted on 15 April 2013
Any mention of the current economic downturn immediately conjures up images of businesses failing, jobs being lost and a fear of spending. However, John Farnsworth – Corporate Finance partner at Smith Cooper - explains that this need not be the case and that, in fact, an economic downturn can be a good time to make a corporate acquisition.
Acquiring the right business can carry numerous benefits including access to new markets and customers, better technology, beneficial synergies and economies of scale. However, quite understandably many are cautious about investing in a new business during such economic uncertainty.
Undoubtedly there are businesses which suffer as a consequence of the recession but downturns do put businesses to the test and reveal their underlying strengths to potential acquirers. In addition, price expectations of business owners, whilst tending always on the high side, are usually made more realistic by poor economic conditions meaning that the recession can create the opportunity to acquire at low entry cost – a critical factor in ensuring an investment pays.
One of the main issues facing acquirers is identifying a suitable business – target identification can be time consuming and often very frustrating; the best way of finding targets is to use a Corporate Finance adviser whose internal and external search databases are geared to this activity. Often these services are provided free of charge unless a target which has been identified by the adviser is actually acquired – so there is nothing to lose. The adviser can also help shape the acquisition criteria and the timing and strategy for acquisitions. Nevertheless, finding exactly the right target can often take many months and involve a number of “dead-ends” being explored.
It’s important to have a clear acquisition strategy that meshes with the overall group plan, and the plans of the key shareholders. Part of this process involves consideration of how the acquisition will be funded - it is certainly now more difficult to find banking support compared to, say, 2007 although the funding crisis has given birth to a number of new funding methods.
Today, the majority of transactions have an element of vendor funding – cash left behind, sometimes on “soft terms”, to help the acquirer fund the deal. Sometimes this is just deferred payment, in other cases it is in the form of a retained equity stake.
There are also more asset-based loan solutions available, linking the amount borrowed to property, debtors (invoice finance), stocks and even purchase orders.
But the most innovative new source is Crowd Funding. Simply, this is a group of people and institutional lenders coming together through an internet portal, often with small individual amounts, to provide equity or debt funding.
John commented: “as a firm we have led many successful acquisitions, both before and during the recession. Although many acquirers are hesitant to invest during times like this it is clear that, for those prepared to put in the effort to find the right target, there are great benefits to be had, and many ways of structuring a transaction to make it fundable.”
He continued “There is no single key to success as such – there are many complex issues to be addressed, over an extended period before a deal can be said to be successful. Perhaps having a clear strategic plan, careful diligence and a post acquisition plan to deliver the synergies are the three most important rules not to break.”
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