Expanding your business in a challenging economy
For well-positioned businesses, now may be a time to consider acquisitions.
5 minute read
- The environment for acquisitions may be better now for some companies than it was before the crisis
- Companies with strong working capital and cash reserves have a significant opportunity to put that to work
- Opportunistic growth strategies can help companies compete in the changed post-crisis world
With so many businesses struggling to deal with the coronavirus health crisis and its economic fallout, it may seem premature to consider expansion possibilities. Yet companies that have managed to maintain or enhance their competitive position may find that the environment for acquisitions is better now than it was before the crisis, says Brooks Gallagher, Managing Director, Head of Private Sales and Referral Network with the Global Corporate Investment Banking Group at Bank of America.
Of course, it’s important to evaluate potential acquisitions carefully and to weigh possible risks, he adds. Here, Gallagher discusses why companies may be looking to expand, where they could find opportunities and what they should consider.
Why could this be a good time to consider an acquisition?
In some industries, COVID-19 has accelerated growth for businesses. That includes health care, e-commerce, telemedicine, teleconferencing tools, utilities, financial services, cleaning services and even some manufacturing and food and beverage companies. Such businesses may be in a good financial position to consider expansion.
Then, in industries that are distressed because of the economy, we’re seeing enormous opportunities for consolidation — for example, the airline industry, oil and gas, and non-discount retail apparel, among many other sectors — and for the downstream companies that provide products or services to them. Owners and CEOs in those distressed areas are seeing growth opportunities everywhere.
Can you characterize the kind of companies that may be available now?
In many cases, these are businesses that have been hurt by this economy but could survive if they chose to. They could raise capital to help them weather the storm. For example, I’m thinking of one good-sized business that could easily get financing to keep going for at least another 18 months. By then, the pandemic will likely be over and demand for the company’s products will have rebounded. But, like many other business owners of the baby-boom generation who have had to fight their way through the 2008-09 financial crisis and COVID-19, the owners of this company have had enough. A sale gives them the exit they’re seeking, and the new owners get a fundamentally strong company for substantially less than they would have paid before the pandemic.
What metrics can help a business decide whether to make an acquisition?
In this environment, liquidity is king. Companies with strong working capital and cash reserves have a significant opportunity to put that to work, especially if they have little or no debt. For businesses in that position, and at a time when many business leaders are risk averse, this could be a great time to be bold, move quickly and leapfrog your competition.
In terms of evaluating possible acquisitions, you need to do a detailed analysis of costs and potential benefits. Companies with a strong balance sheet, a diversified customer base, a recurring revenue business model (or at least strong customer loyalty), an efficient cash conversion cycle and low capital expenditures will be very attractive acquisition targets. But you also need to be diligent in confirming that a possible acquisition fits well within your own business model, and that its products or services can enhance or extend your core vision.
What mindset does it take to expand during a difficult time?
Good leaders enjoy challenges, and the pandemic has been no exception. And while nobody has enjoyed what is happening in terms of the health crisis, I think the challenges business owners are facing have brought many of them back to why they started their business in the first place. After years of good times, now they can take nothing — supply chains, customers, employees — for granted. They’re looking for pivot strategies, new positioning, capabilities and revenue sources. This crisis has afforded them a peek into the future, in which businesses will be significantly different than they were before the pandemic. These leaders are looking at expansions and opportunistic growth that can help them compete in that changed world.
What about companies that may be a few years away from expansion? How can they prepare?
Many companies don’t have a strategic growth plan. If you’re not in a position to pursue new opportunities at this time, we recommend developing a formal strategic plan for future growth. Start by identifying the top three to five opportunities that could be available in your industry. Then assess the potential for each of those, whether it’s a short-, medium- or long-term opportunity, and what the cost of each initiative might be. Finally, identify the major hurdles you would expect and develop an attack plan for each challenge. Having such a plan will prepare you for the next time there’s a situation in which opportunities are so plentiful.
If you’re not in a position to pursue new opportunities at this time, we recommend developing a formal strategic plan for future growth.
What should owners considering expansion discuss with their banker?
A banker could help you and your management team better understand your company’s capital structure and what financing opportunities are available. In some cases, it may be that an expansion could be funded solely through your company’s own balance sheet. Or, if you’re arranging financing, a cash flow analysis might reveal that you’re eligible for more financing than you thought. At the very least, this exercise will help identify any potential gap in getting needed capital. There may be capital markets solutions, and your banker could bring in a team to help assess the attributes, valuation and structure of a potential opportunity. In all of these cases, conversations with your banker can help you get much-needed answers that could have significant strategic importance.
- Mergers, acquisitions, divestitures
Brooks Gallagher, Managing Director, Head of Private Sales and Referral Network with the Global Corporate Investment Banking Group at Bank of America