The best form of defence is attack - the best way of surviving a downturn is to grow your business. But how?
Now we are officially in a recession that is expected to deepen, going for growth may seem like an extreme strategy. But it is worth remembering that many of the biggest names achieved their growth through astute acquisitions when their competitors were weak.
Certainly the region’s business advisers recognise that there will be opportunities for the strong – even though the need to remain cautious is even greater.
Acquisition trail
“Now is a good time to be an acquirer if you are a strongly capitalised business, but it is no time to be a hero,” says Xavier Woodward, corporate finance director at KPMG. “It is important to be prudent in terms of making sure you have sufficient cash reserves to act as a buffer in case conditions deteriorate.”
Margaret Ferris, corporate finance partner in the Leeds office of PKF, adds: “It may seem like an unusual time to be considering an acquisition, but there are always opportunities out there – whether it’s an owner manager who is retiring and has no succession strategy in place, or a larger company that is selling non-core activities to focus their strategy.”
David Maybury, regional director with Yorkshire Bank’s corporate and structured finance team in Leeds, says the banks are also willing to look at acquisitions but they have to meet some rigorous criteria.
“Companies that can show they have robust management information and are trading profitably are in a strong position, as are niche players and those with first-mover advantage or operating in sectors where there are significant barriers to entry,” he says.
“Facilities management, infrastructure support and activities linked to outsourcing or government-funded initiatives are among the most attractive areas for banks at present. Retail deals or those involving products and services that require discretionary spending may find it harder to get funding, as will businesses that are just starting out or looking to replicate.”
Size matters
Some may wonder why it should be so desirable to be larger anyway and question the logic that a business with a turnover of £100m is more likely to survive than one with a turnover of £1m.
"Banks will generally shy away from financing the purchase of distressed businesses and corporate borrowers will need a very strong proposal."
But as Roger Esler, corporate finance partner at Deloitte, points out, there are advantages in being a larger enterprise. “It’s all about business risk and sound management,” he says. “In general, the larger the business in a particular sector, the lower its relative business risk. There is less individual customer and supplier dependence, a stronger market position and, perhaps, more diverse activities.”
But even if your business is cash-rich, not too highly leveraged or even debt-free, it is not necessarily a sign that you are ready to embark on the acquisition trail.
“Cash and liquidity is fundamental at present for survival and valuations,” says Esler. “Many businesses are in a period of transition between the impact of the downturn on their own prospects and turning their minds to the opportunities that are there.”
Bag a bargain
In a downturn it is inevitable there will be distressed sales and possible bargains but, according to Maybury, these sorts of acquisitions make banks very nervous.
“Banks will generally shy away from financing the purchase of distressed businesses and corporate borrowers will need a very strong proposal to convince their bank to fund such a purchase,” he says. “Such purchases are seen as high risk and should generally be purchased with equity capital.”
With bank lending in such short supply it is no surprise that businesses are turning to other forms of finance, such as asset-based lending and invoice finance, as David Jones, regional managing director at Cattles Invoice Finance, says. But this type of finance is not available for every business.
He says: “The invoice financier needs to be confident they can recover their facility from the customer base of the business if it fails. Some businesses that typically fail this acid test are in the construction sector. Here, the existence of stage payments and underlying contracts means it is highly unlikely that a customer who is left with a part-finished building will repay debts,” he says.
But debt is not the only way to raise finance, as Woodward points out. “Bank funding is also markedly more expensive than previously,” he says. “I expect to see a resurgence of private equity providing capital for growth, as opposed to buyouts, as private equity is looking a relatively attractive and flexible form of funding compared with bank debt.”
So ambitious management teams with the right discipline and a strong grasp of their businesses can still grow, even if raising the finance may take longer than they are used to.
A full version of this article appeared in the January 2009 edition of Yorkshire Business Insider. To subscribe, visit our online Shop.
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