Business Management Articles
Can’t Beat ‘Em? Buy ‘Em.
Christopher Porter
Business Times
April 2009
In an article he wrote in the New York Times a while back, legendary investor Warren Buffet said, “A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful.”
If you’re a Warren Buffett fan, you can apply his philosophy not only to the stock markets but equally to the business marketplace. While a recession can be punishing for highly leveraged companies, it can also be a rewarding time for well capitalized enterprises whose leaders are focused on the long term. This can be a very good time to buy.
It’s an especially good time to purchase competitive advantages that just a few months ago may have been prohibitively expensive. It’s helpful to consider long-term plans and what’s required to achieve them. Market share? New distribution channels? Additional products/services? Proprietary technology? A well known brand? Increased capacity?
It’s also helpful to consider whether any of your competitors or industry colleagues possess such advantages. If so, this might be the time to conduct some confidential inquiries to determine what purchasing those advantages might cost.
If you prefer to keep a low profile while you do so, transaction advisory professionals can canvass the market and conduct confidential searches on your behalf. Prospective purchasers are often surprised to learn that companies they believed were successful and growing may be open to discussions about a merger or sale.
Frequently, the reason is capitalization. When a company has limited access to capital, it may not be equipped to ride out an economic downturn. For a prospective purchaser, this can present an opportunity for an affordable acquisition. At the same time, when purchasing a business under stress, buyers need to be prepared to invest time, energy and resources – and to control risks.
If a potential acquisition has a history of operating losses for example, a purchaser may wish to buy shares and utilize the losses to offset future operating income. For others, it may be advantageous to purchase the assets of the company. Not only does this reduce potential liabilities, but if the assets have been depreciated for tax purposes, the purchaser can “bump up” the tax value to current market value, allowing deductions for capital cost allowance to offset future income.
To further separate assets from liabilities such as trade payables, employee severance obligations and some taxes, an acquisition of a troubled business can be conducted through an insolvency process, utilizing the Companies’ Creditors Arrangement Act or the Bankruptcy and Insolvency Act. By acquiring assets through a “vesting order” from the court, for example, assets can be sold to a buyer clear of certain liabilities.
In cases where the vendor has cash flow challenges, the purchaser must act quickly. This means fast tracking due diligence. There may not be enough time, for example, to conduct a detailed review of payables and accrued liabilities or detailed assumptions underlying the vendor’s business plan. As well, the vendor may not be able to provide long-term representations and warranties. A purchaser must be able to quickly identify the key opportunities and risks of the transaction and the benefits and challenges of integrating the companies.
Experienced financial and legal advice is essential to optimizing value, realizing the purchaser’s goals and satisfying critical stakeholders. All of the stakeholders who may impact the success of a transaction – shareholders, lenders, trade creditors, customers, suppliers, employees and others – need to be identified and their interest in supporting the deal needs to be assessed and addressed. Thus a communication strategy is a vital part of the process.
Of course financing is also critical to a successful transaction. Some purchasers may be able to finance an acquisition through the combined balance sheet of the two companies. In other situations, the vendor’s creditors or secured lenders may support the new entity if a purchaser can demonstrate its ability to repay funds. And sometimes, the seller may assume certain debts to facilitate a transaction.
It may be helpful to consider that while purchasing another business during an economic downturn obviously carries some risks, Warren Buffett offers another piece of wisdom: “Risk comes from not knowing what you're doing.” Think clearly, plan carefully and seek the right advice, and you’ll minimize those risks – and beat the competition.
