Today, the Sun enters the zodiac sign Scorpio. When I think of Scorpio, I think of deep, intense, financially intertwined relationships. These are not the mind-to-mind intellectual partnerships of the previous sign, Libra. These are the “’til death do us part” kind, where the commitment is made deeply and emotionally. This is the palm-to-palm blood tie that so mixes the energy of the two entities that they are irrevocably changed forever. These are relationships that demand and require utterly trustworthy behavior and that can brook no betrayal.
Scorpius as depicted in Urania's Mirror, a set of constellation cards published in London c.1825. (Source:Wikipedia)
These relationships show up in business too. In fact, business is built on these kinds of committed and interdependent financial connections. We may not ceremoniously mark them (and maybe we should) but they exist just the same.
I was thinking about the Sun entering Scorpio when I came across a report by the Boston Consulting Group (BCG) about opportunities for Mergers and Acquisitions (M&A) in a downturn. For those of us in small business, what they call M&A, we call buying a business or selling one.
In honor of the Sun moving into Scorpio I thought I’d share some insights from the article with you as some of the points are relevant to small business owners, too.
Predator or Prey?
M&A language makes use of the words “predators” and “prey” to convey the sense of the buyer looking for an advantage and the seller looking for their own advantage. Instead of something dark and dangerous, a predator is someone with the financial and operational strength to purchase a business. And prey is a self-identified state meaning a business that recognizes that it is ready and actually anxious to be sold, rather than liquidated.
Do these two words, predator and prey, make you uncomfortable? They did me, especially as I was searching for an image for this post. All of the Wikipedia images for “predator” were gory nature scenes of some larger or fiercer animal devouring a dying, helpless smaller one. But let’s agree for our purposes that there is a mutual choice involved and a positive outcome for both parties.
Many, many companies have become prey as a result of the current reshaping of the global economy. As the authors note, “The last two years have seen the biggest jolt to the global economy since the crash of 1929, which ushered in the Great Depression of the 1930s.” Prey are businesses that have been hard-hit by the credit crunch – they are companies with immediate financing needs that cannot borrow the funds they need or can do so only by incurring unacceptably high costs.
Are you in this situation? Has it occurred to you that instead of liquidating assets and laying off staff, you may offer your business to a predator for sale? And that doing it now rather than waiting may be most advantageous?
The BCG article delineates a difference between a prey and a liquidator. A prey is a company with financial difficulties but it does not have operating problems. This is a business that is not meeting its debt payments but is still profitable. A liquidator is a business with financial problems and negative earnings. A prey is a good target for a predator; a liquidator is on their own to sell off their separate assets.
The value of a business is based upon its capacity to generate earnings in the future. The prey has much more value than the liquidator because it is still a profitable enterprise. This is why it’s important to recognize your own situation before drastic measures to meet debt payments cause you to undercut your profitability, and therefore your value.
And what puts you into the position of predator? Even in these times, many companies are still financially sound with strong balance sheets, high profitability, and sufficient cash to purchase another business. The article notes that during the Great Depression, companies such as IBM and Procter & Gamble used acquisitions to place them in better competitive positions in later years. If your situation is financially sound, this is an excellent time to purchase a distressed business. According to the authors’ extensive research, “M&A is more likely to create value [for the buyer] in a downturn than in an upturn.”
But how do you identify the right deal? The first success factor is to be financially and operationally healthy yourself and to choose a target that is still operating efficiently and profitably. Another interesting success factor is to choose a business outside of your own core competency. Why? Because if you are overconfident in your own industry, you will be more likely to overpay for the acquisition! You also may be able to see opportunities in another industry that insiders cannot spot.
Due Diligence
Of course, it’s highly critical that you take the time to do proper analysis of a potential purchase. You must thoroughly and rigorously examine the company you are considering so that you’re not left with undisclosed problems after the deal is completed.
But it’s a perfect environment to take a realistic risk. And whether you are predator or prey, you can create a win/win situation for each party. If you sell your business as a whole, you are much more likely to receive a value greater than the sum of the assets sold. And if you are a buyer at this time, you may be able to pick up a better bargain now than at any time in the future, in addition to helping a struggling business person cope with the undeserved fallout from these economic times.
Have you considered buying or selling? Have you bought or sold a business in the past? Share your insights with all of us in the comments section.
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