Is this a time for brave entrepreneurs to expand their business?
April 19, 2023
The economic news might not be as gloomy as a few months ago, but the UK’s GDP is flatlining and the IMF is predicting we will be one of the worst performers in 2023 among leading economies. Surely this is no time for ambitious expansion or opportunistic acquisitions?
Or is it? After the challenges of the pandemic and the impact of the Ukraine war, the commercial battlefield is littered with the walking and more seriously wounded casualties. Some represent the chance for successful businesses to increase market share or to diversify by stepping in to rescue struggling competitors. Judging by the enthusiasm with which US private equity houses are currently looking at UK companies like THG, assets are cheap and the prospects for entrepreneurial success are good.
Fortune favours the brave, but only those who come up with the right answers to some important questions.
Is your Balance Sheet strong enough to support growth?
Pumping up a balance sheet with increased trading can stretch all sort of financial ratios, which may start to threaten how it looks from a credit risk point of view, especially with the trade insurers who provide vital cover to suppliers. Many companies have had their capital base eroded over the past few years by losses and their borrowings swollen by using Coronavirus loan schemes. A sharp rise in debtors and creditors can turn a company into a poster child for over trading.
Do you have access to cash or funding for expansion?
Grasping opportunities doesn’t just involve the initial capital outlay on acquiring a struggling business; higher sales levels will create extra working capital needs. Lenders may be comfortable with funding a reasonable level of organic growth, but less happy to support rapid revenue increases generated from a different customer base to the one with which they are familiar.
How stretched are your management resources?
Acquisitions create all sorts of demands on management bandwidth, whether it is getting internal and external communications right, harmonising systems, understanding the inner workings of the new business or establishing revised financial reporting and control procedures. How much spare capacity does existing management have and how much of the extra burden can be shared with the surviving management (if any) of the acquired entity.
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What will the impact be on your supply chain?
Very few supply chains have been unaffected by the events of the last few years, even stretching back to before the pandemic as the cost and reduced flexibility of shipping and the surge in labour rates in formerly cheap labour jurisdictions began to transform the inventory mantra of ‘just in time’ to ‘just in case’. Will the existing supply chain cope with higher activity levels, or can suppliers to the acquired business be incorporated into it?
Are your expansion plans realistic?
The history of expansion and acquisitions is littered with disappointments. Not all revenue transfers when businesses are combined. Not all key staff are retained, at least not long term. Anticipated economies of scale mysteriously fail to materialise. Profit margin enhancement turns into dilution instead. Unexpected capital expenditure requirements emerge. Starting out with a realistic and cautious attitude to the benefits is a wise strategy.
What are the downside risks?
There will be good reasons why the business being bought is struggling and important limits to how well the acquirer will be able to deal with them. Could the existing business and its reputation be damaged? Will the deal turn the combined entity into a busy fool, with higher revenues but no significant boost to profits or even a lower bottom line? If the purchase is through a formal insolvency process, are the severely limited protections in the deal fully understood?
Ultimately, expanding in these challenging times is all about having a cool head and a well-developed sense of risk awareness, plus a fully costed and workable Plan B. If the entrepreneur, their team and their advisers are satisfied they have asked all these questions and come up with satisfactory answers, there is every prospect of a positive outcome.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.