July 6, 2020 | Business Plans
As Maine enters what is traditionally its peak business season and the COVID-19 pandemic continues to engulf the country, some businesses around the state may be on the verge of bankruptcy or looking for a way out.
While this certainly can cause stress for business owners, it can create opportunities for business investors. For those who have excess cash or capital, now may be an ideal time to acquire and turn around a distressed business. If you find yourself in a position to pursue this strategy, here are a few things you should consider.
Costs vs. Benefits
Acquiring a struggling business for an affordable price and turning it around can create significant long-term rewards. But it also poses risks — oftentimes, businesses are struggling for a reason, and may have been in trouble independent of the COVID-19 pandemic.
The key is to identify a business with fixable problems and develop a plan to address them. In searching for a struggling businesses that may have hidden value, look for these characteristics:
- Untapped market opportunities
- Poor leadership
- Excessive costs
- Underutilized capacity
- Cost-saving or revenue-building synergies with other businesses that you own
It’s important to assess whether these opportunities exceed acquisition risks and potentially provide ample financial benefits.
If you’re thinking of acquiring a company and turning it around, you need to first understand its core business — specifically, its profit drivers and roadblocks. Failing to do so can lead to you misreading the company’s financial statements, misjudging its financial state and potentially failing to make the venture profitable. This is why many successful turnarounds are conducted by corporate buyers in the same industry as the sellers or by investors (such as private equity funds) that specialize in a particular sector.
When doing your due diligence, pinpoint the source of your target’s distress (such as excessive fixed costs, decreased demand for products and services, or overwhelming debt) to determine what, if any, corrective measures can be taken. Be prepared to find hidden liabilities — such as pending legal actions or deferred tax liabilities — beyond those you already know about.
It’s also possible to unearth potential sources of value, such as tax breaks or proprietary technologies. Benchmarking the company’s performance with its peers’ can help reveal where to find potential for profits.
Cash Flow Management
Before you make an acquisition, determine what drives the business’ revenue growth and which costs hinder its profitability. Should you divest from certain products or services? Reduce staff?
Implementing a longer-term cash-management plan and developing a forecast based on receipts and disbursements is also critical. Cost-saving and revenue-generating opportunities, such as excessive overtime pay, high utility bills and unbilled services, can be achieved with a strong cash-management plan and a thorough evaluation of accounting controls and procedures.
During your due diligence, spend time focusing on the accuracy of your potential acquisition’s accounting and reporting. Without dependable data, you won’t be able to measure progress, fully pursue growth opportunities or address potential issues.
In auditing the data, you may even uncover hidden value. For example, one troubled manufacturing company wasn’t tracking future purchase commitments. After being purchased, the new owner prepared a comprehensive commitment and contingency report that helped management renegotiate terms of the customer agreements. This step dramatically improved profitability and helped ensure a successful turnaround.
Turning around a financially distressed company can be a tall order, especially in the uncertain market conditions created by the COVID pandemic. A business valuation professional can help develop a strategic plan that provides a map toward revenue growth and improved cash flow.