Buying Out a Competitor As the Virus Spreads ~ Opportunity May Still Knock

It is important to consider that a recession and yes, a pandemic, can create disastrous results. It is also true these circumstances can open the door to new business opportunities. When the polyester/leisure suit phenomenon hit the market in the 1970’s, many in our industry were in despair as those materials do not require drycleaning. My father, Sid Tuchman, saw an opportunity to expand and grow his existing business. He identified prime locations of his competition in advance and grabbed the leases when those competitive drycleaning businesses folded. Tuchman Cleaners in Indianapolis, Indiana, saw its largest growth (to 35 stores) in the 1980’s due to the emergence of polyester. Crisis can lead to great opportunity!

Christopher Hytry Derrington, Writer @ HuffPost.com, gives insightful advice in his article 10 Rules to Buying and Growing your Competition Now:

Rule #1: Look for Opportunities that Fit Your Core Competency

Maintain your focus. Ask yourself what value this opportunity might bring to your current company: “Will this add a product to our existing line?” “Will this expand our customer base?” “Will this increase our market share?” “Will this bring technical expertise to the company that I do not have?” “Do I gain assets that I will have to purchase over time anyway to remain competitive?” “Will it make my existing company more attractive to another buyer down the road?” If the answer is “no,” or if you have to search for justification, then it is either a bad idea, or you need help in defining your core competencies. It is smart to stay away from this acquisition for a while.

Rule #2: Do not Fall in Love with the First Fruit that Falls from the Tree

Like any courtship, what is on the inside is the only thing that counts. Remember Rule #1: Do your homework, interview the people, analyze the balance sheets and dig into the accounts receivable, accounts payable and inventory. The relationship will not last if the goals and competencies are not compatible.

Rule #3: Find the Best Merger & Acquisition Attorney and Accountant

Your everyday legal-and-accounting team may mean well, but expertise is paramount regarding

Merger & Acquisition (M&A). Seek a partnership with an attorney and accountant who have the necessary experience and listen to them. If necessary, hire a contract CFO to help you. This is easier and more affordable than what you may think. Shop around; there are some very cost-effective professionals and it is best to spend this money upfront before you need them. They will become your new best allies and will be worth their weight in gold.

Rule #4: Use Other People’s Money Whenever Possible

For smaller transactions, unless your existing business has a hoard of cash that is not earning anything, keep your cash and seek additional capital. If you have an existing line of credit, use it. If you do not, get one and see if you can pledge assets of the new company. Always be cultivating and growing an investor network in preparation for future needs, such as an M&A expert. Stay in constant touch with your lawyer and accountant. Generate publicity about your business activities to draw attention to potential investors and help build your network. For complex transactions, your M&A financial and legal team will explain available options. Leveraged buyouts utilizing company assets are common, expensive to structure and take time. Assuming you are not a publicly traded company, you will probably need to acquire private investor capital. You will likely have to give up equity and maybe some management rights so tread carefully.

Rule #5: Hope for the Best, Plan for the Worst

Change is inevitable and hard. Odds are that every person in the target company is dreading the change both individually and collectively. This company was probably poorly managed from the beginning or lacked skills needed to guide it through a recession. The greater the dysfunction, and the longer it lasted, the longer it will take to fix. It is better to begin the painful changes immediately so that you can focus on success. Everything can go wrong, and much of it will. If you believe you will spend x number of dollars, plan on 10 times that amount. If you intend a marketing partnership between two companies expect that to take two or three times longer than anticipated.

Rule #6: Look for Superstars, Incentivize Them, but be Prepared to Replace Them

People are everything, so part of your due diligence is to focus on the management team and personnel. An enormous amount of time is spent structuring parts of the transaction so that key personnel are retained and incentivized. Many deals fall apart based on the uncertainty surrounding the ability of retaining the target management team and key talent assets. Monitoring the merged culture as a leader is very important. If you are a hands-off, casual-dress, no-memos-necessary type of leader, but the target company is used to a rigid, business-dress, top-down management style, you must be flexible enough to adapt. You may see superstars all over the place, but do they buy into your vision? Key people you thought would step up to leadership roles do not, and those you thought would not, do. A good CEO always wants feedback and pushback along with having a vision and management style.

Rule #7: Look for the Hidden Gems

The best approach is to seek out those who will help you with your acquisition decision, and to develop a starting plan. During your due diligence, interview the top 10 to 12 people in the company and ask: (1) Which earlier projects or good ideas are inactive because they did not get funding or sponsorship from your management? (2) How would you like to change your current area and scope of responsibilities over the next year? That gem may be an idea, a new product, an employee looking to take on extra responsibility, or Human Resources pointing out a valuable talent.

Rule #8: Cash-Flow is Critical

You may be buying a company in trouble. Due diligence may reveal some things about accounts receivable. You may discover its true value is much less. After determining cash-flow, cut it in half, then half again. The economics of scale and possible synergy between two small businesses combined are often where better earnings/profits originate. It is important to move functions that are not a core strength of the acquired company to the existing company. Having two sister companies now sharing a combined customer service department will drive down costs for both. Sharing alone will save tens of thousands of dollars over a short time period. Look for waste, no matter how insignificant it may appear.

Rule #9: There is No Fast Closing on a Deal

If you follow Rules #1 and #2, you will discover the organic nature of this rule. Be prepared to take your time and be prepared for the time it takes. The biggest surprise to most people is how long it takes to acquire a company. Only you can decide if you have what it takes to wait and wait for the best.

Rule #10: You Can Always Walk Away from the Deal

Buyers or sellers start out doing everything right, but as they proceed, become totally invested in getting the deal done. They may give up points in the heat of negotiation, overlook due diligence, or over-extend themselves financially. To ensure this does not happen, depend on your M&A team to bring unemotional analysis and advice. Prior to negotiations, write down definite deal parameters to stick to. Always remember the power of “no.”

According to Barlow Research Associates, the average small-business owner in America is 60 years old, and 40% of owners are 65 or older. According to recent data compiled by Emergent Research, “among older owners, 40% say they are now considering closing their businesses permanently because they do not want to put their time, energy or resources into rebuilding during this crisis due to age.”

With Covid-19 escalating, many business owners are considering selling sooner rather than later. It may make sense to sell at today’s market value rather than investing more in your company. Regardless of the current market situation, bold investors never fail to look for new opportunities.

If your dreams of retirement include travel and purchasing that summer home on the lake that you have dreamed about, pouring more dollars into your business and draining your personal assets may put these retirement goals in jeopardy. Ask yourself, if it’s worth using savings earmarked for retirement to fund a business that may not bounce back in a post-pandemic world. No matter whether you are selling or buying a company, it is your responsibility to cover all the bases and do your due diligence.

About Ellen Tuchman Rothmann

Ellen Rothmann has 30 years of experience in sales and marketing and utilizes these skills to support and facilitate seminars for Tuchman Advisory Group (TAG). Prior to her role with TAG, she was VP of Operations for Richard Wolffer’s Auctions that specialized in sports and entertainment memorabilia. As an Account Manager for K101 – a San Francisco Bay Area radio station – she worked with small businesses to build unique and profitable advertising and promotional campaigns for her clients. Growing up in the dry cleaning business, Ellen worked in numerous capacities at Tuchman Cleaners. She also held sales positions at Apparelmaster and Tuchman Cleaner’s Home Carpet and Drapery businesses. Rothmann earned her B.A. in Marketing from Indiana University. She lives in San Francisco with her husband John, they have two sons For more information contact Ellen Tuchman Rothmann, President, Tuchman Advisory Group. e-mail: ellenrothmann@yahoo.com