Mergers emerge in rough economy

SOURCE: Green Bay Press Gazette, July 11, 2010

By Scott Bushkie

A very smart friend of mine once said, “In good times you can make good money, but in bad times you can make a fortune.”

The M&A market is picking up steam. Sellers are pushing to beat the capital gains increases coming at the end of the year. Profits and multiples are increasing which translates to higher valuations, but that doesn’t mean buyers have missed their opportunity to get a deal.

Not yet anyway. There are still a significant number of distressed businesses in the marketplace.

These aren’t bad companies, and they’re not run by bad people. In some cases, it’s simply that their current cash flow doesn’t work with their debt structure. In addition, lending institutions are under a great deal of pressure from regulators, and undercapitalized businesses are getting squeezed out.

Other times distressed businesses truly are in trouble. A down economy exacerbates mismanagement problems, ill-advised strategies and some business owners have simply been burned out by this recession.

For companies that made it through the hard times and are doing well, this can be the time to make great strides—whether that means expanding market share, diversifying, or picking up new products or technology.

You might be able to buy two or three distressed companies for the overall price of one very profitable company. Remember to evaluate the market and do your due diligence. Just as with any potential acquisition, you’re looking for 1+1=3 scenarios. You need to be aware that the risk you are taking may bring a great reward, but it is riskier than buying a profitable company.

How can you mitigate the risk? Look for synergies. Can you move the existing operation into your current facility, expand geographic territory, or acquire some well respected salespeople? Perhaps the company sells completely different product lines but markets to the same type of customers. Think creatively. In the scenarios we have facilitated, the buyer was bringing something new to the table. The buyers got a deal, the lending institutions felt good as they got a troubled loan off their books.

Although there will always be distressed businesses available, the opportunities will become fewer. Now is the time to act, due to the significant number of troubled loans, as lending institutions continue to work to get distressed businesses off their books, many have chosen to take a loss now to close out the account. Based on what I’m seeing and hearing, I expect distressed business options will remain strong through the end of 2010.

A distressed company can present a significant growth opportunity—at a great value. If you have cash on the balance sheet or a strong banking relationship, it might make sense to tap those resources now and take advantage of this limited opportunity. Call around to the area intermediaries. We have relationships with lenders and are aware of these short-term opportunities.

Scott Bushkie is President of Cornerstone Business Services. To request a book (at no cost ) with advice on the exit planning process contact Scott at (920) 436.9890 or sbushkie@conerstone-business.com.