When trading in a recession it is difficult to know which course of action is right for your business. Although times are tough there are opportunities for your business in this recession. Now is certainly the time to safeguard your business interests but it could also be the best time to prepare for the eventual upturn.
One of the less obvious effects of the recession is that for some it can bring opportunity. Several of our clients have found that their competitors have been forced into administration or other insolvency proceedings. This can create opportunity; some of our clients have bought their competitors whilst others have explored other means of acquiring their competitor's customer base. If you are considering buying a competitor it is crucial to firstly understand why the business failed. Without understanding this it is impossible to judge the real value and the potential of making this kind of acquisition. It may be that the business model is fundamentally unsound, in which case it may not be wise to consider making a purchase. On the other hand it could be a range of other issues (the insolvency of a key customer, a change in bank lending policies, etc) that have led to the insolvency, issues which could be resolved and the business made profitable. The clear advantage to you, as the potential buyer, is price. If your competitor is unfortunate enough to face administration and the business cannot be rescued, it is likely to be sold at less than its true market value. A business that can afford to buy in these circumstances could stand to make a significant profit once the market stabilises.
The process followed when buying an insolvent business is similar to any normal purchase; arranging finance, considering tax issues, due diligence and negotiating the sale agreement. The one major difference is that an administrator will not give warranties or indemnities as part of the sale process, making the due diligence process even more important. It is more than likely, however, that any information given by the administrators will not be complete and accurate. Lots of businesses fail precisely because their financial and contractual information is unreliable, and an administrator will not have sufficient knowledge of the business to be able to provide much additional in-depth information. If you do decide to purchase, you will need to move quickly as valuable contracts and goodwill start to disappear once administrators take over. Great care needs to be taken over exactly what liabilities you are going to acquire as part of the process. Unwanted employee or equipment lease liabilities could greatly impact upon the profitability of the business being taken over.
There are other methods of acquiring the business of a failed competitor. Some have sat back and done nothing, waiting for the removal of their competitor's supply from the market to increase the demand for their products. Others have produced a targeted marketing strategy designed to entice their competitor's former customers to start doing business with them. Which strategy is right depends on the circumstances in question, but this recession has created interesting opportunities for our clients. Now is the right time to start thinking about growth. Many businesses (including your competitors) are cutting costs, slowing their marketing spend or even going into administration. The strong businesses that survive may face a wealth of opportunity by acquiring the business or customers of their competitors. The upturn is coming, and when it does the most strongly positioned businesses will reap the rewards.