24 August 2019
At every level we seem to be facing uncertainty whether it is a worsening trade war, Brexit, economic shocks or fear of recessionary pressures.
Talk to seasoned venture capitalists or serial acquirors of businesses and most will tell you the best deals they’ve done are those where they’ve bought a business in an uncertain environment or a downturn. This shouldn’t really be a surprise. Private equity make their money by buying a good business when the purchase price represents value and in a market environment where they see opportunities for growth. Valuations tend to fall when there are fewer buyers in the market and there is less optimism around.
However trade acquirors can be more averse to M&A in an uncertain market. This is often a combination of several things – availability of finance, spare management resource and attitude to risk. Looking firstly at finance, in the current market there is no doubt that raising finance for acquisitions remains stringent.
Attitude to risk is as important as access to finance. Private equity can take more of a portfolio approach to buying businesses. The risk for entrepreneurs in making an acquisition is greater. If an acquisition goes sour it has the potential to bring the whole business down.
Making acquisitions in these turbulent times is not without its challenges. The fundamental principle of making acquisitions remains the same – it’s all about buying the right business and at the right price.
To overpay for a business at any time is a cardinal sin, but even more so in the current market. However, a sound acquisition could well prove to be the making of a business.
McKinsey studied corporate behaviour over several business cycles and found a tangible difference between the best-performing companies and the worst:
- The worst acquired other companies in boom times.
- The best performing acquired in slower times, when they could buy at sensible prices.
So now might be the right time to dust off the file and find the ideal target that perhaps fills a geographic hole or a product or technology gap.