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Recession: taking advantage

philgreen

The delirium of disaster headlines could lead you to believe 2009 is no time to be buying a business, but a stormy economic climate can generate great opportunities for business buyers.

When a downturn hits, deals can still be struck, credit can be raised and business opportunities are nonetheless there to be driven home and capitalised on. Do I sound completely insane? Well, I assure you I'm not.

Although erring on the side of caution is wise during an economic slump, it shouldn't be a buyer, vendor or broker's sole mantra.

Volatility creates opportunities, don't be blinkered by the overall surrounding bad news, focus on the opportunities

Marc Fecher, Kingston Smith

"Volatility creates opportunities, don't be blinkered by the overall surrounding bad news, focus on the opportunities," says Marc Fecher, partner and chartered accountant at Kingston Smith.

Volatility can be an entrepreneur's saving grace during a recession. Without volatility Lloyds might never have sought the opportunity to acquire HBOS, and Sir Philip Green may have missed the chance to buy Moss Bros and then sell it at a £1m profit only two weeks later. Opportunities presented in a recession prove one man's trash really can be another's treasure. 

Starting from scratch during a recession may still be challenging, but when was it easy? For those unprepared to start at ground level, it could be the most fruitful time in a decade to buy into an existing business. Cue Marc Fecher again: "In reality, it's much more difficult to set a business up from scratch compared to actually acquiring a business. Hopefully, the business you're chasing is profitable or near profitable." Buying a business means you automatically leap the headache of start-up stage which can be long and costly.

As a first time business buyer, seeking the opportunities that are currently profitable to limit risk is preferable, but if you're a previous business owner with a good track record of turning businesses around, you have greater scope to capitalise on a financial crisis. Seizing on an underpriced competitor could add value to your existing business, or their assets may help to increase market share. The potential to grow through acquisition increases greatly during recession.

Patterns

Shaun Sweeny, founder and managing director of UK based business broker Turner Butler, relishes the thrill of a recession. Says Sweeny: "Personally, I believe we are standing on the biggest exchange of business the UK has ever seen."

Whether optimistic or opportunistic, Shaun's positivity is grounded in 40 years experience of running a successful brokerage. Shaun adds: "The 80s recession saw fundamental change in Britain. Employees went from working for big companies and industries, which seemed to disappear overnight, to starting businesses of their own. Successful business owners who built in the last recession are now retiring, and they are meeting an influx of individuals, 10 years their junior, who've worked for large corporations all their lives but recently been laid off . Rather than go back into the market, these 40 and 50 somethings are looking to buy a secure future." What Shaun is describing here is a cyclical pattern of economic, fiscal and vocational behaviour.

 

With more buyers looking to secure their futures, sellers of mid market businesses are once again in the driving seat.  As Shaun adds: "A buyer came to me recently who was made redundant from his position as director in a major construction company.  He had a great redundancy package with a large capital payment. To cut a long story short, he bought into a company that manufactures wind turbines for homes. Effectively, he's bought a job and a future." With green energy set to be a growth market, understanding a businesses' growth potential within its market sphere increases your chances of success.

Job security is just one of many reasons you might consider buying a business. Perhaps readjustment of lifestyle or lack of faith in future employment conditions drives you instead? Either way, owning a business provides control and growth over your own future, allowing you to become master of your own destiny.

Credit

When credit dries up, cash becomes king. Business buyers with good track records and extra stashedcash are in pole position to secure dwindling credit, but what do you do if you're a first time business buyer with some money, but not the full asking price of a potential acquisition?  

Lenders will have greater confidence in buyers that can prove theacquisition is profitable, and demonstrate authentic, impermeable projected growth. As Henry Edjelbaum, a broker for ASC Finance for Business observes: "Six months ago, if you were to buy a guest house, banks were quite happy to ask about the profit for the year. Now it's much more detailed, they would want the seasonal cash flow and analysis of how you manage the low and high season."

Although credit is more difficult to secure, lenders are still out there and will lend, albeit with tighter regulation. Having the confidence to approach them is the first hurdle. If you have a cash sum to put down, and choose a business in a recession-proof sector - such as an accountancy practice or MOT garage - money lenders will view you favourably.

Looking into the finer details of a potential acquisition before taking the plunge is a must. A successful acquisition strategy should take an objective view, investigating profitability, assets and the vendor's reason for selling. This information, in turn, feeds the lender's rationale for lending. Always employ a reputable accountant to investigate the liquidity of a potential acquisition, ensuring you don't pay over the odds or get fleeced.

An increasingly popular and creative option to secure both peace of mind and finance for a new business is loan notes, commonly used in the US, and gaining popularity in the UK.  Loan notes (otherwise known as 'seller financing') is in essence an IOU between buyer and vendor.  The buyer typically puts down a deposit, and then agrees to repay the outstanding sum over a determined period. The buyer has the assurance that the business is in a good shape and has the potential to yield the remaining payment on the loan. The vendor enhances the chance for a rapid exchange, while entrusting the business to the right buyer who can return the remaining sum. Richard May, at business brokerage TSL, has witnessed seller financing activity significantly increase in recent months. He says: "If the seller isn't confident about the future of his business then why should anyone else be? It shows a commitment on both sides, and if other people aren't lending then it may be the only way to go forward."

Opportunism

Countercyclical businesses do well when a downturn strikes. Insolvency practitioners, pawn shops, value products and services will buck the trend.  Tomlinson, a UK based insolvency practitioners, have seen a marked rise in trade during the past six months. Tomlinson reports an 8.8 percent increase in insolvencies during the third quarter of 2008 compared with the second, with a further 10.1% increase in the amount of businesses going into liquidation. When insolvency accelerates in 2009, practitioners are set to do a roaring trade. Catherine Matthews, a partner at Tomlinson, says: "We expect the number of personal insolvencies to rise from around 110,000 this year to around 140,000 in 2009 and even further thereafter."

Cash Converters, a pawn franchise with over 500 franchised stores worldwide has seen a jaw-dropping 94.5% increase in UK profit since last year. The pawn shop giants plan to implement an aggressive growth strategy in the UK this year, ensuring they will profit from the discarded trinkets of sorry and sore bankers. Repossession agencies will also experience a busy 2009.  With home repossessions up 71% on last year, owning a repossessions agency could be an attractive and profitable option.

 

Retail

The high street is arguably the most accurate gauge when it comes to the nation's spending habits, and it is here that one can observe certain budget retailers capitalising on changing tastes.  Marks and Spencer has seen pre-tax profits dwindle by 34% while Primark report a 17% rise in profits. Waitrose is currently reporting significant losses as Lidl enjoys an unprecedented boom. McDonalds has seen sales rise by 8.5% but Whole Foods will posit a slump in fourth quarter profits. Tapping into these changing tastes and attitudes is a winning strategy to adopt when pondering which business is resilient in the near future.

In times of trouble, consumers seek comfort to compensate for their pessimistic moods. Vintners and chocolate production factories have therefore been cited in recession proof business theory since its conception. This trend has continued with Thorntons increasing sales by 12% and profits by 20% last year. The £11bn confectionary industry is expected to increase year on year sales by 4% over the next six years, making a prospective business like Opulentessence, a potentially sweet business venture.

Repair

Cobblers, clothing, electrical, and motor repairs businesses are currently experiencing a boom in trade as concerns switch from purchase to repair, some as much as 30% according to a recent Times survey. One business that plans to leverage the repair and wear ethos is Spit 'n' Shine, a new network of UK shoe shine booths. Spit 'n' Shine plan to target locations where bankers and budding job seekers need a little extra shine to avoid the chop or sparkle at a job interview.

Another prime business opportunity for sale this month is a used clothes distribution wholesaler based in the UK.  With annual sales standing at £1.7m and net profits at £180K, there is proven room for growth with Oxfam predicting the potential market to be worth £500m in the future. Buying this business would launch you headfirst into the credit crunch driven and burgeoning second hand goods market, and increase potential to expand into further markets in the future.

While greed and the economy begin their trial separation, foresight is as imperative as ever for the entrepreneur. Fleet Street will continue to argue with the City over who was to blame, and Westminster will still have to bankroll every failing financial institution, but the moralising and finger pointing is likely to continue for some time. One thing we can be sure is the opulent party is over and it's time to change.

As fear and uncertainty prevail, lack of confidence and loss of clarity will allow savvy buyers to seize the opportunities offered by faltering markets. Existing business owners will have the opportunity to acquire greater market share through faltering competition. To paraphrase Rudyard Kipling:  "If you can keep your head, when all about you are losing theirs, you'll be an entrepreneur, my son."

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