Q. A competitor has recently approached me as he’s hoping to sell his business. My sector is going through a downturn and he wants to get out and retire before things get any worse. However, I’m worried that buying at this time is risky, and that if I bide my time I might get a better price for his business in any case. What are your thoughts about buying in a downturn – is it the wrong time? Also, what should a business do to prepare to make the most of opportunities such as this going forward?
Andy Mintern of Secantor writes:

Downturns tend to provide opportunities to companies that are the fi ttest at the expense of those less well prepared. First, you need to be confi dent that it’s cyclical. If good times are genuinely ahead, then you should prepare your business to weather the storm and be ready to take advantage later.

Funding and capitalisation are keys to providing the reserves you may need to get through this. You need a realistic cash forecast and ensure your bank or equity partners are aware of the period ahead. To what extent are your overheads fi xed or variable? Is there a level of discretionary expenditure that will enable you to cut back and improve profi tability to preserve cash resources?

With respect to your competitor, buying in a diffi cult market should enable you to negotiate a more favourable price. If things get worse, this could improve the opportunity, but may also mean you miss out. And it will take time to complete any transaction. However, before you buy, you need a complete picture of the business being sold. A confi dentiality agreement should give you access to most of the important information concerning his business. Remember that time is likely to be on your side rather than his and performing a thorough due diligence exercise may assist you.

Be clear about how you would fund the acquisition and build enough contingency into your forecasts to ensure you could survive if either business continues to underperform. It may be that the potential for the consolidation of the joint cost base would enable you to improve operating margins. Perhaps the expansion of your customer base would help your presence in the market?

Confidence that you are able to survive and tactics to ensure that you are around to take advantage of any upturn will be vital. Plan ahead now and ensure that you are one of the fittest.

Andy Mintern is a director of Secantor, the national network of financial directors, who work part-time for small to medium-sized companies. www.secantor.com