Growing Your Business During a Recession

With economic turbulence expected to continue through much of 2009, many business owners and executives will primarily look to maintain earnings or reduce losses by cutting costs. Retrenching, however, may not be the best business strategy. While some “bottom-line” improvement may be realized through cost reductions, these measures often deliver diminishing returns, short-term results, a weaker company, and poor morale. An alternate long-term strategy is to take every cost-effective opportunity to increase revenues, and a recessionary environment may offer excellent opportunities for growth through mergers and acquisitions.

In a recessionary market, it may be difficult or impossible to generate internal sales growth by increasing sales in current markets or to current customers. In fact, it may be difficult to maintain existing sales – even with proactive marketing efforts and excellent customer relationships. Acquiring a healthy, cash-generating company or product line can lead to enhanced revenues and sustainable profits. A strategic acquisition in a cyclical market permits a business to maintain or even increase revenues while waiting for the market to rebound. And if the markets do not immediately improve, the company will at least command a larger share of the smaller market.

Key reasons to pursue mergers and acquisitions for top line growth during 2009 and beyond are:

• Acquiring revenues may be more effective than growing organically. Organic growth has its limits and it often takes years to achieve the same revenue growth attained in just months through strategic acquisitions. Acquisition prices have returned to historical averages, making acquisitions much more attractive than during much of the last two decades.
• Acquiring new business may be a good strategy to help you reposition your company to be more competitive and innovative. If, for example, your company is losing sales to a competitor, purchasing the competitor – or another company that your rival is positioned to acquire – can arrest the slippage. A successful acquisition of a competitor expedites sales growth by immediately adding their customer relationships to your company. Or, if your customers are purchasing products you currently do not offer, it may be time to acquire those product lines. Acquiring “bolt-on” products, technologies or services is often an easier path than buying an entire company, usually results in an easier post-acquisition integration, and is a good way to begin an acquisition process. Another repositioning strategy is to acquire a higher margin business or product line to strengthen your company’s cash flow and value well beyond today’s economic turbulence.
• A company with greater revenues may have economies of scale that better utilize existing resources and produce better returns. Your company may not need to cut costs; it may just need to utilize assets it has already developed to support larger operations.
• Acquisitions are often a great way to strengthen your team. For example, bringing aboard a seasoned marketing executive or dynamic sales team from an acquisition could bring even more top line growth to your business.
• In a recessionary market, other businesses are more likely to recognize the need to grow and to be open to a combination of businesses through merger. Some competitors may be cash strapped or struggling, and competitive feedback from your key customers can help you identify potential acquisition targets. Even a merger of near equals may require little cash, provide all of the strategic benefits of an acquisition, and produce a much stronger successor company.

A popular business axiom reminds us that, “You can’t shrink a company to greatness.” Some business owners who are focusing on simply surviving the recession may be missing opportunities to both preserve and grow their companies. This is especially true for companies in solid industries expecting future growth, companies with available cash or more than adequate borrowing capacities, and companies who can achieve greater economies of scale as they grow. For these companies, it is particularly important to follow another important piece of business wisdom: “Ensure your business is different tomorrow than it is today.”

A down market is not a time to add costs – unless those costs are more than offset by new top line revenues. This is a time to approach acquisitions cautiously – not to over-leverage financially – but nevertheless a time to see acquisitions as the valuable growth opportunities they are. A business buyer must be especially careful in its diligence to understand customer relationships, revenues and expected future cash flows. While financing is less readily available than a year ago, business sellers may also assist more with financing or by taking some risks with earn-outs.

An acquisition is the most complex form of business transaction and requires careful planning and execution. Perhaps it is also the most complex investment decision. And yet, for the prepared investor there is no better time to invest for the future than in a down market. Certainly, you need several good reasons to make an acquisition at any time, and current conditions may make this the right time for your business to make a merger or acquisition.

Jim Gettel and Lou Banach are Managing Directors of Schenck M&A Solutions and have over 20 years of experience helping businesses grow. As part of Schenck Business Solutions, one of the largest CPA and consulting firms in the country, Schenck M&A Solutions provides a full range of merger-and-acquisition-related services including business sales, acquisition searches, business financing, recapitalizations and turnarounds, valuations, due diligence services, cultural compatibility analyses, and assistance with post-acquisition integration.

January 2009