With the shifting of ground in an uncertain economy comes tremendous growth opportunity. As competitors stumble and weaken, the power of strong capital becomes immensely attractive.
The economy was so strong for such a long time that many plastics companies became fat and lazy. They grew. They generated profits. They thrived, in fact, for such a long span of time that they evolved away from their original ability to respond quickly to change. Becoming lean and agile once again is extremely difficult. (Ever try to lose 20 pounds? The older you get and the longer you have been out of shape, the harder it becomes.)
Most of the newly troubled companies of today will not make it back to lean and mean on their own. Still, 90 percent of these troubled firms continue to have some very valuable elements, which can be nourished and enhanced with the right capital and the right management support. This means opportunities for great buys.
The most difficult element in buying well in a troubled economy is finding the troubled seller who sees and appreciates his dilemma early enough to get help. It is difficult for an owner, who knows that he had substantial value three years ago, to face the fact that he is in real trouble today. Instinctively and fundamentally, he knows. He sees the downhill path ahead, but he still can't help but hope for a dramatic turnaround.
The buying process includes two major steps. The first one is finding the right firm to buy. The identification and screening process is critical and complex, too complex to cover here generally or quickly. (This area is covered in a supplement to this article on Plastics News' Web site, in the Opinion section.)
Here we will, however, share a few tips on the second stage, which is negotiating a deal that a seller will find viable. The following list includes a few top tips to consider in trying to secure the deal with that desirable competitor who may be tired of fighting tough times alone:
Sell the power of business combination. Many would-be sellers long for the relief of pressure. The notion of having ``more than enough'' capital is very enticing to them. The potential to grow new business more easily by cross-selling or by combining resources also can be powerful. Entice perspective sellers with the security a strong business combination can offer.
Leave room for upside. Most sellers in hard times have a real fear of leaving money on the table. What if the business recovered entirely in three months, and profits soared? They fear selling just before the upturn, at the possible cost of forfeiting significant value. To counter such fear, consider building in a future performance bonus to the seller. This will help in eliminating the ``wrong time to sell'' objection.
Consider a long-term employment or consulting contract. Sellers often have some sadness or reluctance in leaving the helm. The sense of potential for longer- term involvement is often comforting. The degree of such involvement may vary, depending upon the seller's gusto for post- sale continuation. However, even if it means a reduction in price, your willingness to accommodate the owner's interests and acknowledge his value can be comforting to the exiting owner.
Consider leasing rather than buying real properties. Sellers often fear sale, in part, due to a perceived forfeit of annuity. They may assume a 4-5 percent treasury return on their net proceeds from sale, and then compare that number to pre-sale cash flows. Sometimes the simple shift of one element of the deal to an ongoing annuity stream for real-estate rentals can make the sale ``feel'' much more palatable and secure.
Earn the seller's trust. Novice sellers find the process traumatic. Earning their trust can go far toward improving the likelihood of success. Guard confidentiality with great care. In negotiating sessions use an intermediary, if possible. The shelter of a skilled and careful third party can quadruple your likeliness for successful closure and enhance the post-closing relationship. Never foray with terms that you may be unwilling to stick with. Sellers tend to hear what they are hoping to hear, and if they perceive that you have reneged, the chances for a successful close will plummet.
In contemplating acquisitions, timing is critical. Right now there are tremendous opportunities to solidify through combination. Watch the marketplace and remain alert for those great opportunities to use tough economic times to great advantage.
Deborah Douglas is managing director of the Douglas Group, a St. Louis firm that represents middle market business owners in the sale of their businesses, and periodically assists large corporate acquirers in acquisition planning and in very specific and focused business search endeavors.