We don’t need to tell you both stocks and bonds have been weak lately. While sentiment has been falling since February, actions related to that sentiment have not shifted to reflect it.

Many businesses owners we have spoken to have become frozen.

Let’s start with our suggestions on what to do now.

 

Control through Acquisition

What can you control? You can control how you behave, how you speak to customers and staff and how you look at costs. As the saying goes: don’t remember the mistake but remember the lesson. The lesson here is while you may have been surprised by this year, there are other companies which were surprised much more.

…These companies could be you competitors.

…These companies could be your vendors.

…These companies could be your customers.

First you have to forget about how your banker looks at acquisitions. We should know, as here at Diamant Carré, we talk to both large and small financial institutions all day long.  Find the attraction first, then talk to us about how to finance it. Allow me to give you an example:

Someone you know is in trouble. They have too much debt and are willing to accept an acquisition offer (if management can be retained) at book value. You ask for their financials, and you see that while revenue trends are similar to yours, their costs have increased markedly. As they are concerned about privacy, they ask you to sign a non-disclosure agreement (NDA). As it has acceptable language, which you know because your attorney saw it before you signed it, you accept it. We interviewed an excellent business broker – Steve Barnett – on Tuesday (video link) so you can hear what a business broker has to say on this subject.

 

Latent Equity

Now the hunt begins for “latent equity” or LE. This is equity that doesn’t conform to generally accepted accounting principles (GAAP), i.e. it doesn’t show in the company’s financials. And it should not, to be clear. Let me give you an example.

This company has a ten year contract for something. It can be a lease on commercial property, it could be a fixed price contract for an manufacturing input. It could be an employee who understands a narrow customer type..far better than anyone at your company.

It is something they have and you do not, which could give you an advantage if acquired. It could also be a patent, a trademark or even a salesperson who has relationships with companies which you do not have now.

Latent Equity is an unaccounted for competitive advantage. Your job as CEO is to find it, value it, and if you can get it cheaply enough…buy it!

Smaller businesses don’t have the staff that larger ones do, that’s a given. Which is why they are better at finding latent equity than smaller businesses. Large businesses keep files on the financial status of all key vendors, lists of internal and external employee skills (both at their company and competitors) and other key pre-acquisition information. This information gives them an advantage in acquisitions and negotiations.

You need to start building competitive intelligence on anything or anybody that rocks their role.  This means you record and follow it. Meet and uncommonly good salesman?  Write their details down and make plans to get to know them better.  Hear about a particular good deal just made in the press?  Write it down and follow up on the progress.  Be ready with information should the deal fall apart.  Many deals don’t conclude because of personalities and price.  Be the nicer one on your initial approach.  Let the acquired know you are there if the deal doesn’t work out.

We are good at finding latent equity and helping companies monetize it. But we’ll save that discussion for another article.

 

Acquisitions Can Improve Profits

Acquisition of competitors can help you control costs better. Acquisition of vendors can help you reduce costs by reducing combined overhead/SG&A. Acquisition of clients is the trickiest. That too, we save for a difference piece.

The point is: there are many ways you can control costs. A competitor/vendor/customer acquisition is the best idea for 2022 to increase profits.

 

One final observation:  if you are worried or scared, your staff probably can see it. By acquiring a company, you give them something to focus on, especially if it is one they can see is not as good as yours. At best, it will occupy their thoughts in a good way. At worst, they know you are thinking about action and not sitting still.

“Let us know if we should do a Zoom with you and your staff, with suggestions on who to approach and how to finance it. Our pre-qualification process can help you know how much to bid and get you to where you need to be with the acquisition…much faster.”

 

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