There are sharks in the water. If you’re in business in 2020, there’s no escaping that. The only question is whether you’re one of them – or if you’re their prey.
In a year like 2020, a lot of businesses are in precarious positions. They might have made questionable decisions for years, but good economic conditions allowed them to escape major consequences for a time. In a year like this, your weaknesses get exposed, and you sometimes find yourself in a position where you can’t refuse any offer that gives you an escape hatch.
That’s where the sharks come in. There are always people looking for good bargains on businesses. They want your property. They want your fixtures. They want access to your clients. They probably have the ability to shore up the operation in ways that you can’t, and they know you’re not in a position to turn down their offer.
So, they’re looking to buy, at a price that’s very favorable to them. They’re sharks, and I mean that without the slightest hint of condemnation. There’s a reason sharks rule the ocean. They’re a crucial part of the ecosystem and it wouldn’t work without them.
Sharks in business are doing what smart people always do. They’re responding rationally to incentives. If a business is in precarious shape because it doesn’t have a good balance sheet, or hasn’t been keeping its numbers as it should have, or can’t seem to make its cash flow work, the shark understands a few things:
First, the assets of that business are probably worth more than its current leadership. Better leadership could turn it around. Second, you would only want to make a minimal investment in a business like this because a) its performance doesn’t justify any more than that; and b) the owner wouldn’t be smart to hold out for any more than that.
So, I’m talking to the people who own businesses that might be targets of the sharks. How do you recognize these sharks? Often, they have made their money by coming into generational wealth or gotten their money somehow on the sidelines. They don’t want to build a business. They want to take over one that someone else has built but is having trouble leading to prosperity.
These sharks could invest in a business for a multiple on EBITA, which is the kind of business acquisition you’d hope to be part of if you’re the seller. But the sharks don’t want to do that. They want to take on distressed businesses that they can get for mere book value, or maybe just the straight value of the assets and the cash on hand. In some cases, they’ll want to take over your business, but won’t offer any more than to cover your payroll for the coming year.
That’s quite a bargain, wouldn’t you say? Acquiring all a company’s assets just for keeping people employed?
But these sharks have long memories. They know that in 2001, when we experienced the last recession similar to the current one (in other words, not precipitated by a financial market meltdown like in 2008), a lot of businesses changed hands for very little money.
Do you want to avoid being prey for sharks like this? Then do the following:
First look at your cash conversion cycle. That seems so fundamental, no one should even need to be told to do it, right? But you have to tell NBA players to practice their free throws because they don’t like to. I know better than to assume that everyone in business does this. Very few look at the full maturity of their CCCs. They usually just look at how quickly they can get one portion of that cycle back by collecting on current receivables.
But you need to look at the full cycle from top to bottom. How do you get sales, make things and collect the money faster? At the other end, how do you stretch your payables as long as possible without being unethical about it?
If you don’t have this mastered, you are ripe for a shark to come and get you.
Another solution is the Power of One. You want to look at the seven levers of corporate success. (Want to know what they are? E-mail me and I’ll tell you.) If you’re not inspecting every one of these in your weekly management meetings, you’re in trouble.
Finally, you need to be in frequent and good communication with your bank. There has rarely been a time when the business community had more access to capital than it does right now. If you’re not talking to your banker, you could be missing out on an opportunity to either save or expand your business.
But let’s say you’re on top of all this. Your finances are sound and your performance is solid. In this case, you have no need to think about these sharks, correct?
Wrong. If this is the case, you should be one of the sharks. The natural direction of business is always growth, and if you’re not taking advantage of high-value opportunities to expand a well-run operation, you’re missing the chance to strengthen the business community as a whole while rewarding yourself in the process.
The business owner who can’t get these things right is ultimately doing no favors to his employees, his customers or himself. I can understand why you don’t want to be prey for the sharks, but in the long run you’re probably better off taking a shark’s offer than continuing to struggle. And the shark can probably shore up your business in a way that you can’t – because if you could, you would have already done so.
So don’t be shy about hunting your prey if you’re in a position to be the shark. And if you’re not, you’d better start doing it right. You know how sharks get when they smell blood.
Written by: Wade Wyant
Red Wagon Advisors