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March 29, 2009

Pulling Off an Acquisition in Today's Economy: Risks and Rewards

In our talk with Wharton lecturer and author Robert Chalfin, CPA, JD, we asked about the advantages and disadvantages of buying a business i

In our talk with Wharton lecturer and author Robert Chalfin, CPA, JD, we asked about the advantages and disadvantages of buying a business in today’s economy.

“In this economy, there will be a tremendous number of benefits,” says Chalfin.  “When you read about a business that closes, you think about those who remain in the industry who will benefit when the economy turns around.” When we emerge from this economic downturn, he says, those businesses will be well positioned with less competition.  So, an acquisition in today’s economy may make sense if the buyer has enough capital to weather the downturn. Then, when the economy comes back, the business will have fewer competitors and more opportunities to grow.

Banks aren’t making loans that don’t make sense anymore, says Chalfin. “But a lot of community banks are still lending money. In certain industries, money is available. Banks make money by lending money. When they lend they may require more from the borrower in terms of equity from the borrower, personal guarantees, loan covenants, and possibly co-signers. There is money available, but lenders are more careful.”

Chalfin says there’s another potential advantage to buying a business today: it’s easier to find good talent at a reasonable cost. While you don’t want to take advantage by underpaying good talent (because if you do, they will likely scramble for the exits the moment the economy picks up) people may have lower expectations in this market. They may not have a sense of entitlement around bonus pay or perquisites, for example, that they had just a couple of years ago.

Of course, buying a business in today’s economy has certain disadvantages. Some industries are undergoing significant, fundamental changes due to a combination of economic forces and technical innovation. “Say you buy a company tied to a sector of the economy that is going through big changes,” says Chalfin. “An industry could face big structural changes in the coming years, and today’s buyer could be stuck with an obsolete business.” On the other hand, he says, “The situation may present opportunities to a nimble and agile buyer.” Or, he says, think about how new players like Google, Craig’s List and eBay have affected businesses. “Five years ago, you called a travel agent; today you go online. And today you may visit a bookstore; many people buy books and music on the web. It’s a question of what else will change over time.“

But, he says, if you have a well thought out business plan and a valid business model, you will be prepared to adapt to change.

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