Buying struggling companies: where should I look?

Our industry is currently being inundated with businesses going under. I’d like to talk to the right companies as they teeter on the edge to see if we can make acquisitions. How can I find these businesses without knocking on everyone’s door? Surely there are agencies that are working with the banks and insolvency practices to bring interested parties together, where one plus one makes three or four.

A. David Watt writes:

There is no quick fix in this situation and you’ll need to do a lot of groundwork to identify targets. Unless you have access to confidential knowledge from an insider, you’ll have to get your head down and do as much digging as you can.

Merging with a company that has a weak balance sheet is always risky because you’ll need to alleviate some of the strain. But if you have strong cashflow, there is plenty of scope for growth and ultimately overcoming the odds.

Carefully build a database of competitors and suppliers that have a certain amount of synergy with your business. Then download their financials from Companies House. Examine their balance sheets, and try to get their hands on more detailed information, along with a history of their activities, if possible.

Once you’ve done this, there are several poor performance indicators to look for. These include: the late filing of accounts; mortgages on assets; negative net worth; high fixed assets – what is the true worth of these?; the results of an acid test ratio – this is the value of the current assets divided by the current liabilities. This final indicator gives you an idea of what can be converted into cash – a +1 ratio is good, while a -1 ratio is bad. You should also take into account any relationships with related companies that share the same directors, but are not otherwise legally linked. There may be loans between each of the companies that are only adding to the balance sheet problems.

There are other ways to keep abreast of failing companies. Public companies must inform the City of their performance and industry trade publications report on firms in trouble.

But if all of this seems like a lot of hard work and far too risky, there are alternative growth strategies that can be just as fruitful. You can always pick off clients from failing businesses or even recruit complete account teams. This approach eliminates the need to buy the business, but can still give you the experience, knowledge and clients to take your business forward.

David Watt is the managing director of Corporate Innovations, the customer experience marketing company he acquired through a management buy-out, which he led in 2003. www.corporateinnovations.co.uk

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