CEOs: Will You Have The Bucks For Bargain Season?

Posted on May 17, 2016

For companies hungry to grow, economic slowdowns are the time to accelerate growth through acquisitions of weak competitors and by snagging market share at a bargain.  Here are five ways to prepare to be a power bargain shopper and build your war chest.

Originally posted on Forbes online: https://www.forbes.com/sites/robertsher/2016/05/17/ceos-will-you-have-the-bucks-for-bargain-season/

Companies that are hungry to grow should look forward to economic slowdowns. This time provides the perfect opportunity for companies to accelerate their growth by buying weak competitors and snagging market share at a bargain. But they can only do this if they have the capital. Now is the time to accumulate that war chest.

Long periods of economic expansion are kind to all companies, including slow-growth and weak companies.  However, late in the economic cycle (where we are now), it becomes harder for aggressive-growth companies to outpace average industry growth and still earn a reasonable ROI.  Without an economic downturn to cull the weak, the marketplace is crowded with sellers.  Aggressive companies are tempted to overpay for acquisitions.  They may overspend on marketing and business development to wrench away market share from competitors.  They pay high salaries to attract talent in short supply.  Attracting investment capital gets costlier, and interest rates on debt grows higher.

Spending big money on growth isn’t wrong; it’s how you grow when the “good times” have no end in sight.  But the end is in sight.  We are in the late stage of the current economic expansion.  Credit is starting to tighten a bit.  The stock market is turbulent again.  The demand for head hunters has eased just a bit.  We are at or nearing full employment (and you know what happens after most peaks). Everywhere I turn, I see small signs that the economy is slowing down.

I doubt it will be as epic a downturn as in 2008.  I hope not.  But even a small recession will provide an incredible bargain hunt for growth companies—if they have a strong enough balance sheet to snap up the bargains first.  What kind of bargains are in the hunt?  Bargain basement companies (who didn’t build their balance sheet), bargain assets (equipment, etc.), bargain technology, easy to land customers (when weak competitors make mistakes), and more.

I hope the next down cycle is one, two or three years away—it can take that long to truly prepare a company to be strong enough to be a power bargain shopper when the downturn presents.

Preparing to be a power bargain shopper means building a war chest within your balance sheet while your business (and the economy) is still in growth mode, as well as building a well-vetted shopping list.  You can do this by following these five steps:

1. Get efficient now.  Common wisdom is to emphasize efficiency when recessions hit.  But that’s too late.  After spending the early years of economic expansion focusing on sales, when the economic upswing slows, it’s time to get efficient and lower your costs.  But don’t give away the savings by decreasing price or spending in other areas—set aside the savings for the downturn.

2. Don’t overpay for growth.  Buying growth without consideration to price is wrong.  Enforce your hurdle rates and only grow if the ROI is good.  Venture capitalists and private equity firms are turning their noses up at overpriced deals.  They are becoming very selective and demanding a high price for their capital because they know we are late stage.  Follow their lead.  Having excess liquidity (or dry powder as they call it) is a good thing right now.  It’s true that you may grow less, or miss a few opportunities, but feel good knowing that your competition is overpaying.

3. Strengthen your balance sheet.  That means running healthy profits (if you can’t do it at this point in the economic cycle, you’re going to be in trouble soon).  Minimize capital expenditures.  Pull back a bit (maybe just 5%) on spending.  Nudge pricing up a bit.  Collect the overflow inside the balance sheet, pulling debt down, and short term assets up.  Build the bankroll.  At the same time, work to increase your borrowing limits so you have flexibility when you need it.

4. Nail down your growth strategy.  When the bargain shopping begins, you must be clear on what strategy you’ll be accelerating.  Are you sure geographic expansion is smart?  Is horizontal expansion prudent, and can you really make it work?  Do your homework, finish your research and run your tests so you’re confident in your next move.

5. Check out the merchandise.  Since you’re certain of your strategy, you can start the search for bargains (without buying).  What companies would you love to acquire?  What sales and marketing campaign would you love to launch? And prep for that campaign; target lists and other collateral and assets need to be prepared for a fast start.

With all that ready, just sit back and wait.  When the economy slides from late-stage expansion to early-stage recession, you’ll be armed and ready to start bargain hunting.

Companies that seek to grow aggressively must change their tactics in the year or two before the downturn begins.  This will position them to snap up bargain-priced market share, acquisitions, personnel and assets when the downturn arrives.