Aquiring a struggling business

Article by: Moshe Katz

CEO

MK Consulting, Management and Business Development Ltd.

September 2020

Introduction

Acquiring a struggling business is a very tempting choice allowing to overtake an organization at a very low cost.

However, the biggest and most substantial question is what happens the day after? If it is so great, why is it so often a failure?

To answer these questions, let us start with reviewing the events previous to this "opportunity":

- How does a business become a struggling business?

- What happens to the business during this time period?

- What are the issues that the business is dealing with at the peak of its crisis, once its already for sale?

- And lastly, what does it mean to take over the responsibilities of a struggling business?

Then, we will try and define the keys to successfully pull a business out of a struggle:

- Which keys are available and / or required?

- Which keys can stand for themselves (or almost for themselves)?

From there we will go to the model of building an infrastructure to pull a business out of a crisis.

How does it happen – Chains of Events

A crisis can be initiated from many different events, processes, and situations, for example:

- Managerial difficulties=>Loss of Talents=>Market Weakness=>Decreased Profitability =>Losses=>Technical/Technology Weakness=>Market Weakness=>Decreased Profitability...

- Market Failure=>Decreased Sales=>Losses=>Cash Flow Shortage=>No Investments=>Lay Offs=>Outdated Technology=>Decreased Sales=>Losses=>Cash Flow Shortage=>No Investments...

- Unsuccessful Investment=>Cash Flow Shortage=>Layoffs=>No Investments=>Decreased Profitability=>Losses=>Cash Flow Shortage=>Layoffs=>No Investments=>Decreased Profitability...

- Outdated Technology=>weakens the market position=>decreased profitabilit=>Losses=>Cashflow Shortage=>Loss of Talents=>Loss of Markets=>losses...

As just shown, A crisis can initiate from many different events, processes, and situations. However, two things we can say almost for certain:

- When a crisis is revealed, it usually happens in the financial aspect - loans are difficult to repay, it is difficult to pay vendors on time - in short, the company faces insolvency or is close to it.

- Although the crisis is revealed in the financial aspect, by this point all or most of the business’ legs (finance, operations, technology, Sales & Marketing and even HR) are failing and are maybe even crippled.

More often than not, one day after closing the excels indicates a rise in sales, improvements in finance, loans being repaid and support from bank is granted.

In reality, the business continues to bleed, the banks are still reluctant to participate, the human capital abandons and the losses accumulate.

The steps and Keys to successfully rebuild and\or integrate a struggling business

Firstly, we begin a process of due diligence, even though there is high pressure to conclude the deal as timing becomes more and more critical. We must not cut corners because of the pressure – we should go by the book and even more than ever – it must be coordinated and managed professionally in order to fully understand all the issues and build a realistic plan containing actions and resources needed with realistic time tables.

Which keys do we possess and how we should use them?

The three keys to successfully integrate a business in crisis:

- Upgraded Management - theoretically, new management comes in with proven successes, experience and connections. All of that in comparison to management proven as failing.

o This is an important yet misleading key – yes, it can treat all damaged legs by recruiting talents and resources but:

§ One should not judge the quality of the decision making by management in times and in a position of crisis

§ These processes take time, during which more and more damages pile up and the financial pressure grows. Meaning, it is very well possible that this key already exists in the business but lacks the means to pull the cart out of the mud. However, it is important to remember that even if we empower this key it is still not enough on its own.

- Finance/Money- we prepared the funds to purchase the new company and support it until the sales go up, however:

o We need a plan to rehabilitate and restore the damaged legs of the business- a process that requires money, these funds should also become available - before the closing!

o Rehabilitation takes time, in which the company continues to operate as before therefor continues to bleed, and the banks will not support the company. Hence, the funds to cover the continuous bleeding should be available - before the closing!

o Meaning- this key, if designed and prepared well, combined with the previous key, may be sufficient.

- Synergy - the most elusive yet probably the most important of all keys:

o Whether it's a horizontal synergy, or a vertical synergy, with the right approach and organization culture we could be capable to take advantage of the synergy immediately, not only from the market point of view but also make other existing resources available to support the rehabilitation of the acquired entity: technology, operation, marketing, R&D, etc., meaning strong synergy (mainly horizontal) could instantly become a multiplier and could support the damaged legs in a short time

o This is the only key which, in certain conditions, might stand on its own. However, is still requires time and money, though not as much.

In conclusion

The chance is good, and the opportunity is exciting and tempting. And yet, we must understand the risks and challenges we will face and prepare a realistic plan.