Acquiring Troubled Companies in Today’s Economy

In a receding economy, well-managed companies have an opportunity to capitalize on the weaknesses of their competitors, according to Vistage International speaker Ed Freiermuth.

During a recession, most companies struggle to deal with shrinking revenues. But those with a sound balance sheet, strong cash flow, and the ability to plan beyond the downturn can do more than just survive; they can grab assets and market share by acquiring weak competitors.

“An economic downturn provides a great opportunity to buy assets, customer lists, and inventories from struggling companies,” says Freiermuth. “Now is the time to identify direct competitors who might be vulnerable. Don’t buy anything yet because valuations are still too high. But several months down the road, companies will start dying on the vine. When that happens, move in and acquire assets on the cheap.”

To identify potential acquisition candidates, Freiermuth recommends the following:

  • Study the financial condition of your competitors. Public companies have to file SEC reports, which contain a wealth of information and are available to the general public. You can also get information via Web sites such as www.freeedgar.com. For private companies, you can obtain varying amounts of information from Dun & Bradstreet reports.
  • Compare competitor information to industry statistics. Many companies use the “Robert Morris Annual Statement Studies” to benchmark their performance against their industry as a whole. Use this information to track how well your competitors are faring.
  • Find out which competitors are accepting business you turn away. Companies in dire straits often accept risky business because they have no other choice. Pay close attention to competitors that you know are taking on unprofitable business.
  • Conduct your own research. At trade shows and conventions, talk to your counterparts in competing companies. Ask questions such as, “How’s your business doing? How’s your bank treating you? Are you having difficulty getting supplies?” When companies get in trouble, says Freiermuth, CEOs blame their bankers.
  • Talk to your suppliers and customers. They know who is doing well and who isn’t, and will tell you if you ask.

“Gather information from as many sources as you can,” advises Freiermuth. “Pay close attention to the early warning signals so you know which companies to pursue.”

Contact Lois Arbogast: lois.arbogast@vistage.com, Vistage International 858.509.5861