Why not buy a better business?
The economic ripples of COVID-19 have led to something of a gold rush as companies scramble to pick up distressed businesses at knock down rates. Most industries, even those enjoying relatively healthy sales growth in 2020 have been buffeted by the consequences of the pandemic. As a result, the vultures are circling and buying up their distressed rivals or pivoting and snapping up distressed assets in new or auxiliary markets.
But why not buy a better business?
While companies are rushing to buy bargains, perhaps buying quality is a better option for your business. As with all other walks of life, buying something from the bargain bin is often a series of compromises in terms of quality and even longevity. Why not go for a top shelf, high performing business? In the current climate, there is a real danger that buying a distressed company could see you invest in something that may never return to its former glory.
Here are the pros and cons of buying a better business versus buying a distressed company:
| Buy a better business |
Buy a distressed business |
| Pros: Highly profitable Often high growth Few post-acquisition changes |
Pros: Much cheaper Willing sellers Add sales to your portfolio |
| Cons: High price Reluctant sellers Often reliant on a 'visionary' leader |
Cons: A lot of post-acquisition improvements Is poor performance a sign of poor culture? Potentially in terminal decline |
The ongoing demand for M&A opportunities in the face of a pandemic is obvious. COVID-19 has exposed weaknesses in many companies’ business models across all markets including:
- Dependencies – Many companies have been caught out with too narrow a product range.
- Exposure – Many companies are too reliant on too few big customers.
- Direct access to market – Many firms have been caught out by not selling direct to market.
Despite these clear business model weaknesses, most companies on the acquisition trail seem bent on growing their business by snapping up a distressed competitor in bargain deal. Buying a distressed company with one of the above deficiencies could see you catch a falling knife.
Clearly, the easiest of the three deficiencies to address is having too narrow an offering. There are opportunities to buy a strong rival, a company in a related market or even to acquire a customer.
The following is a list of the 10 industries with the highest proportion of strong performing companies:
| Industry |
Strong companies |
| Brickwork Contractors |
64% |
| Measuring Instrument Manufacturers |
63% |
| Air Compressors |
61% |
| Electronic Component Distributors |
59% |
| Seals & Gasket companies |
58% |
| Consulting Engineers |
58% |
| Civil & Structural Engineers |
57% |
| Control Panel Manufacturers |
57% |
| Electrical Inspection & Testing |
56% |
| Food Machinery companies |
56% |
Plimsoll can help you to identify good businesses to acquire across 1600 different UK markets and beyond. Whatever your M&A criteria, it pays instant dividends to have a pre-defined list of potential targets, a comprehensive list of alternatives and an in-depth understanding of the financial health behind each name. Plimsoll can help you build your list today.
Please visit www.plimsoll.co.uk to find out more about the industries that matter to you.
