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Considering opportunities for growth

Considering opportunities for growth

Local Insight by a director with accountants and business and financial advisers, HLB Mann Judd Sydney

Despite ongoing talk of recession and unemployment, many businesses may be starting to feel more optimistic about the future, particularly with the Government’s 50 per cent investment allowance for small businesses which could stimulate demand for IT purchases.

As a result, some businesses may feel this is a good time to look at growth or expansion opportunities. However, businesses should remain very cautious about extending themselves, as the economic situation continues to be very uncertain and the IT market remains volatile.

The Government’s actions may provide a temporary stimulus, but it remains only temporary, and any increase in sales or revenue as a result of this should not be included in long-term forecasts. In addition, most experts are still forecasting rises in unemployment which will undoubtedly have a negative impact on consumer and business spending.

At the moment, good business sense is to keep focusing on the basics and make sure they are being done well, rather than considering a move into new areas. But for those businesses that believe they are well-positioned to expand or grow, there are a few important considerations in the current environment.

USE DEBT CAUTIOUSLY

Only those businesses with very low gearing should consider using debt to fund growth or acquisitions. While interest rates may seem very attractive at the moment, the lesson learned from the current cycle is that debt and capital markets can change with a speed and severity never before seen in modern economic times.

As a result, it is expected that banks will be increasingly vigilant about the credit-worthiness of loans. Not only is it likely to be harder to get one, but the terms will be much stricter than they were in the recent past and any deviation – such as a late repayment – is likely to be dealt, for the time being, with a higher level of scrutiny and intrusion (and cost) into a business’ day-to-day affairs.

TAKE MORE TIME

In a non-competitive environment, vendors should be agreeable to much longer periods of due diligence. Businesses purchased after a considered and thorough due diligence process are less likely to surprise purchasers with lower than expected earnings, cost synergies, or higher than expected integration costs.

OPPORTUNISTIC OR PART OF THE PLAN?

Is the intended purchase opportunistic or does it form part of the long-term business plan or growth strategy? Opportunistic acquisitions should only be considered if purchasers can afford to lose the money; however, careful due diligence is still required. Problem purchases can distract from ‘core’ business and result not just in the loss of the investment but can also destroy significant value in existing businesses.

CONSIDER SMALLER ACQUISITIONS

Integration and management of acquisitions is a skill in its own right. Business owners that have only ever grown their business organically in the past will find that it pays to start small.


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