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Kenny Rogers – The Gambler Lyrics (1978)

If you’re gonna play the game, boy you gotta learn to play it right

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

Yes, I am showing my age here by quoting lyrics from a 1970s song.

Hold them or fold them?

I never cease to be amazed at business owners who think that their industry will remain stable in the face of overwhelming evidence to the contrary.  Business owners who operated a successful business are surprised that a few years later they are largely irrelevant.

We advised a company that saw the opportunity to rationalise what was then structured on state lines.  We attempted to acquire some compatible businesses.  One of the target company owners felt that they could prosper from the changes in the market rather than be overwhelmed by it.  We offered a very fair, if not strategic price, for their business, however the owner wanted almost 50% more again.

Our client declined and we went down a different path over the next two years taking it to one of the three major groups.  The vendor who we approached came back saying that they were now willing to sell at the price we offered.  The problem for the vendor is that they were no longer needed by my client and we were only willing to pay a modest price for the business.

By ignoring seemingly obvious changes that were likely in their industry, the vendor destroyed much most of the value they had created over many years.

Michael Porter’s Five Forces Model is a useful framework to gauge the impact of the trends in an industry and who are the likely winners and losers.  Porter considers that the five key forces in an industry are suppliers, customers, substitutes, potential entrants and direct competitors.

How the power between each of these groups shift will impact the strategic position, profitability and value of businesses in the industry.  Considering their strategic positioning is even more important for small and medium sized businesses as they may be the target of acquisition plays, become irrelevant in rationalisations and may be squeezed by the increasing power of customers and/or suppliers.

The adage that in a maturing industry is that you need to choose from one of

1)    get big,

2)    get specialised or

3)    get out

How is the power shifting in your industry and what are you going to do about it.

Don’t count your money while you are sitting at the table

There have been a few notable times over recent years where irrational exuberance has been at the fore (such as tech boom, mining boom, residential real estate?).  People were convinced that the market price of the asset would continue to rise from their already frothy values and adjusted their expectations accordingly, always wanting just that bit more before they sold – only to be burnt after the correction.

How many times during the past few years have I heard business owners say they can’t possibly sell their business for the current market price because it is well below what the business was worth pre GFC – sorry that horse has bolted.

You gotta learn to play it right

Endeavour Capital can assist either buyers or sellers of businesses achieve their strategic outcomes.  We recommend that a business focus on being exit ready and take succession planning actions early to reduce or eliminate the key issues of owner dependency well before they decide to sell the business.

 

 

Peter Wallace

Endeavour Capital

Sydney

 

 

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