Javier Zarraonandia
Corporate Development Director
2021 has been a year of contrasts in terms of business performance, with some extremely dynamic sectors and others that are suffering the effects of the pandemic.
The appearance of new and unforeseen variables such as inflation, supply chain difficulties, energy costs, etc., have slowed the recovery. It is now a given that we will have to know how to manage the permanent uncertainty regarding the evolution of multiple economic variables and the lack of long-term visibility for the foreseeable future.
As a result of this new crisis, we are reminded of the structural challenges facing SMEs in particular, which make them more vulnerable to crisis situations and delay or limit their ability to take advantage of the opportunities for recovery, such as the ones on the immediate horizon.
The structural challenges I am referring to are:
1: Increased capitalisation
The crisis has once again highlighted the reduced capitalisation of a large number of companies with financing structures that rely heavily on debt.
This lack of equity capital makes companies much more vulnerable and slower to emerge from the crisis since they do not have the financial resources to grow.
How to resolve this situation is one of the issues that must be addressed in order to emerge stronger from the crisis. Assessing whether the situation can be solved alone or whether third party support is needed, where and how to look for capital, the type of potential partners (industrial, financial), how to articulate the entrance conditions, or even the sale of the company as an alternative, are some of the issues that must be addressed to be successful.
2: Gaining in size
Small size is another aspect that characterises our business fabric. In times of crisis it becomes more evident that size DOES matter.
In situations like the current one where demand is contracting, organic growth is difficult, but there are opportunities for inorganic growth. Partnerships, integrations, and the incorporation of industrial or financial partners are options that are within reach and can be considered.
We are experiencing a period of technological revolution as a result of the massive introduction of 4.0 technologies in all sectors, along with the energy and environmental transitions taking place around us, all of which makes this an especially interesting time to analyse the acquisition of companies that provide us with markets, technologies, volume or diversification.
When analysing the alternative of inorganic growth, it is essential to consider the following aspects:
-The ability to lead
-The existence of a project with clear and achievable aims
-The availability of management capabilities to lead the growth process
-Interest in sharing the project with third parties
If, as a result of reflecting on the aspects mentioned above, the decision is taken to embark on a growth process, the financial resources are not difficult to obtain for high quality projects. Where leadership capacity is lacking, the most advisable alternative is to sell / integrate and let others do the rest.
3: International expansion
International companies are more resistant to adverse situations and benefit in times of recovery.
Initiating a process of growth or diversification by acquiring a company is an alternative that has clear advantages, although it requires advance preparation and resources capable of managing the new dimension and remoteness. Adequate selection of the market, the local partner, or the target company for acquisition or integration is essential. In fact, a well-designed internationalisation transaction can be the best way to gain in size, knowledge, technology, product or market.
We are currently experiencing a boom in international transactions. In fact, in 2021, 30% of the transactions closed by IMAP Albia Capital worldwide were international in nature. In view of this, our business fabric must be prepared to face this challenge and in all cases we would recommend seeking the advice of experts in these types of transactions.
4: Succession and business continuity
At IMAP Albia Capital, we often encounter situations in which our clients are faced with the dilemma of how to couple the challenges and opportunities of the company with the personal situation of the owners/shareholders and the need to put a succession plan in place. Thinking through the continuity options and planning the process is critical to the company’s future.
In the medium to long term, the worst option is to make no decision at all. Every situation is different and there is a lot at stake (employees, customers, suppliers, family assets, etc). Therefore, when analysing personal, family and business circumstances, it is best to take decisions that consider both the development of the business project and what is best on a personal or family level.
Deciding to sell a company is an alternative that often places a strong emotional burden on the owner (giving up his creation). There are other possible options that can be considered, such as integration or searching for a new partner to bring renewed momentum to the business.
Rushing deadlines or delaying decisions to resolve the problem of continuity are understandable from a personal point of view, but they can have a negative impact on the options available to conclude the process successfully. Hence, the importance of planning and being realistic when considering this vital issue.
Conclusion
The aspects discussed above are often interconnected with each other and should be part of the company’s corporate strategy.
The economic outlook for 2022 presents us with significant opportunities for growth (not without uncertainties), making it a good time to undertake new challenges to improve our competitive position. The liquidity existing in the market and the multitude of investors and financing options for business projects offer an exceptional opportunity to begin to tackle these challenges, slowly but surely, this year.