How to buy in the coming acquisition target rich environment
I have had recent conversations with folks in the business about the acquisition opportunities that will be available in 2016. Many feel the impending bankruptcies will provide virtually unlimited opportunity to acquire assets at basement prices or below. It will be a buyer’s market. However, based on the experience I had in the Oklahoma in the bust of the 80’s, it won’t be as simple, nor as straightforward, nor as ruthless as they seem to envision.
In the mid 80’s, I was working with a small operator who has since done very well, the assets we acquired during the late 80’s provided the basis for his dynamic growth in the last 25 years. At that time, the FDIC controlled most of the industry in Oklahoma, by virtue of the numerous bank failures due to poor lending practices. The system that evolved was, an operator failed to pay the bank, operator filed for bankruptcy, the court took control, and would put the assets up for sale. Potential buyers would submit bids, the Bank (FDIC) would bid it’s entire outstanding debt on the properties, the court would award title to the Bank (FDIC). The bank (FDIC) would usually sell the properties back to the original bankrupt party as long as they had some semblance of a possible ongoing business, under new terms that the assets could handle. The other bidders served to give the Court an evaluation and to price the deal that was already in the making. We pursued several bankrupt auctions before we understood the process and changed our acquisition strategy.
It seemed that, while there were many exceptions, the predominant cases handled by the bankruptcy court were generated by companies that were not well run, often with no real substance to their business. They had simply developed a scheme to take advantage of the easy money that was flowing from the banks during the boom. There were few with the type of assets that an operator could acquire and build upon. A similar phenomenon exists today.
We had the most success in finding opportunities before they went to bankruptcy. That usually required an ethical seller, who’s business practices were solid and had just got caught in the price squeeze. The assets they controlled were worth owning, they just weren’t generating the cash to service the debt. The deals were fair, reasonable for both parties, a good buy, but not the ruthless winner take all deal like many envision. Ruthless approaches did not work with any situation, no matter how desperate the seller was.
The 80’s boom was primarily bank financed. This time, there is much more private equity financing in the industry rather than bank financing. It will take a while to see how those situations are resolved.
As a sidenote, I recall that many of the attorneys in Oklahoma City who had done well with commission work during the boom instantly became bankruptcy attorneys. They were hosting seminars at the local Holiday Inn inviting everyone to come learn how easily bankruptcy would solve all of your financial woes. I was invited several times, but never attended one.
My bottom line is that this is a tough business, no matter what the economic environment. There are going to be good deals to be realized, but they are going to take a lot of fundamental evaluation work and sound acquisition strategies. It requires conducting business with a degree of compassion for the seller, even desperate people deserve respect. Most of the people in the present industry haven’t experienced the unraveling of the financial mess we have on our hands, so there will be a steep learning curve on all fronts. As Yogi Berra said, “its Deja Vu all over again”.
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