Business Fundamentals: How to Survive and Thrive in a Downturn
The cost of living crisis has been impacting businesses and consumers for almost two years now and has presented significant challenges for UK businesses, not just consumers.
Businesses are facing rising costs caused or accelerated by the crisis: wages, rents, transport, utilities, supply chain and running costs have all been steadily increasing. Against that backdrop, the difficult decisions to increase prices, find efficiencies and/or reduce staff levels will be familiar to business owners and managers. Many professional services business leaders have not operated through a downturn – so how can you best position your firm to survive and thrive in this environment?
The Garwood team have built a model to help businesses like yours survive. Our ‘Survive, Stabilise and Succeed’ model draws upon our experiences of successfully guiding organisations through past recessions and adverse economic conditions and outlines the 3 distinct phases that your business will likely transition through during a downturn:
Survive: First, you have to survive the actual downturn. As opportunity flow slows down and budgets are cut, you start to see your revenue diminishing.
Stabilise: Then you have to find the bottom. You can only regrow once you know you’ve hit the bottom.
Succeed: Then it’s time to rebuild, and grow on the other side of the curve.
Fundamentals For Surviving and Thriving in a Downturn
To transition through these three phases, there are some core fundamentals to have in place. This is particularly important if making acquisitions or exiting the business at some point is part of your plan: be able to effectively demonstrate and articulate the strategy and the steps you have taken to preserve and grow value.
Fundamental 1: Strategy
The temptation is to be too focused on internal costs. However, now is the time to take the opportunity to invest strategically in your people, systems and infrastructure.
The ‘survive’ phase provides a great chance to focus on your customer. Start thinking about your systems and processes and building them around your customers so that when you do emerge to the ‘stabilise’ and ‘succeed’ phases of your model, you are positioned well. Ensure that your operating model is aligned with your revised strategy.
Acquisitions need to be consistent with your existing strategy. The first challenge in any kind of bolt-on acquisition plan is to identify the solution or skills gap that you’re looking to fill.
Following that, you’ll want to find the right target acquisition. It’s worth noting that organisations are rarely perfectly shaped to your requirements. They may have a degree of “appendage” or non-core business that either overlaps with what you already have or is outside the market in which you are operating. The key here is to determine how many features you’re getting that you don’t want or need, compared to the ‘jewel in the crown’.
Fundamental 2: Value Proposition
To maximise your deal value, you must genuinely understand the potential of your own firm. Potential for a professional services firm can encompass many things, but ultimately it’s about the premium nature of the clients, the degree to which they are ‘sticky’ and the level of onward commitment from them (recurring revenue and earnings visibility).
Driving value for a sale relies on articulating the investment case correctly, tailoring the message to the audience and creating a competitive process: any business is worth only as much as someone is willing to pay for it, so positioning the business in the right way with the buyer audience is essential.
Fundamental 3: Talent & Leadership
One thing that holds organisations back on the ‘succeed’ phase of the model is that you often find yourself in a war for talent. This leaves you in a position where you can’t recruit people fast enough.
For example, during the first lockdown, one business we worked with was running at around 50% of regular revenue, and the decision was made not to let people go. When the market returned, the business was then in a robust position to capitalise on the growth available because they weren’t out trying to recruit people to deliver; they were ready to go.
Communication during all three phases of the model is critical. It’s not just about putting out a press release; everyone must be bought in and driving the process. For a deal to be successful in terms of integration, you need champions throughout your organisation – not just at the C-suite level.
Fundamental 4: Core Operations
If you need to right-size your business, it’s vital not to shy away from difficult decisions, particularly in the early phases of the model. That said, if you can give yourself the bandwidth to ‘survive’ and ‘stabilise’ without a big restructuring then you’re likely to be in a much better position for the subsequent phases.
The use of technology in tough times becomes increasingly essential too. There are lots of systems and software that you can use to streamline your core operations and adapt to the changing environment. The integration of support systems, such as operational management, finance, CRM, and HR, are all essential infrastructures for running a high-performing professional services business. So exploring automated solutions that bring all your core systems together can provide the operational glue you need to thrive. We specialise in advising on and implementing such PSA (Professional Services Automation) software
In the early stages of post-merger or acquisition, securing the underlying technology platform and integrating technically with the acquiring business or parent company is critical, and no matter the degree of complexity the key is to consider it early, ideally prior to acquisition.
Fundamental 5: Finance
Whenever you’re faced with a downturn, remember: Cash is King.
There are some simple actions that you can take to make sure that you’re quickly collecting what you’re owed. You need a strong hand at the tiller (particularly CFO and core finance team) to keep an eye on cash flows, and working capital management and to ensure that you’re keeping your head above water.
Critically you’ve also got to right-size your capital structure: look at your debt-equity mix, overall financing arrangements, and flexibility. With rocketing interest rates hitting lots of businesses hard, you want flexibility within your financing arrangements and covenants to execute your strategy.
One of the challenges often seen in the professional services sector, more than other sectors, is the tendency to make people redundant prematurely. This leads to the war for talent we mentioned earlier, with everyone trying to hire the best people six to ten months later.
With flexibility in your funding structure, you can minimise the potential negative impact of right-sizing. Remember, there is opportunity as well as crisis on the table here. Make sure you’ve got supportive debt providers and supportive equity providers (to the extent that you’re backed by private equity) and can negotiate the flexibility to remain fleet of foot in a demanding environment. Tough conditions in your sector can create opportunities to acquire competitors, take capacity out of the market and re-assess pricing.
How do you best sell your business and get value for it?
Selling your business is a big step, whichever phase of the model you’re in; we can help you explore and embark upon this process, with confidence that you’ll get the best deal from trade, private equity and the public markets, as appropriate.
Preparation is vital. Ensuring that you have the right team, and the data quality that demonstrates the visibility of revenues and earnings is critical to getting the house in order before you come to market.
Having sold and bought professional services firms, we’re highly experienced in getting under the skin of a target business, building strategic alignment, reducing risk, validating strategies, driving cost savings and process improvements, streamlining systems and optimising exit value.
So whether you’re looking for support with operational due diligence, operational plan validation, value maximisation, post-acquisition performance improvement, or exit structuring and negotiation our experienced team is here to help you on your M&A journey.
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