The New World of Transactions

Financial markets are constantly moving, in an ebb and flow that creates both opportunities and obstacles that business owners must assess on a daily basis.The ability to understand those obstacles and opportunities within any market is what can make a major difference in success or failure, especially when a business owner is planning to buy or sell a business.

Now, more than ever, business owners at all levels of business are being impacted by large international market trends. Today’s business owner must understand this big picture, and how it effects the nuts and bolts that determine a business’ success — things like the ability of a business to get a loan, match up with international competition, and develop a supply chain. Since the 2008 recession the world economy has been limping back to recovery with slow growth, tight credit markets and little job creation in developed countries. As a result, many will argue that there has been a fundamental shift in how businesses are operating and growing due to this downturn. Other factors such as cheap foreign labor markets and technology have also shifted the business landscape. So what does this mean for a business owner looking to buy or sell a business? I think it is important to look at where the markets are today from a high-level viewpoint and then dive into the details.

The World is Flat …

We now live in a global, information age economy where a 20-year-old college student has the same information at his fingertips as a Fortune 500 CEO. This has leveled the playing field in many ways, but also made the markets much more volatile. Information overload is both an obstacle and an opportunity to any business owner. Thomas Friedman captured this shift in our global markets well in his book “The World is Flat”:

“Well, here’s the truth that no one wanted to tell you: The world has been flattened. As a result of the triple convergence, global collaboration and competition — between individuals and individuals, companies and individuals, companies and companies, and companies and customers — have been made cheaper, easier, more friction-free, and more productive for more people from more corners of the earth than at any time in the history of the world”.

To many this may come off as discouraging but for the glass-half-full individuals this type of competition and free-flowing information creates opportunity. Although the world has been flattened, which has increased availability of information and heightened competition, it does not translate into an environment where everyone interprets that information correctly and thinks strategically. The advantage in the marketplace now comes in the form of thinking and acting deliberately and strategically. In order to do this every business owner must take a macro and micro view of the landscape before making decisions on whether to buy or sell a business. Here are three areas to consider when thinking strategically about buying or selling a business.

  • Technology: Technology is a constant threat and opportunity in the markets and an area that every business owner should be watching closely. There is a constant struggle between the large companies and small companies that are seeking to set the standard for new innovation. This struggle is usually decided by the customers and end users, and understanding this behavior is crucial to buying or selling a business at the right time. A good example of thinking strategically about technology was Google’s acquisition of Android in 2005 when it was only a 22-month-old start-up and well before the mass adoption of smart phones and tablets. Android is now the core of Google’s operating system that powers nearly 300 million smart phones and tablets. Google purchased Android for an estimated $50 million at the time. This type of foresight and timing can make significant difference in the growth of a business or the price a seller obtains for their business.
  • Policy: The information age has made policy-making a spectator sport and as a result the markets are extremely reactive to what happens at the local, state and federal level of legislation. This has been witnessed in the last two years by unprecedented cash on the balance sheets of Fortune 500 companies (between $1 trillion and $2 trillion) or the most recent downturn in Apple’s stock, which many credit to investors realizing capital gains prior to changes in tax rates and the uncertainty associated with resolving the fiscal cliff. This can be viewed as a positive indicator that the money will need to reinvested back into the market and strategic acquisitions could be one of the best uses of that cash. A sobering example of policy effects happened to Health Plan One, a health insurance agency that sells private policies, fell victim to policy changes when the Obama health care bill was upheld in court. Health Plan One did not react to the changes of policy in time and ultimately their business became obsolete. Monitoring policy and how it affects business directly and indirectly is a key way of thinking strategically and gaining an advantage when buying or selling a business.
  • Globalization: The globalization of modern business has made the markets infinitely more complex but also opened up many new avenues for business. Globalization has changed the supply chain, labor markets, commodity markets, and capital markets which are crucial to making any decision to buy or sell a business. A business model can completely change overnight based on changes half a world away. There is no better example than the opening of the China and India markets in the late 20th century. This newly available cheap labor for back office and manufacturing changed Western business markets forever. Although this negatively impacted the United States’ and European Union’s labor markets it improved the margins and efficiencies of companies. As a result, this made some companies more attractive to sell and also gave companies increased cash flow through improved margins that could be used to buy companies. These global economic shifts also increased market activity in new areas of the world. In 2012, China set a record spending $10.5 billion on U.S. company acquisitions. This type of activity and globalization has greatly expanded the potential for buying and selling businesses.

There is always opportunity in every free market environment. Making good buying and selling decisions in the modern day market is simply about discipline and looking at the subtle cues that matter within the mass information available. The global economy and easy access to information is only an advantage if one knows how to analyze and think strategically about the information at hand. Make it a practice to find new ways to think strategically and find those opportunities within the information age.