Record low interest rates mean an acquisition can kick start your growth

I’m sure you’re all familiar with the term ‘acquisition’ but have you ever seriously considered it a viable component of your growth strategy? At a difficult time in the economic cycle surviving rather than growing is probably your most pressing issue. But acquisitions can be, and have long been, an excellent way to quickly increase revenues, expand products or service offerings, improve market reach and increase enterprise and shareholder value. That all sounds good but what does it really mean?

When defining an acquisitions strategy, smart companies always start with a fine-tuned business strategy. Once that business strategy is defined, they then look at acquisitions as a potential tactic that can help them achieve that strategy.

A fundamental part of every business strategy is growth, which can be achieved in a multitude of different ways. By examining key rationales for acquisition activity, it may become more evident why including acquisitions in your growth strategy warrants a closer look. The following list of acquisition benefits is not comprehensive, but it is a good start.

Scale. Greater scale provides opportunities for profit enhancement across many aspects of the company and its operations.

Market share. Control a greater percentage of the total available market. Anecdotal evidence and economic theory suggest that long-run profitability increases with market share as it gives you the opportunity to be a price maker not a price taker.

Economies of scale. Decreased per unit cost occurs as output increases. By consolidating and eliminating duplicative departments, job functions and certain processes, thereby lowering costs relative to the same revenue stream, significant improvement in margin can be realized.

Distribution channels. New or additional channels for distribution can be more quickly acquired than developed. Established distribution channels can take years to develop and are usually not easily penetrable.

High cost of excess capacity. Excess or idle capacity is a killer on margins. Every unit of excess capacity carries with it an incremental piece of overhead. Zero excess capacity equates to the lowest cost per unit.

Convergence. Products or services that incline towards each other, rather than ones that run parallel, present unique opportunities.

Cost synergies. Significant savings are generally found in production and procurement, but also present in marketing and advertising.

Intellectual property. Firms in need of IP as part of their strategy can often acquire it more quickly and less expensively than developing it.

Countercyclical balance. Firms in cyclical businesses may seek to acquire businesses that are countercyclical to absorb excess capacity or idle production.

Resource transfer. Resources are unevenly distributed across companies and the interaction of the target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Vertical integration. Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers.

So if you believe acquisition should be part of your overall growth strategy, is now a good time? Mergers and acquisitions (M&A) deal activity has taken a precipitous drop over the last few years from the previous all-time highs. Economic factors are the key drivers behind reduced deal volume, particularly the severe tightening of the credit markets.

Although the global recession and constrained credit markets may make completing acquisitions more challenging, significant opportunities remain for well-positioned companies. Firms in stable, mature industries with strong balance sheets have opportunities not seen in decades. Lower valuations, together with fewer competitors capable of making acquisitions, indicates the time for making acquisitions couldn’t be better. Interest rates are at record lows and credit is still available for strong companies making the right acquisitions for the right reasons.

Start the new year off by giving growth-by-acquisition a serious look. First and foremost, know your strategy and take into careful consideration whether the cultural aspects of an acquisition, and the affect it will have on your employees, will be beneficial to your firm’s long-term viability.

Government freezes super guarantee

The government has announced that it will freeze the superannuation guarantee at 9.5% until 2021.  Under previous plans, the super contributions paid by employers had been set to increase in 0.5% increments from the current rate of 9.5% until they reached 12% in 2019/2020. It will now be 2025 by the time the guarantee reaches 12%. The rationale behind the freeze on super is that it will ease pressure on the federal budget, due to the significant tax concessions associated with superannuation contributions.

There have been many claims by superannuation industry representatives about how this will impact the size of future superannuation accounts. While these figures can only amount to speculation because nobody can accurately predict wages, fund growth rates and the future taxation of superannuation, it is certain that these changes will result in smaller superannuation accounts. It is also likely that the freeze will disproportionately affect younger Australians, women, low-income earners and part time/casual employees.

There are, however, some strategies that may be useful to individuals seeking to counterbalance the impact of the freeze:

  • Salary sacrificing into your super is a great way to offset the impact of the superannuation guarantee freeze. The money that you salary sacrifice into super, known as concessional contributions, will be taxed at 15%, which for most people is significantly lower than their marginal tax rate. Therefore, salary sacrificing is a particularly effective tax strategy for high-income earners. Concessional contributions are capped at $30 000 per year for most people and $35 000 per year for over 50s. For low-income earners, the government co-contribution is a great way to boost super balances. If you earn under $34 448, the government will contribute 50c for every $1 you put into your super account from your after-tax income (up to a total co-contribution amount of $500). If you earn anywhere up to $49 448, you may also be eligible for reduced co-contribution payments.
  • If you are a low-income earner or are taking a break from work, it may be worth investigating the possibility of your partner making super contributions on your behalf. If you earn less than $13 800, then your partner will be eligible for a low-income spouse tax offset with a maximum value of $540.
  • It may also be beneficial to re-examine your superannuation investment strategy, considering the returns and risks involved with different investment options. Your investment strategy choices should be informed by your age, retirement goals and level of comfort with risk.

Regardless of whether or not the super guarantee freeze has affected your superannuation plans, now is a good time to start putting some serious thought into your superannuation, and the retirement that you want.

Work smarter not harder in 2013

As the economic environment we operate in changes down a gear, we have seen a lot of businesses take a closer look at what they are doing and why, while others stick their heads down and pedal harder hoping things will go back to they way they were.  With the new year looming and businesses everywhere grappling with change, we thought it was timely to give you some ideas on how you can work more on your business, setting yourself up for a stronger year in 2013.  It’s time to work smarter not harder.

When times are good most business owners are focussed on the task in front of them and literally have no time to focus on planning as they need to deal with the customers or clients that have engaged them.

Then, when they get a sense that business is starting to slow down, they get nervous and focus even more closely on the current needs of the business, rather than looking into the future.  As humans we are all creatures of habit, so often, pedalling harder in our businesses along the same road is the easiest and most comfortable thing to do when times get tougher.  But is it the right thing to do? Or could you get there faster by standing back and selecting a shorter route?

We all know that family business owners are among the hardest working people in the community. They are often the first to arrive and last to leave their workplaces each day. They deal with all facets of their business from operations, marketing, staffing and administration to name a few, with each area’s complications adding to the stress of being a business owner.

Not only are family business owners good, hard working people, but they also like to think they are good planners.  But in reality, in almost every family and small business, there is simply not enough emphasis on planning for the future, on working smarter not harder, or on finding a shorter route to the goal.

But if you are a business owner, how do you get from working in your business every day, to working on your business? And what might it do for you in the future?

In principle, working on the business is taking time out to determine your personal objectives and the objectives of the business. (Please note this is not always making more money, it may be to reduce risk or have more personal time or less stress or all of the above.)  When business owners work on their businesses they could be:

  • developing a plan focussing on the objectives set.
  • developing an annual budget which is reviewed periodically knowing profit expectations, capital needs and cash flow needs.
  • determining the people resources required to achieve their objectives. To share your vision and to create a culture that develops your team into “doers” .This includes setting the values and ethics they expect within the business.
  • creating and implementing a sales and marketing plan, to assure you and your team, there is adequate revenue flows and revenue sources.
  • putting in place a programme to make sure you are up to date with your products and services, as well as pricing.
  • reviewing processes and procedures to maximise efficiency.
  • understanding variable costs and fixed costs to allow the business to manoeuvre when there  is a change in the market.
  • ensuring they have a good focus on the industry and the customers to understand change and the evolving needs of customers and clients.

Working on the business requires taking time out to develop a well thought out plan, programming the plan then executing that plan. The difficulty is that it is easy to fall into the habit of going back to “working in your business“  and getting distracted from the implementation.

Our team often gets called in to be the independent person that assists with the development of the plan, execution of the plan and sorting the programme from month to month, keeping the business owner and their leaders executing their plan on a controlled basis.

So why not start working on your business now for 2013.  You can start by considering the changing economic environment and work through each of the items below to form plans for your coming year.

P lanning

P rojecting/budgeting

P ricing

P roduct/ service

P romotion/marketing

P remises and location of the business

P eople within the organisation

P rocesses and expectation

Or you can give us a call  and we’ll help you with it.

You can be sure that your competitors are making plans to improve their share of the changing market.  Isnt it time you did too?

Glen Stapley is an Associate Director of Prosperity Advisers Group.