KEY POINTS:
The holidays are over, and now is the perfect time to get an advantage over competitors.
Smart business owners should be examining whether they're the natural owner of the assets they own.
If they are not, they should sell and use this valuable capital to acquire
other businesses or invest in their core activities. In doing so, they will strengthen their long-term position.
The assets may take the form of different geographic divisions (e.g. factories in Sydney and Auckland), businesses in different parts of the value chain (e.g. a sales business and a distribution arm) or even different plant and equipment.
What does it mean to be the natural owner of an asset? The natural owner is the business which can extract the most profit from the asset.
Imagine two competitor companies with divisions that package beef.
Company A would be the natural owner of Company B's packaging division if it could use spare capacity to process beef more cost-effectively than Company B.
Conversely, a jam-manufacturing business might not be the natural owner of its distribution business if it is paying high costs for distribution services that could be substituted by an existing distribution business for little cost.
Identifying the natural owner is a challenging and sometimes complex task. Companies doing this analysis should consider other businesses, probably competitors, who might run parts of their own business more profitably - because of spare capacity, greater management skills, or access to valuable sales channels or products to name a few advantages.
In a recent commercial due diligence engagement Temple undertook, we estimated a competitor's costs to serve customers currently managed by a division of our client and found they were 78 per cent lower than our client's division because of spare capacity and specialist skills. The competitor was clearly the natural owner of this division.
Finding that you're not the natural owner need not be a bad thing, as long as it isn't about your ego. In transferring ownership from one company to another, new profit is created. This profit can be shared between buyer and seller during the sales process, so both come out ahead.
Deciding which assets a business continues to own - that is, the parts for which they are the natural owner - should be something that is reviewed regularly by effective businesses. In fact, research shows that this type of capital reallocation is a core tool used by successful businesses.
However, the current business environment has some particular benefits that should be taken into account when considering what to retain or sell and when.
First, recent surveys show that business confidence has slumped, meaning competitors are unlikely to be moving.
As in the residential property market, we can expect to see a reduction in transactions while businesses wait to see what will happen and hope their value will grow.
For those who have done their commercial due diligence effectively and understand the relative value of the different parts of their business, the deer-in-the-headlights look on their competitors' faces is the perfect chance to move.
Second, the current climate means companies can expect reduced transaction costs.
This is a result of two things: a) transaction costs, typically linked to asset value, are lower now due to the reduced asset values; and b) reduced transaction volumes will put further downward pressure on fees charged by buy and sell-side advisors. The combination of these factors may make an otherwise questionable transaction worth doing.
Last, many companies will be buying and selling into the same climate. Asset values are down across the board. If the new assets the capital is being used for are more productive than the current assets, the business is already ahead, and as times get rosier this lead will grow.
Simple? Not really - but understanding whether you are the natural owner of all the elements of your business is an important first step in turning around performance and getting the steal on your competitors to stack the deck in your favour for sunnier times.
* Dr Paul Winton is a partner at capital investment company Temple Investments
