THE IMPORTANCE OF FOCUS

Unsurprisingly, once you begin to approach the intermediaries who represent business sellers, or seek to engage an adviser to search for a business for you, the obvious first question that they are going to ask you is: ‘What sort of business are you looking to buy?’

Response 1

‘I am interested in buying a nice profitable business that I can make my million on/run in retirement’ (delete as applicable).

This is an aspiration not a search criteria; and professionals can’t do much for you with your dreams. They will also try not to waste their time dealing with someone who is so obviously unprepared.

Response 2

‘I am interested in buying a widget manufacturer based in Yorkshire or Humberside with a stable turnover of £3m to £5m, that is currently profitable, makes its own branded products, and has the basis for expansion.’

This is a search profile that demonstrates that you are serious and with which a professional can work with you to find, fund and buy a business.

At first sight it might appear that the more flexible you are about the type of business that you want to buy, the more choice you will have. And in some parts of the market such as for small shops, bars, pubs, restaurants, and hotels where there are plenty of businesses turning over that can be easily identified from advertising by the specialist brokers, this may well be the case.

However, the market for most other types of business is relatively inefficient and as discussed in Chapter 5, a key part of your effort will need to go into finding appropriate businesses for sale. So while it will pay to be flexible about the details of business that you looking to buy, if you’re looking for a larger business it is important to identify and then keep focused on a particular target market. This will allow you to:

• effectively communicate what you are looking for to the various parties who may be able to introduce appropriate targets to you
• persuade potential introducers and lead advisers that you are serious in your search
• focus your search so that it is as efficient as possible.

Having said that, you will also undoubtedly find that as you review the details of businesses for sale and screen potential targets, you will at the same time refine your criteria and improve your targeting.

WHAT TYPE OF BUSINESS DO YOU WANT TO BUY?

Before looking at the different types of businesses that you might consider, you first need to think about your motivation for buying a business, as you will want to buy one that is most likely to allow you to meet your personal or business objectives.

For individuals, the starting point in assessing what type of business you should be looking for is to decide what is most important to you about buying a business. Ask yourself, are you looking at this step principally as:

• a chance to change significantly your lifestyle by either taking more control or by downshifting?
• a financially driven entrepreneurial or commercial opportunity and a chance to make significant amounts of money either in ongoing earnings or by building a business to sell?
• an investment decision in the way that you might buy any other financial asset, and where you might in fact want no role in running the business once you have bought it?

Lifestyle businesses

Business professionals often refer to some businesses as ’lifestyle’ ones. These are typically those where the business can be run at such a level as to support the chosen lifestyle of the owner, but which generally have little opportunity to build significant capital value.

Lifestyle businesses generally divide into property-based businesses such as shops, post offices, pubs or guesthouses; or service-based businesses such as freelance work or self-employed consultancy, and tend not to involve employing significant numbers of staff.

Property-based lifestyle businesses can be easily bought. However, in many service-based lifestyle businesses, despite having a powerful niche presence or well-known name in their industry, there is in practice no real business to be sold. This is because the owner is the business and the business has no life outside of them and their skills and contacts. Without a significant amount of work to ‘institutionalise’ these relationships and knowledge into some business structure outside of the individual, the business has no value, as on the principal’s retirement the customers will have no reason to deal with any new owner.

Lifestyle businesses are particularly appropriate for buyers who are more interested in their lifestyle and work-life balance than in pure financial return, perhaps because they have other sources of income.

So if your reasons for being interested in buying a business are focused around the following then you might consider buying a lifestyle business:

• working for yourself without office politics
• organising your own time and avoiding a nine to five routine
• working in a pleasant environment and choosing your working conditions to suit yourself
• working on your own without the need to manage staff
• living and working where you want rather than commuting to an office.

Given these priorities which a lifestyle business will tend to satisfy, there is a view that these businesses are only of interest to people seeking a more relaxed lifestyle. In fact the owners of many lifestyle businesses work extremely hard and can generate a very good income from their business.

However, to make a success of a service-based lifestyle industry requires very strong self-discipline and time management as without a supervising ‘boss’ you need to avoid a number of dangers:

• As your working and domestic lives merge and you are able to work outside the confines of normal business hours set by others, it may be difficult to avoid being sucked into other domestic activities when you should be working (as you are at home and dressed in casual clothes it can be difficult for other family members to remember that you are actually working).
• You may also find that your natural working rhythm lies outside of the normal nine to five of office hours. This is fine and may allow you to work in a way that is more efficient for you, but beware of the danger of having your working time drift too far out of kilter with that of your clients. One self-employed person I know works very efficiently from noon through into the early evening. However, his clients’ perception is simply that he is never available in the mornings and this undoubtedly damages his business.
• In contrast, without the formal structure of a normal working week you may also find that you end up being able to work ‘whichever seven days a week you choose’ and are unable to switch off your working life in order to have clear periods of domestic life.
• In managing your time you need to remember to set aside some of it to reinvest in the business. One of the key mistakes owners of lifestyle businesses make is to rely on an existing network of contacts or knowledge base they have either acquired in buying a business or have brought with them from their previous employment. The problem is that in some cases over surprisingly short periods of time, contacts will gradually fade away as they meet new suppliers, move on within their organisations or retire; and any body of knowledge will become out of date. To maintain the value of a lifestyle business you will need to work in a structured way at continuously renewing its raison d’etre.

And finally, if you are buying a business for lifestyle reasons, you must make sure that you have really understood what the business lifestyle really entails. For example, many people dream of running a pub. However, the reality of running a pub is that most need to be open from 11 a.m. through to 11 p.m., seven days a week, 52 weeks a year, after someone has thoroughly cleaned the public areas. The scope for any time off is extremely limited. The work can be extremely hard and put a great deal of pressure on any partnership running it including marriage partners; and alcoholism resulting from the stress and continual requirement to perform as the host and authority figure night after night is a real risk.

Commercial businesses

A commercial business in contrast is one where the business can be run to generate profits in excess of those needed simply to support the owner’s lifestyle and where the business can either be expanded or developed to generate a real capital value.

So if your reasons for buying a business are much more financially focused you are likely to be looking for a commercial business that offers you the opportunity to:

• grow the business, which is likely to involve employing staff if the business does not already do so; and
• work towards a sale of the business to give you a capital return.

This type of business will demand a higher level of commitment from you as owner than a lifestyle business, and you will have to trade your lifestyle and work-life balance in terms of hours worked in the business or being continually on call, for the greater returns that may be available.

Investors and businesses

You may, however, whilst wanting to build capital value, not be looking to work specifically in any one particular business. Instead you may be looking to buy a number of businesses, normally in a related area, so as to be able to build up a portfolio of investments, or perhaps a chain of similar businesses where the whole is more valuable than the sum of the parts. Each individual business within your empire is therefore an investment as far as you are concerned, to be either retained or disposed of as part of your management of your portfolio.

This approach to owning businesses can lead to high returns if managed properly but will require you to take on and manage appropriate staff in order to run each of the businesses, while you will need to focus on the questions of strategy and managing the acquisition process. It will also require you to think through how you are going to manage a number of separate business units within the group. Some groups are in practice very ‘hands off, allowing each unit to operate with a high degree of independence and simply manage on the basis that each business unit is responsible for hitting its financial targets. Other groups are highly centralised and seek to impose consistent standards of operations and approaches on all businesses that they buy through a thorough post-acquisition integration process.

From this it can be seen that a critical characteristic of a business to be bought for investment purposes is that the business can clearly support the cost of paying for its own management and provide over and above this an investment return to you as the investor.

Buying a share in a business

As a last point on the subject, if you are simply looking for an investment you might consider whether you want to buy the whole of the business, that is 100%; a controlling share, 51% or above; or simply a minority stake, less than 50%.

Obviously buying a minority stake which does not allow you to control the business except with the cooperation of some of the other shareholders, leaves you exposed to the risk that the controlling shareholders will cause the company to act in ways you don’t want it to. Against this, a minority stake will presumably have cost you less than buying a controlling share or the whole of the business, so financially you may have less at risk than had you bought a larger stake.

WHAT TYPES OF BUSINESS ARE THERE?

Once you have decided what you are looking to achieve from buying a business and therefore what you are looking for in a business, you need to consider what area of business you want to buy.

Before going into the characteristics of the main broad groups of businesses, it is worth saying at the outset that the best business for you to buy will be the one that you already know the most about. In other words, wherever possible seek to buy a business within which you have already worked or in an industry that you know. In doing so you are:

• reducing the risks significantly
• improving your chances of engaging high-quality professional advisers as you will be a more credible purchaser
• improving your probable credibility with the seller which as we will see can be important in helping deals to go through improving your chances of obtaining funding from backers who will be more prepared to believe that you will know what you are doing once you buy the business.

There are obviously many different ways of categorising businesses into groups. For simplicity’s sake I will divide them into five main classes with a limited number of significant sub-groups as follows:

Production

Production covers a wide scope of manufacturing activities that result in the physical production of goods to be sold. The best-known manufacturers will be those that produce their own branded products (often referred to as original equipment manufacturers or OEMs) such as cars or domestic appliances.

But of course these manufacturers will generally only have produced some of the components in-house and will actually be assemblers of a mix of their own products (the car’s engine and body shell) with those purchased from subcontractors (the windscreen and tyres) to make the finished product.

The levels of work undertaken by subcontractors can range from the creation of bespoke one-off orders to match a client’s specific requirements, to the production of large batches or continuous product runs on behalf of large manufacturing customers. In some cases the parts produced will be specifically to the customer’s design and unique to their product (a plastic moulded bumper or a particular shaped headlamp lens). In other cases the subcontractor will be producing a range of their own standard products (such as tyres, light bulbs or car radios) as an OEM in their own right, which the customer has then decided to specify for use in their product.

In some cases such subcontractors may also have much of the subassembly work outsourced to them by the customer, or the customer may engage specific subcontractors to finish components (such as machining rough castings to the tolerances required) and to produce subassemblies.

As companies seek to concentrate on their core skills and to outsource secondary activities to specialists who should be able to undertake them more efficiently, it is rare these days to find a fully integrated manufacturing business which produces completely finished goods for supply to the consumer directly from raw materials.

The largest exception to this general rule is in the area of agriculture, which I would tend to class within the broad category of manufacturing, although the financial characteristics of agriculture are significantly different from most other forms of manufacturing.

The other activity which should be included in manufacturing but which differs significantly from other types is the production of raw materials such as quarrying and mining (sometimes referred to as primary production). In some ways this activity has more in common with agriculture than other forms of manufacturing in that it is largely based on the acquisition and efficient exploitation of property assets.

Manufacturing businesses tend to have significant physical and financial assets in terms of plant and machinery, premises, stock and a debtor book. They can therefore be easier to finance than retail or service businesses. As materials will form a major part of their cost base, the labour element of their costs and in some cases the criticality of labour overall will also be lower than in service and retail businesses.

Those looking for a commercial or entrepreneurial opportunity often find manufacturing businesses to be of most interest and particularly those which produce their own branded products for sale to OEMs or direct consumers, not least because of the perception that the market risks inherent in a transfer of ownership will be lower than for a service business based on personal relationships.

Distribution

Distribution companies may either be acting as:

• transporters offering a service to manufacturers in taking their goods to market; or
• wholesalers offering a service to both manufacturers as a channel to market, and to retailers as a way of packaging industrial quantities of goods into amounts convenient for a retailer to stock.

As facilitators, margins are generally low since the existence of a high margin would incentivise manufacturers to expand downstream into undertaking its activity and capturing its margin for themselves. Distribution businesses therefore rely on:

• high levels of turnover
• effectively sweating the assets, so for a transport business for example, utilisation of the trucks and ensuring that return runs are always fully loaded is critical to profitability
• negotiation of volume discounts and rebates – these are areas that are notoriously difficult to police and quantify (they were for example the issue underlying the accounting scandal at Wickes) and will be an area of real uncertainty for any purchaser requiring significant due diligence work.

The strength of the distributor’s contacts with both the suppliers and customers are therefore critical and the degree to which these can be successfully transferred will be a key issue in considering a purchase.

The nature of distribution businesses means that they are unlikely to be attractive as a lifestyle purchase, while the margin pressure also tends to make them unattractive commercial or entrepreneurial prospects, unless you can identify some significant level of underperformance that you will be able to address or significant scope to develop the business, such as by adding on extra lines.

Retail

Retail might be considered a subset of distribution as retailers are acting as a ‘mini wholesaler’ between the wholesaler or manufacturer and the end-user consumer. In fact some retail outlets such as motor main dealers are really in effect franchised extensions of the manufacturer’s own distribution chain and have to operate in many ways as dictated by the manufacturer as the franchisor (e.g. use of standardised accounting packages and marketing materials).

Retail differs from pure distribution in that the retailer is always dealing direct with the end-user and is therefore having to market direct to, and interact directly with, consumers.

Gross margins in retail businesses are generally high, with 50% being not untypical. This is, however, in order to cover a correspondingly high level of overheads of which the major components are property costs and staffing.

Retailers are generally very site dependent, although the development of e-commerce gives both an opportunity to retailers to expand easily beyond the confines of their bricks and mortar sites, but also acts as a threat in that it enables manufacturers to more easily deal direct with consumers, bypassing traditional distribution and retail networks and generally offering goods at a lower cost as a result of not having to carry the high property and staffing overheads of a retail network. The exception to this is generally the ‘tied’ outlets such as motor dealers, where the majority of profit can come from ancillary services such as servicing and spare parts, and from volume overrides tied to the level of new car sales.

In addition, unless they are able to negotiate supplies on a sale or return basis, retailers take significant risks in the degree to which they have to buy and hold stock. The ability to forecast customer tastes and requirements and to stock appropriately so as to neither lose sales (because you have run out of stock), nor be left with unsold goods is critical to the success of a retail business. If you are considering buying a retail business you will have to be very sure of your abilities in this area.

Single-sited retail businesses often offer potentially attractive lifestyle business. They are, however, obviously limited in their scope to expand without you having to take on good management to run any larger number of outlets.

As service and the ability to give the customer an attractive shopping experience is often critical to the success of a retail business, you will need to be confident of your abilities to successfully ‘front’ the business, as well as managing the ‘theatre’ of the shop’s decor, layout, lighting and ambience so as to make it a success.

Services

Service businesses divide into business services such as advertising, consultancy, recruitment, or professional firms through to banking, as well as outsourced suppliers of administration and services such as telemarketing, software support or call centres; and leisure and consumer services which can range from hairdressers and landscape gardeners through to vets and travel agencies, and on to holiday operators, publicans, restaurateurs and hoteliers.

Despite the fact that service businesses do not produce a solid product in the way that manufacturing companies do, service businesses that establish and maintain a good reputation for value and service may be extremely solid businesses.

The key to a successful service business is the strength of its relationships with customers; which in turn is normally dependent upon the quality and commitment of its staff and the efficiency of the business systems in supporting staff to deal with customers.

The new owner’s ability successfully to take over and continue the customer relationships, as well as to manage staff so as to provide the required level of service, will be critical in any purchase of a service business. Providing you believe you have the necessary personal characteristics that will be required for the type of business you are looking at, such businesses can be a reasonable lifestyle or commercial opportunity.

Given the vital importance of transferring the customer relationships and the difficulty of valuing most service businesses because of the uncertainty as to how successful this will be, retaining the old owner for a period on a consultancy basis – tied into payments by way of an earn-out dependent upon the future performance of the business – is normal in such situations.

Construction

Construction businesses can either be:

• the equivalent of manufacturers operating in their own right, acquiring land as their raw material and converting this into property for sale or lease; or
• providers of services to others in carrying out projects on their behalf.

There are a number of specific issues affecting the construction industry, such as:

• The standard form of contract with its structure of payment on applications. This leads to restrictions in the ability to finance working capital and also to disputes and claims, which mean that there is a tendency to conflict and legal wrangling between main and subcontractors throughout the industry. There is also still the tendency of larger contractors to ‘subbie bash’ or stretch payment terms to subcontractors.
• The highly cyclical nature of the business from boom to bust which closely tracks the overall level of economy. This effect is magnified by the relatively low barriers to entry which tend to reduce the levels of achievable profit (as in any period when the market picks up, there is little to prevent new contractors starting up, resulting in increased price competition), while at the start of any boom there always tends to be a shortage of skilled labour which drives wage costs up and tends to make it difficult to retain skilled employees. Another result of large numbers of entrants into the market is inevitably a large number of failures at the end of each boom.
• The criticality for developers of holding an appropriate ‘land bank’ for the stage in the cycle.

In other respects the characteristics of a construction business will tend to mirror those of either manufacturer or a service businesses as appropriate.

Mixed characteristics

With each of these categorisations, there can be a high degree of overlap.

For example, a manufacturing workshop that acts solely as a subcontractor producing sub-components for other manufacturers, is in many ways supplying a business service in that it is ‘renting out’ its machining capacity to those who want to hire it. Many such manufacturing businesses will also have a significant role in helping customers to design the goods or components to be manufactured, or being involved in assembling components into subassemblies, again supplying services to their customer.

At the other end of the scale, an integrated supplier producing own branded goods may well have its own distribution network to take them to market and even in some cases its own dedicated retail outlets.

OTHER CHARACTERISTICS TO CONSIDER

Size

The size of business you look at will be influenced by both the type of business you want and the funding you have available. Those interested in lifestyle businesses tend to look for smaller businesses, with less staff to manage and a lower purchase price so that the owner is under less financial stretch. Those looking for commercial opportunities may be more prepared to take on larger businesses with more staff and higher financing requirements.

The levels of financing that you are likely to be able to raise against the assets being bought is discussed in detail in Chapter 10. The difference between this and the purchase price of the business will have to be met from either vendor finance (the seller allowing you credit or time to pay) or from the cash of your own that you put into the deal. So the level of equity that you are able to raise (e.g. by borrowing against your house) will have a direct impact on the size of business that you are going to be able to buy.

Underperformance

Most people looking to buy a business will be looking for one that is as profitable and low risk as possible. However, some entrepreneurial buyers will be deliberately interested in finding businesses that are loss making or in difficulties despite the higher risks involved. This is because you might be able to buy such a business relatively cheaply, while if you are able successfully to turn it around to be a stable, profitable and growing business you may then be able to realise a substantial capital gain.

Buying an under-performing business to turn around can, however, be a very risky business and the issues involved are covered in detail in Chapter 19.

Franchises

There are also of course businesses which are operated on a franchise basis. These will generally be in the services and retail sectors and will require the franchisee to have bought the franchise for the area. There will then generally be a requirement to purchase the bulk of goods from the franchisor and/or to pay some form of commission or royalty on sales. In return, the franchisee should expect to receive a business that is a proven model and normally a degree of ongoing management and marketing support to make the business a success. The franchisor will usually retain some rights to approve any subsequent purchaser of the business.

Whilst there are a number of successful businesses that have been franchised, there can be risks in buying a franchise business, as discussed in Chapter 5.

RESEARCHING THE BUSINESS

If you are interested in buying a business in an industry that you don’t know well (and even if you do know the industry well) you should conduct research into the sector and its trends and developments. Sources of information that you can use include:

• Publicly available data produced by government departments, business directories, local authorities, local libraries, business associations, Chambers of Commerce and so on, much of which will be available either on the web or through a decent local library. If you are having difficulty obtaining information at your library, try visiting the business library of your nearest university which is likely to have more extensive sets of reference books than an ordinary lending library. If you’re in London try the Business Information Library on London Wall.
• Trade associations and publications. Most industries have some form of trade association that produces material and information about the sector as well as a publication to which you may be able to subscribe. Similarly, most industries will have some form of trade press which may alert you to trade exhibitions and shows that you can attend.
• Bankers and professional advisers, who may be able to provide information, with some banks producing ranges of leaflets or briefings for potential customers on different types of business.
• Any personal contacts that you have who may be involved in the industry or have connections to people who are.

Perhaps the most valuable source of information, if you are able to tap into it, is owners and managers currently in the industry, some of whom may be prepared to talk to you if approached in the right manner. These are people who will be able to give you the inside track on what it’s really like in the business and they may even be able to point you towards businesses that are likely to be for sale.

The sorts of questions you could ask (many of which you might also usefully ask of the owner of any business you are considering buying) are:

• What was your motivation for getting into the business? Has it fulfilled your expectations? Has it given you the lifestyle or financial return you were expecting? What impact has it had on your family life?
• What are the key skills that you have needed to make a success of it? Did you learn these on the job or did they come from your previous experience?
• Did you set the business up or did you buy it? If you bought it, how did you go about finding a business? Where did you raise the finance? What advisers did you use?
• Have you any particular rules for success? Is there anything you wish you’d known before you bought?
• What is changing in the industry? Are there any particular issues to do with regulation, customers or suppliers to be aware of?
• Would you buy a business in this industry now? If not, why not? Do you know any that may be for sale?

WHERE SHOULD YOU BUY A BUSINESS?

After thinking about what you want to achieve by buying a business, and the types of business that might enable you to do this, the next question that you need to consider is: where do you want to buy a business?

Do you want to buy something local to where you currently live or do you want to, or are you willing to, move to buy the right business? Obviously if you are simply an investment buyer and not interested in working directly in the business to be bought then the impact of the business’s locality will be much less than on a buyer who is intending to work in it.

Family and lifestyle issues

This is a major decision for both you and your family and raises a whole range of issues, such as:

• Do you have family commitments that will prevent you moving, such as responsibilities for older relatives, or children at critical periods of their schooling?
• Does your partner work? If so how will any move affect this and what impact might any change have?
• Are there any factors that will be critical in any new area that you might move to, such as schooling for your children?
• What sort of housing will you need in any new area and how likely is it to be available at a price you can afford?
• How important to you is your current social life? How easy will this be to maintain if you move away from your current area? How easy will you find it to create a new social life in your new area?

Differences in culture

If you are considering a move to a very different type of area, such as from town to country or vice versa, ask yourself if you have a realistic appreciation of the differences in lifestyle that this will involve. Do you feel you (and all your family) are suited to this type of change?

You should also bear in mind that different areas of the country will have different cultures and ways of life. So even though both might be rural, buying a business in Wales may be significantly different from doing so in East Anglia.

Locality and service industries

And of course the importance of locality to the success of the venture varies across the different types of business. For a pub, shop or other supplier of local services, the nature of the local marketplace is obviously critical, as the business’s customer base will be determined by whether the locality is:

• rural, suburban or urban
• rich or poor
• a place people retire to such as the south coast (so has a more aged population than normal) or an educational centre such as a university city which might have a higher number of young people
• a centre of high-tech industries or traditional ones
• up and coming or in decline.

Locality and manufacturing businesses

By contrast, for a manufacturing business supplying into a national or even international market and which is not therefore simply relying on serving the local marketplace, the locality will, however, still have an impact in a variety of ways, such as the:

• availability of skilled and qualified staff
• transport infrastructure for getting the goods to market
• planning rules that may impact any plans to expand
• level of grant support available.

Property issues

Whilst on the subject of locality, the type, precise location and tenure of property should be part of the criteria you consider.

Again, the importance of the property issues will vary significantly between different types of business. A small manufacturing or printing business, say, may be able to operate from almost any industrial unit and you can therefore have an open mind towards the business’s existing property when searching for targets.

The location of a shop or hotel will generally, however, be absolutely critical to the success or otherwise of the business, as will its state of repair and decoration.

Many purchases of small retail and leisure businesses are in effect purchases of property with a business element, rather than purchases of the business with a property element. The state of the buildings and the tenure available (freehold or leasehold) will therefore be critical to the value of the deal and you should form a view as to your preferences in putting together your criteria.

WHEN IS THE BEST TIME TO BUY A BUSINESS?

All businesses, sectors and industries go through cycles of growth (A), stabilisation (B) and eventual downturn and contraction (C), before hopefully being reinvigorated into new growth by some change in economic climate or the introduction of some new technology. These tendencies are known as business life cycles and are overlaid in turn by the general cycle of growth, stability or downturn of the economy as a whole. The conditions at any point will tend to affect the valuation of businesses based on the anticipated future continuation of the trend.

The safest advice concerning the best time to buy a business is therefore:

• Don’t buy into a rising market – as valuations are based on a multiple of earnings that takes into account an expectation of future growth, it is very easy to overpay in a market that is growing significantly. The thing to remember about any period of growth is that at some point it will come to an end. The faster the rate of growth, the more attractive it will have been for businesses to pile into the area and to create capacity, and the greater the fall out will be when the bubble bursts.
• Don’t buy at the top of the cycle (as growth starts to tail off) – because again there is a significant danger of overpaying. As any market starts to stabilise after a period of high growth there tends to be a lull before the real crash, as all capacity that has been installed by people who have come into the market comes online and fierce price competition ensues as competing businesses try to fill this capacity by buying turnover from each other with discounts.
• Don’t buy into a falling market – as until the market has stopped falling you do not know how much worse things are going to get and how long the shakeout is going to last.
• Don’t buy at the bottom of the market – as once the market is in depression, you do not know how long it is going to be before there will be opportunities for new growth.

The real answer of course is that there are pros and cons of buying at each point in the cycle, which can be summarised as follows:

Market	Pro	Con
Rising	Overall growth in the market can often get you out of trouble. There is a ready resale value to other people wishing to enter the market or other players wishing to expand their market share.	High growth will imply a high growth of the business’s requirement for working capital. Will you be able to fund this going forwards? There is a danger of overpaying for the business if the prices are based on current growth trends. How long will current growth trends continue? Increasing levels of competition can be expected from new entrants into the market attracted by the high growth. This will lead inevitably to an eventual shakeout as the rate of market growth must decline at some point, while the growth in number and capacity of players in the market may continue past this point as capacity being built during the boom years continues to come on stream.
Top	Performance trends are easier to see, giving an apparently more stable basis on which to base purchasing decision. Few new entrants coming into the marketplace.	If you are buying at the top of a growth phase you need to consider carefully whether any shakeout and consolidation of the market is complete or is there more pain to come? At this point there is little likelihood of any significant natural growth in the market to get you out of trouble, and the market is only likely to become more competitive as the only route for players seeking to grow their market share is by way of taking it from weaker competitors. If you’re fortunate, however, and the market does start to have a second phase of growth, you will be facing the issues to do with working capital requirements outlined above. If, as is more normal, the market then shrinks, it will tend to be the stronger businesses in the sector which will be the ones that survive. How comfortable can you be that your newly acquired business will be one of the stronger, better managed businesses in the industry? (If so why did the old owners sell?) There will be a limited resale value other than to consolidators looking to strengthen their market share and once the market has fallen there is a significant chance you will have been seen to have overpaid for the business.
Falling or bottom	There will be very little threat to the business from new entrants as who wants to enter into a falling market or one in recession? Businesses may therefore be available at cheap prices due to little demand from buyers. In fact businesses may be under priced as the expectation of further falls in the market may be exaggerated. In addition there will usually be a number of distressed sellers wishing to exit the market because of poor performance of the business or other financial pressures and distressed sellers are in a poor bargaining position.	You’re taking a significant risk as you will not be in a position to tell with certainty how far and how fast the fall will continue and what reserves you will need in order to ride out the shakeout. Ironically strong businesses can do extremely well in a falling or mature market as they can force out or take over the weaker players. Indeed for these stronger businesses, in some ways the longer it lasts the better, as it is sufficient to reduce the number of players to a few dominant ones; these are then in a position to set prices in the market. And they may have little fear of new entrants because their strong brand position, good network of customers and lack of immediate growth potential means there is little to attract new players to invest in the market. By the same token, there is, however, no prospect of growth to get you out of trouble, and you may find difficulty in raising finance as funders will be nervous of the sector.

From the above it can be seen that times of change in the industry or economy as a whole can give increased opportunities, but these will be matched by increased levels of risk.