James Caan is the newest dragon on the BBC television show Dragons’ Den. He
is chief executive of the private-equity firm Hamilton Bradshaw and has been
building and selling businesses since 1985 in various sectors, including
publishing, recruitment, software and franchising. A graduate of Harvard
Business School’s Advanced Management Programme, he has won several awards
for entrepreneurship.
In today’s economic environment there is no such thing as isolation. Events in
another sector on another continent could affect your business.
For example, the credit crisis spawned by the sub-prime housing market in
America had an immediate effect on US liquidity and a critical impact on
both the cost and supply of funds, and then spread across the Atlantic to
Britain.
After the $950 billion (£485 billion) write-down in America and despite the
Bank of England’s attempt to ease the liquidity situation in Britain, there
is much less money for doing deals and fewer investors able to do them.
With a rise in Libor, the interest rate banks charge each other for loans to
ensure their own liquidity, British banks are paying more for their money.
Needing to cover their own balance-sheet deficits or provisions, they are
charging higher margins to borrowers and trying to attract savings, not lend.
This can be seen in the property sector, which for the past few years has been
regarded as an excellent business opportunity. Last year, 85%-90% LTV (loan
to value) was readily available from most commercial banks. Today, LTVs are
lower, typically 65%-70%, which requires a much higher equity component.
For example, last year, 85% LTV plus £1.5m equity would have bought a £10m
property. Now, to buy the same property with a 65% LTV, the equity
requirement has more than doubled to £3.5m.
With fewer deals taking place, the price of property is being pushed
downwards. So there are opportunities in a falling market, and this
especially applies to those who are liquid, able to act quickly and apply
their cash.
In such circumstances consider syndicating the equity requirement of a deal to
two or three co-investors to secure the opportunity with a lower loan while
also spreading the risk. Lower LTVs will also ensure you get better margins
from banks.
With depressed growth forecasts causing property and company valuations to
decline, buyers today will have an advantage when there is an upturn in the
market.
This principle also works with employment. With my background in recruitment,
I am aware that the best people are available before a market becomes
buoyant. If a leading professional-services company is releasing 10% of its
workforce, this is a good time to employ highly talented people who weren’t
available 10 months ago.
In all areas of business it is just a case of prising out interesting
opportunities presented by the market. For instance, a leading private bank
is currently consolidating its property portfolio and centralising some of
its operations. As a result, it has recently vacated premises in Cavendish
Square, London. I have been looking for prestigious headquarters for my
company, Hamilton Bradshaw and, lo and behold, a perfect opportunity
presents itself at a competitive price.
Fortunately, this opportunity coincided with a position of good liquidity
following the sale of a number of assets last year before the credit crunch.
Was this foresight or luck?
In any situation, when I have sold assets it has been when the valuation is at
an attractive level that provides a good return.
My experience in a rising market has been to take the profit on the table,
having made a fair return, and not gamble on the value increasing further.
In general this has meant that I have always sold my assets at or near the top
of the market; understanding this cycle led me to sell my main business, the
executive-recruitment firm Alexander Mann, in 1999 at its peak.
The lesson I have learnt is to recognise when I have made a reasonable and
fair return on my investment, to sell leaving something on the table for the
next guy, and move on swiftly to another opportunity. This attitude denotes
the difference between an entrepreneur and a gambler.
There is also another attribute of the successful entrepreneur that will
assist in weathering a downturn in the market – self belief.
In the late 1980s I was on a high, with Alexander Mann placing candidates in
record numbers. In 1991 the recession hit hard and, instead of recruiting,
my clients were all making people redundant. This was not something I had
ever experienced and I had to evaluate my options – observing the masses and
doing the opposite.
In the face of huge competition, I had built a successful business in
recruitment. I knew the recruitment industry but little else.
With competitors going under every week I was determined to ride out the
recession and reap the benefits of being in a good position when the market
recovered. With the support of a reduced workforce, offering reduced fees,
taking reduced commissions and working harder than ever before, Alexander
Mann was perfectly placed when the recession eventually passed over.
History shows there is a continuous cycle of ups and downs in the economy. So
this is a good time to test your business skills and evaluate risks that
apply to you, draw on your strengths, rely on your instincts and have
confidence in yourself and your team.
However, if you are looking to borrow to make an acquisition, buy a property
or implement an invoice-discounting system, be aware that in a falling
market the cost of capital will be higher than in recent years.
Consider the timing of your transactions – it might be better to wait until
the credit crisis has settled and banks are in a better position to lend.
In the meantime, if you are in a business with high receivables, avoid being a
provider of free credit and make sure you are collecting it. Remember: cash
is king.
