What if you could double your profitability in the next 6-12 months? How about getting additional cash flow for a fraction of what it worth? Most business owners think that growth is only achieved by adding more clients, doing more marketing, increasing the number or quality of the products they sell.
Yet, one of the easiest ways to grow is to make an acquisition – to buy another company.
How about a competitor? If your business competes against a few specific companies, what would it look like to eliminate some competition by buying their business?
How about a competitor in a different market? How about growing geographically? You live and work in one county. Let’s say your effective reach has a 50 mile radius. How about going 100 miles away and buying a company doing the same thing you do?
The other possibility is doing a vertical acquisition. What is that? It’s buying a supplier. It could also be buying a business that is highly complementary to your business. You may deal with the same customer and now have the ability to cross sell. They now sell your products and you now sell their products, all to the same customer base.
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They could buy a competitor in an adjacent market. They could buy a marina. They could buy a company that sells accessories to boat owners. They could even buy a boat manufacturer.
So why is this such a great way to grow. Let’s look at the numbers.
Let’s say, for example, that your business generates $1 million in earnings. Your targeted acquisition earns $500,000. Typically, for a business this size, the acquisition price is 3x earnings, or $1.5 million.
Both companies have a controller or accountant. Both have a sales force. Both may have a general manager or other executive. Do you need 2 controllers? 2 sales forces? 2 general managers?
No, of course not. Let’s say you eliminate one controller at $100,000/year and trim 2 people from the combined sales force for another $100,000/year.
Buying insurance together could save more. What other services do both companies use? What’s the possibility of reducing other costs, simply because the two businesses are now commonly owned?
How about cross selling? How much could you sell to your newly acquired company’s customers? How much would your customers buy of their products or services? Often a well thought out acquisition can increase sales while simultaneously boosting the profitability of the combined companies.
A true win-win --- for you.
For our example, let’s just say that you could reduce expenses by $200,000. That effectively increases your target company’s earnings by 40% to $700,000. Yet, you still pay $1.5 million for the business. Except now you’re not paying 3x earnings, you’re paying 2.1x earnings.
Often financing such a transaction is easier than getting your existing company financed. Why? Instead of having $1,000,000 in annual earnings you now have $1,700,000 in earnings, a 70% increase. Based on $1,700,000 in cash flow banks often lend up to 2x cash flow.
In this example, that could mean that the bank finances the entire acquisition. Or, you can get SBA financing, or ABL financing. As a larger more profitable company, you are more attractive to lots of lenders.
Often, the answer is easy – they don’t know how. And, as they think about it, the “but machine” is activated:
But, I don’t know how.
But, how do I approach a possible target?
But, I don’t have the financing?
But, I can’t afford a $1.5 million acquisition.
But, who is going to run the combined companies?
That’s where a strong M&A advisor can make all the difference.
Anything that is new can cause anxiety, including going out and buying another business. Yet when one looks at the numbers, at the synergies of reduced cost and/or increased revenue and earnings, it’s pretty clear that for a lot of businesses, growth by acquisition is a great alternative.