Whether you are contemplating buying your first business, or you already own a business, growth is one of the key elements to the long-term health and vibrancy of your company. However, with the pandemic looming over every industry, it has become hard to grow a business in traditional ways like adding salespeople, increasing the marketing budget, or attending trade shows. On today’s podcast, let Domenic Rinaldi share a strategy to grow your business faster and cheaper. Want to know how? Tune in for more.
For more comprehensive guidance, click here to download our due diligence best practices and checklist resource for free.
Listen to the podcast here:
Growing Your Business Through Acquisitions – Ep. 089
Over the past year, 2020, we’ve spent a lot of time discussing the process of acquiring a business and the steps involved. I’m going to devote some time to the top seven reasons why growing your business through acquisition is perhaps a much faster and cheaper way to grow your existing business. Whether you are contemplating buying your first business or you already own a business, growth is one of the key elements to the long-term health and vibrancy of your company. I speak to enough owners every day who share with me how hard it has become to grow their business in traditional ways, such as adding salespeople, increasing the marketing budget, attending trade shows, which has become virtually impossible during COVID or developing a new product or service and hoping you can make a market.
One of the things that have stood out is the difficulty owners are having in recruiting and retaining great talent. This is especially true in sectors like the trades, construction, and business services. I think there’s a better path to growth through acquiring other businesses and assets. While acquisitions can be difficult, if you assemble the right team and build some acquisition skills, this is something that can result in big dividends. I’m going to give you my top seven reasons to acquire a business. I believe there will be some things you might not have considered, and it will hopefully get you thinking about how you can leverage acquisitions to get your business to the next level, perhaps break through a plateau that you’ve reached.
We’ll provide you with peace of mind that not all your efforts are riding on one product, one service, or maybe even one vendor. Before we get into the show, we have created a best practices and a checklist for how to conduct due diligence. This is a free resource available on either of our websites, SunAcquisitions.com or K2Adviser.com. Take a minute to download this invaluable resource. It’s a great starting point for you and your advisors when contemplating an acquisition. Thank you for being here and I hope you enjoy it.
I’m going to go through the list. There’s no particular order to the list while I’ll label them one through seven for one business, number six might be their number one strategy. There’s no rhyme or reason to the listing other than to put some number in system to them. The first one on the list is geographic expansion. Many clients are seeing that expanding geographically is a great way to expand their footprint and get some things that they don’t have today. You might consider this if perhaps your current market is saturated, or you could see that it’s going to be saturated at some point in time, or perhaps you’re looking at an adjacent market and you see that it’s much more fertile than the one that you’re operating in.
Rather than trying to build it there organically, maybe you could buy somebody that’s operating in that marketplace. Maybe that new geographic area will give you access to a better pool of potential future employees. The new geography will give you some advantage from an infrastructure perspective that’s maybe holding you back in your current market. I think about if you’re in the transportation industry, you might not have rail systems. That’s just one example of where maybe new geography can give you infrastructure that you can’t leverage in your current geography.
You will need to be careful to choose the right company in a geographically dispersed market. Especially if that new market, that new geography is not near your current location and you can’t get to it quickly. It might require having a good management team in place that will be staying after the transaction to run that local market. There are lots to consider when you’re thinking about geographic expansion, but it really can give you a tremendous foothold. I’m thinking about a client that we represented a couple of years out of Singapore, it was looking to grow internationally. The US was clearly a market that they had identified along with Europe. They had some clients there. While they were selling through to the US markets and the European markets, what they were lacking was a presence here. They didn’t have, for lack of a better term, boots on the ground and a geographic expansion to the US just made a lot of sense. It would put them closer to some of the clients that they were selling to. They could probably sell more of their existing product and then potentially introduce the new service, the new product that they were going to acquire into this marketplace. This is a perfect example of why a geographic expansion can make a lot of sense.
Item number two, growth. I know this seems obvious, but there are lots of different ways to expand your business across a variety of areas to achieve different types of growth. For example, you may be just looking to grow market share. You can increase your overall share in your current markets that you operate in by picking up new clients. The client acquisition may also give you a larger platform to offer new products and other services. You might be looking purely to add revenue. You might be adding a significant amount of revenue to your top line, which may have other effects that we’ll describe later on in another area and you may be looking to grow your bottom line. The hope is that you will also be increasing the net profits of the business.
In some cases, this might be substantial. If you’re able to remove a bunch of expenses related to the duplicate facility costs perhaps, or utilities, payroll, maybe vendors, and then the other growth might be in locations. You might be looking for more client or distribution points, so you’re in a better position to deliver additional goods and services. Another client in a different industry, the HVAC industry, Heating, Ventilation and Air Conditioning industry a number of years ago that had retained us because they were looking to grow and add additional locations.There are many different ways to expand your business across a variety of areas to achieve different types of growth. Click To Tweet
They had a very decent footprint in their local market, but they thought that adding locations would give them an extra advantage. Actually, 1 in 1 would make 5 or 6 for them because they could now spread marketing dollars over a much broader area and the strategy worked fabulously for them. They were able to add some locations. They picked up some great talent along the way and were able to increase their client base substantially because they were just a bigger business. Clients had more comfort that they were doing business with a more substantial business that was likely to be around the long-term.
Number three on the list is diversification. When I think of diversification, I think of de-risking your current business, much like you would de-risk an investment portfolio by diversifying your holdings. You can accomplish the same thing for your business to ensure that you’ll be thriving even if the core operations hit speed bumps somewhere down the road. There are various forms of diversification, such as client diversification. A number of ways to look at client diversification, for example, if you have 1 or 2 clients that each represent more than 10% of your company revenues. By acquiring more clients, you can dilute the percentage of these large clients and therefore de-risk the business. You could also target an acquisition that will give you a slightly different client base than you currently have. If you have a lower-end client and you want to get into the higher end of the market, you could hire a company that is servicing the higher end of the market. Now, you’ve got a broader spectrum of clients and more diversification.
The other type of diversification is vendor diversification. If the COVID pandemic has taught us one thing, it’s the painful lesson about the need to have vendor diversity. Some of our clients had their supply chains completely disrupted and brought sales to a screeching halt because the supply chains overseas were halted. Acquiring a business that will bring you new vendor relationships so you can have backup and alternate sources is a great way and a great reason to acquire another company. You’ve got product and service diversification. This is probably one of the more popular acquisition strategies your business’s product or service line has reached maybe a maturity level or the prospects for growth have been increasingly difficult in your industry. A great way to pick up new things is for your sales and marketing team to offer something else in the marketplace to the same set of clients. If you pick up a new product or service, put that in their toolkit, now, you’ve got real product and service diversity. Rather than having to build that from scratch, you’re buying something that’s proven, you have a track record and can plug it into your existing operation.
Number four on the list is talent acquisition. It’s no surprise to anybody that hiring, training and retaining good talent has become increasingly difficult, especially given the more distributed workforce. Not having a regular office routine has made it increasingly difficult for businesses to bring in new people. In some industries such as the trades, construction and service sectors, clients have been lamenting for years now about how hard it has become to source and hire those types of candidates. An acquisition can give your company an immediate shot in the arm of talent that can be cross-trained and further de-risk the business and insulate it from employee turnover.
This is one area of an acquisition that requires extra attention. However, you don’t want to get the people part of the acquisition wrong as much of the value, I believe, lies in the employees. They have the knowledge, they have the relationships with the client base. An underlying communication plan and understanding how you’re going to deal with people and integrate them into your business is of utmost importance. I probably think its job number one in integration, probably even more important than integrating and worrying about the clients. Not that you can ignore that, but I think getting the people right is job number one.
The number five reason is you want to pick up some assets. You might be looking to grab some intellectual property, some patents, equipment, maybe a facility that will give you tremendous leverage or contracts. There are many types of assets and your firm might be able to leverage these certain assets to grow your either existing client base or open up a new client base. In this instance, sometimes there’s no need to acquire the entire business. If the owner is willing to carve out a particular asset, that may not always be the case, but it’s worth trying to negotiate, especially if you don’t need or want the other parts of the business.
The other types of assets could be related to a company’s brand like their website, social media accounts, public relations, or just overall media. If a company has done a really good job of building goodwill on the market, you could acquire some of those digital and media related assets and then use those to leverage your own company’s products and services. I think a lot of people ignore this. It’s a great way to boost your presence in the marketplace by just grabbing somebody else’s websites or social media accounts, and then leverage those against your own companies.
Number six is to eliminate competitors. Not sure if I need to elaborate on this point, but it’s a great acquisition strategy if you have a pesky competitor or competitor in the market that is somehow preventing you from achieving your growth goals. Removing a competitor not only makes you larger, but it can also give you some pricing and margin leverage that will make you much more profitable. Last but not least, number seven is the value multiplier on your own business. A quick tutorial on valuations, most companies are valued by taking an adjusted EBITDA number, Earnings Before Interest, Taxes, Depreciation, and Amortization, and applying a multiple to that 1, 2, 5, 7, whatever the multiple is for your industry and based on how you’re running the company. What a lot of people may not understand is the larger your business is, typically the larger the multiple gets. The larger the multiple that the buyer is willing to pay. Growing through acquisition can not only boost your top and bottom line, but it can also then boost the multiplier that your business receives upon a sale.If the COVID-19 pandemic has taught us one thing, it's the painful lesson about the need to have vendor diversity. Click To Tweet
Let’s look at an example. A business with $3 million in annual revenues will have a ceiling on value. Their multiple will be kept. There’s a certain amount of risk with businesses of that size. If you step that up and you’re looking at now a $10 or $20 million annual revenue business, the multiples are going to get higher for a business like that, assuming that it’s a healthy business. I’m assuming here that these are both healthy businesses that we’re looking at, the margins fall in line with industry averages, and so on and so forth. The mere fact that business is larger, there’s less risk in it for a potential buyer and the multiples will go up. Acquiring additional businesses, growing your top and bottom line not only gives you a higher EBITDA but then it might apply a higher multiple, and so your business went on steroids.
I’m going to give you an example here. A number of years ago, we represented a pharmacy group. It was a multi-location pharmacy group. We took that business to market and the ultimate acquirer was a private equity group that was in the process of rolling up and acquiring independent pharmacies. The whole strategy for them was to acquire as many independent pharmacies as they possibly could. Grow the business top and bottom line, build some efficiencies in it, and then package up that business and sell it to one of the big pharmacy groups for a multiple. It was much higher than the multiple that they had paid for any of those individual transactions and sure enough, the group pulled that off. They were able to acquire dozens of independent pharmacies. After a couple of years of doing that, they packaged up the business. They had a much bigger business. The multiples were much higher than anything they had acquired anything at, and it was a great return for them and their investors.
You could do this for yourself as a business owner and reap the rewards. Hopefully, this list will give you some ideas on how to grow your business through acquisition. That said, acquisitions are hard and fraught with all speed bumps, and there will be many things standing in the way of your success. In a future show, I will be detailing some of the top reasons acquisitions fail and things you need to be thinking about that. Until that show, I’ll share with you that integration is critical to ensuring acquisition success. The integration runs the gamut from how you integrate employees to clients, vendors, systems, technology, facilities, and the thread that pulls all of that together is communications.
Communication is key to getting and keeping all the parties in an acquisition on the same page and rowing the boat in the same direction. If you can pull together the right team advisors, I strongly believe acquisitions are a must in your overall growth strategy for your business. You will gain a skillset that will serve you and your business for years to come. I hope you enjoy this episode. If you enjoy our show, please remember to subscribe and review our show. I look forward to seeing you again on the next episode of the show. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.
About Domenic Rinaldi
As owner and managing partner of Sun Acquisitions, Domenic helps clients buy and sell businesses across a variety of industries. Since 2005 he’s been personally involved in over 300 transactions for businesses with enterprise values of $2 million to $50 million.
Recognizing many business owners didn’t understand the full requirements of successful exit, acquisition and scaling processes, he founded K2Adviser. The mission – educate business owners and buyers so they can maximize transaction benefits and minimize transaction risks.
Domenic’s an industry-recognized expert who frequently shares his hard-earned knowledge from the stage, in print and over the airwaves – including as host of the popular M&A Unplugged podcast.
Love the show? Subscribe, rate, review, and share!
Join the M&A Unplugged Community today: