Herb McMillan For Anne Arundel County Executive
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“Nationals October 2019

Growing Your Business Through Acquisition – Why and When It Makes Sense

| January 22, 2022, 01:00 PM

Now that we have officially kicked off 2022, and hopefully everyone has recovered from the craziness that is the holiday season, it is time to turn our attention back to work and back to achieving those 2022 Revenue/Growth Goals that were laid out during your strategic planning sessions in December.

Growth goals are often accomplished through the expansion into new markets or by growing your team and further saturating your current market. However, there is another way. One that will cost more upfront but comes with a predictable income stream on the backend. And that is acquiring an income stream by buying a business.

One of the biggest advantages of this approach is that you are acquiring a known entity, staff, products, and/or licenses. These are all things that a value can be put on – as opposed to hypothetical growth that new staff or markets could add to your bottom line.

Typically, there are three scenarios when it makes the most sense. So let’s talk about them individually, although realize that there could be overlap, and then I’ll come back with a few notes at the end about what to keep in mind.

1. Buying a Competitor to Add Revenue

This is as straightforward as it gets. You have the tools. You have the processes. Now, you just need the clients – or more clients anyway.

Buying a book of business is a proven way to do that. While you should never expect to capture 100% of the customers you acquire, if you know how much the lifetime value of your customer is (or at least how much they bring in a year), you can perform a basic breakeven analysis to determine what percentage of customers you would need to bring over to hit that mark in 2 years, 3 years, 5 years, or whatever your timeframe is.

Once you have that plan, you can also work with your broker and/or lawyer to structure the buyout in a way that protects you. So you may only give 50-70% of the purchase price upfront, and then ask the current owner to help you acquire the necessary clientele to hit your projections and give them a financial incentive to help you get there.

When Does This Make Sense?

This makes the most sense when your current team has extra capacity to meet the additional demand. This is by far the most common approach for financial advisors, insurance providers, and franchise owners. Although fair warning, as a business broker, I am not sure I would recommend coming to me to sell any of those practices. I am always happy to help and have a conversation, but those are three scenarios where I often do not provide the best value to the sellers.

This could also make sense if you are looking to sell your business in the next few years. As the value of your business is based, directly or indirectly, on the revenue your company brings in, scaling up before selling gets you a bigger return. But please be aware that you will need to run the business long enough to get evidence that the merger added revenue, which I would expect to be at least 2 years.

2. Buying a Competitor to Add Talent

Anyone that has ever tried to hire knows how hard it is to get talent. Anyone who has tried to hire recently knows somehow that it has gotten even harder. Something I have noticed buyers telling me is that they are less interested in the book of business, but more interested in the owner, ownership team, and employees that will be coming with the business.

When Does This Make Sense?

I have had conversations with CPAs firms about buying out independent CPAs to bolster their staff. This makes a lot of sense for doctors and lawyers too. Basically, consider this strategy as another option for hiring. But remember that the purchaser also comes with a book of business, and you will need to be able to scale to handle the additional work.

3. Buying a Company to Add Products, Services or Distribution Channels

Notice the change in title. Here the buyer is not buying a competitor, they are buying a complimentary company. The goal here is to supplement your offerings and provide a better, or more complete, experience for your customers, or to recognize profit/price reductions in other parts of the product offering.

This is common in the larger world of Mergers and Acquisitions. For anyone watching Succession on HBO, Season 2 dedicated a lot of screen time to Waystar Royco trying to acquire – or merge, depending on the episode – with GoJo because they see the business as complementary. Waystar Royco has the content and content creators. GoJo has a better technology platform for distribution. Together, they offer a better customer experience and can extract value at multiple points.

When Does This Make Sense?

Outside of HBO, some of your favorite large companies are known for this. Amazon, Microsoft, Apple, and Facebook have all been under government scrutiny during various times for purchasing competitors and “hurting competition.”

I have had conversations with teams in the construction industry that needed licenses and were willing to acquire businesses to get those licenses. I’m seeing this in the world of government contracting where small businesses are getting acquired because they are awarded specific contracts that larger businesses want.

I am currently trying to do this with a couple of businesses I have for sale. I am working with a General Contractor known for renovations and new home development, as well as a flooring company that sells and installs tiles and wood flooring products. If a buyer comes in and buys the package, they would now be able to recommend flooring tiles they sell to customers for who they are redesigning their kitchen or bathroom for.

Liquified Creative Annapolis

Things to Consider Before Purchasing a Company

One of the first things you need to examine is whether this company would be a good fit for your company.

  • Can you handle the influx of new customers?
  • Does this company add to your current capabilities in a way that you can capture additional value?
  • Do you have, or are you acquiring, a management team that can oversee the integration of the business?
  • Are they a cultural match for your organization?
  • Are they appropriately priced, or are you willing to pay the premium?

Talk to a Broker

Finally, consider whether it does or does not make sense to reach out to your local business broker. Obviously, I am partial to using a broker, but ask yourself these questions to help determine if it makes sense for you to work with us:

  • Do you have an acquisition target in mind?
  • Do I have the resources needed to come up with the money for this purchase?
    • If you do not have the required cash on hand or a relationship with bankers, then we can add value here.
    • Note, different bankers offer different values, so I would want to talk to a larger national bank, as well as a community bank…and probably the AAEDC as well.
    • If you have a rollover IRA, we also work with partners who can help you extract money from that tax/penalty-free.
  • Do I have the contacts necessary to do the due diligence on this acquisition?
    • At a bare minimum, that is a CPA or bookkeeper.
    • You may also want various technologists or even business coaches to get involved to inspect the purchase or purchase plan.
  • Do I have the legal team in place to draw up the contracts?
    • You will want a lawyer to draft the turnover paperwork. Do you have a lawyer well vested in business transitions? Because we have several that we love working with.
  • Do you have experience in negotiating?
    • One of the biggest values we provide our customers is our ability to negotiate on their behalf to get the best value, which can be difficult when you as an owner are so vested in the business. Some people can do it, others cannot.
  • Have you gone through this before?
    • This process is not rocket science, but it can be scary the first time.
  • Is the business appropriately priced?

We add value to our clients in all seven of the areas outlined above. If you feel comfortable that you have all of those areas covered, then maybe we do not make sense for you. Which is perfectly fine. Your only obligation is to your business, your employees, and most importantly, your family.

Just know if you would like to have a conversation, where are here to support you. You can always, reach out and schedule a conversation. My team works exclusively with companies and owners within an hour of Annapolis.

We are local, responsive, and in tune with the community.

If you have questions or are stuck, see if we can help.

 

Category: Businesses, LIFE IN THE AREA, Local News, NEWS, Post To FB

About the Author - Steve Palmer

Steve Palmer is the Principal Business Broker with Transworld Business Advisors of Annapolis, and currently lives with his wife, Erin, and daughter Isla Mae, in Harwood, MD. Transworld is the largest business brokerage franchise in the world and has conducted over 10,000 business sale transactions across dozens of industry verticals since its founding in 1979. If you are, or have ever considered, selling or buying a business, please reach out to Steve by email at [email protected] or by call or text at (410) 842-6063.

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