Buying another company might be one of the best ways to pull your business through tough times. Find out how this approach could work for you.
How would you like a second chance to reinvent your business? You can — if you’re willing to think boldly about growing your business through one or more clever acquisitions.
At a time when so many small-business owners are depressed about the economy, opportunistic business builders may be able to gobble up revenues, customer lists, Web traffic, technology and operating assets at reasonable prices.
Here are five reasons to scan your industry’s landscape for business combination opportunities:
- Faster revenue growth. Sometimes it’s just faster and cheaper to buy revenues through opportunistic acquisitions than pay all the promotional and sales costs associated with securing new customers on your own. Savvy business acquirers look for special situation sales prompted by divorces, feuding partners, retirements and “tired” investors in order to buy business assets at reasonable valuations with extended payment terms.
- Reduced administrative costs. The most emotionally wrenching aspect of buying another business is the high likelihood that some employees will lose their jobs. Most companies don’t need two bookkeepers, two HR and payroll managers, two same-city sales managers, etc.
The upshot of reducing redundant sales and administrative personnel costs is a boost to your new company’s (“newco”) operating margins. The extra cash flow can then be reinvested in additional acquisitions, product R&D or bigger year-end bonuses for top management and loyal staff members.
- Lower lending costs. Provided that the acquisition is not highly leveraged, business acquirers can expect to get a better deal on commercial lending facilities and other deposit account fees. Banks will compete for your business, too.
Here’s another benefit of acquisition activity for business owners: Sometimes single-entity businesses that couldn’t quite make the grade for obtaining expansion funding from Small Business Administration-backed lenders can get a hearty hello for acquisition funding. Projections associated with combining two business entities can be more believable than a single business entity’s guesswork growth projections.
- Higher valuation. Scale improves the overall valuation of a business and the appetite of “lower middle market” buyout funds to compete for well-managed companies.
For example, a single restaurant might sell on a good day at two to three times EBITDA (earnings before interest, taxes, depreciation and amortization). In comparison, an owner of a fast-food franchise outlet that aggressively buys up other regional outlets can be valued at four to five times EBITDA. Bigger operations, especially in consumer service sectors, get bigger valuations. It’s that simple.
- Complementary skills. The most productive acquisitions not only build a company’s revenues and profits, but also combine know-how and intellectual property to strengthen a newco’s operating position.
Last year, I saw a neat merger deal in which one East Coast chain was matched to a similar West Coast chain. The East Coast chain was a master of new-lead generation through radio and promotion advertising. The West Coast chain excelled at generating repeat business from existing customers at high profit margins. Company managers were motivated to learn from each business’ strategic strengths. It was magic!
Like everyone else in the buyout world, I’m a great admirer of Warren Buffett’s disciplined approach to business buying. Buffett only buys proven cash-flow-generating businesses for his holding company, Berkshire Hathaway. He’s stingy, practical and doesn’t overpay for an operating business, no matter how fun it may seem. If you copy Buffett’s rules for business buying, you might soon realize your big business dreams of success.