If you’re a successful business owner, you know that organic growth is hard work. It takes time, capital, tolerance for risk, and at least some luck in the market or your timing. You have to build infrastructure on faith, go out and find business, find talent to service the business, and deliver on your promises, all while maintaining the highest standards for your current customers so you can retain them.
Not for the faint of heart
There is another way to grow. But we find most owners don’t usually consider it, especially as a first option. Acquisition is a very viable strategy for most companies, and it presents plenty of advantages with much less risk.
Buying another company allows you to expand immediately into another geographic area, another complimentary product line, or a new group of customers you can cross-sell to. If you choose to buy a local competitor, you will strengthen your position in the market relative to other companies. At the very least, you’ll have one less competitor to bid against the next time you submit a proposal. You gain these advantages without the time and massive effort it would take to expand your existing business model.
You’ll also find that you can gain significant economies of scale. You may have more negotiating power with vendors because you’re ordering larger quantities. You may be able to manage both companies without retaining two full teams; keeping the best of both the current and new HR, accounting, or IT staff may be all you need to function at a high level.
Buying instead of growing changes your risk profile dramatically. You’ll acquire assets and infrastructure that are already in place and functioning well. You’ll have trained staff who are already familiar with and serving current customers. You may even acquire resources that enhance your current business: talent with specialized skills, intellectual property or proprietary processes, or newer equipment.
What’s the catch?
So why don’t more owners consider acquisition as a strategy? In our experience, many are daunted by the top line numbers. They see a sale price of millions of dollars and believe they don’t have access to that kind of cash. That’s where an experienced M&A Advisor or Business Broker can be helpful.
First, we’ll help you understand the numbers. It’s important to determine both the cost and the value of the business you’re planning to acquire. How beneficial will the assets, staff, customer base, and infrastructure be to your current company? Is there enough cash flow in the business to service any debt you must take on to acquire it? (If there’s not, it may not be a viable target.) If the business is not profitable or well-run, you may still consider it simply for the value of its assets, especially if it comes at a steeply discounted price.
Financing the acquisition
In most cases, an established business owner of a profitable company will not need anywhere near the full asking price of an acquisition to make a purchase. The SBA offers plenty of affordable loan options up to $5 million. Most lenders will be able to make a deal with as little as five to ten percent down – it’s not unheard of for a well-established industry buyer to be offered zero down financing. You also have the option to ask the seller to hold some of the note as well; they may be more willing to do that for someone who is already successful in their industry and likely to make sure they recoup a return on their risk. Larger transactions beyond the scope of an SBA loan, can be financed by a combination of conventional, mezzanine loans, and additional equity raised from outside investors if necessary.
If a strategic buyer is already experienced and successful in the industry and buying a smaller business, a lender may even treat the deal as an expansion loan, rather than a new acquisition loan. You may be able to negotiate even more favorable terms under those conditions. Because you’re already taking an adequate salary from your current business, you won’t need to siphon off cash flow to support yourself. That, along with the economies of scale you achieve in the acquisition, leaves more cash flow from the new business available to service debt, making the deal even more attractive to lenders.
If you think acquisition is a viable strategy for your growth plans, get in touch with a Business Broker or M &A Advisor you trust to work on your behalf. They should be able to find opportunities to fast forward your growth.
