The key to any company’s continued success is continued ongoing growth. While this is traditionally achieved through strategies like marketing and traditional expansion, there’s another option that business owners should consider: acquisitions.
An acquisition can be a great vehicle for rapid growth. This practice is employed by companies of all sizes to secure additional market share and increase revenue. It is an excellent strategy for diversification and sustained growth.
For entrepreneurs, and especially those in the e-commerce sector, an acquisition can provide a world of exciting opportunities. It’s a great way to expand your customer base, gain market share, and boost your sales and revenue. When it’s a good fit, and if the deal is properly executed, exponential growth is possible in a very short amount of time.
But when it comes to acquisitions, there’s not much information out there to help those who are just getting started. There’s a lack of information surrounding the process, and the industry is filled with jargon. Many tips are designed for institutional-level investors. Because of this, acquisitions are something that’s on most people’s radar. But it’s time for that to change.
In this article, I’ll share some of the strategies that I employ during my acquisitions, as well as some insight from Jeremy Harbour, an experienced M&A expert with 20 years experience buying and selling SMBs. Harbour owns M&A firm Unity Group and runs The Harbour Club, a company that helps entrepreneurs to buy owner-managed businesses.
Let’s take a deep dive into some of the finer points of acquisition, and delve into some strategies that you should employ if you’re thinking of making your first purchase.
Although it’s the route that most business owners take, organic growth can be a time-consuming process. Mergers and acquisitions can help to fast-track this process.
“Growth through acquisition is a quicker, cheaper, and far less risky proposition than the tried and true methods of expanded marketing and sales efforts,” shares David Annis in his book, Strategic Acquisition: A Smarter Way to Grow a Company. “The competitive advantages are also formidable, ranging from catching one’s competition off guard, to instant market penetration even in areas where you may currently be weak.”
Another advantage is time to cash flow. If you’re starting your business from scratch, it could be 6-12 months before the cash starts coming in so you’ll have a lot of sunken costs. But with an acquisition, you can get the ball rolling right away. You’ll already have an existing customer list, a rough idea of cost per acquisition of clients, existing manufacturing connections, and brand recognition (in most cases).
Mergers and acquisitions can also help you to increase your company’s value as well. It varies from niche to niche, but a lot of times there are higher multiples offered by private equity firms if you reach a certain revenue or profitability level in your business. In my space, when it comes to acquisitions, there are firms that will pay a 10-12 times multiple at a five million dollar and above EBITDA (earnings before interest, taxes, depreciation, and amortization). Through acquisition, you can reach that threshold much faster than growing organically.
If you’re looking to grow quickly, it could prove to be an ideal strategy; but it’s not always entirely smooth sailing. If you’re not sure what you’re doing, or rush into it unprepared, you could end up losing money, or time trying to merge companies that aren’t a good fit.
It’s also important to know what you’re looking for from the start. This will help to guide your search. You can buy or acquire another business for a revenue stream or you can buy for scaling. If you are buying and will need to take a salary out of the business, you need to have a completely different profile of the type of business you are looking to buy.
Now, let’s take a look at some things that you should know before you begin the process of an acquisition.
Accurately Estimate Synergies
Synergies in an acquisition refer to the concept that the value and performance of two companies combined is greater than the sum of the separate individual parts. And it’s easy for companies to overestimate this. According to one survey of 352 global executives, overestimating synergies was cited as a major cause behind failed mergers by some 55% of respondents.
At first glance, the synergies between both companies might seem strong. On paper, it can appear promising and be a deciding factor when considering a deal. Under closer scrutiny, however, actual real-world synergies can fall well below expectations.
Take into consideration these three sources of synergies native to mergers and acquisitions:
- The combined customer base of both companies and the opportunity for cross-selling.
- An increase in your buying power, thus resulting in the growth of your gross margins.
- A reduction in administrative and general expenses as a result of scaling and removing redundant systems.
These are all excellent synergies to consider, and they will add value and increase the growth of your company. Just be sure to accurately assess any potential synergies.
Merger and acquisition expert Jeremy Harbour says that he intentionally leaves out synergies when estimating the value-add that he is bringing to a business.
“There are certain value-ads that I can bring to a business to increase the value, but that doesn’t include the synergies that exist between those companies,” says Harbour. They shouldn’t be the reason for doing the deal. “Consider them as a bonus.”
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Conduct Due Diligence
Neglecting to conduct due diligence is another common mistake, and is something that was cited by 59% of respondents to the abovementioned global executive survey. In my acquisitions, we always hire a third-party auditing firm to make sure that we are not overlooking anything. Ensure they are paying close attention to changes in expenses, increases or decreases in sales volume, or anything that might be a red flag or alert you to problems in the business.
Likewise, make sure you develop a clear integration plan. Setting a 100-day benchmark can help to increase your chances of success with your acquisition. Moreover, it will allow you to diagnose and quickly fix any problems that may come along.
Use your implementation plan to lay out your vision, strategy, and initiatives. Define what success will look like. How you finish is just as important as how you start. Others will be relying on you for clear guidance. Be precise in your vision and intent.
Have the discipline to map out the first 100 days. It will alleviate the anxiety people are no doubt experiencing. Change is hard, but if you are clear with your intentions, your team will be productive and continue to grow.
Get the Entire Team On Board
It’s also important to ensure that the entire team is on board. But this can be complicated, especially when you’re merging staff and management. How can you ensure that everyone will be on board and willing to come together to make the merger a success?
Consider that with an acquisition, there will often be overlap in responsibilities. This may create some concern for employees, but it does create an opportunity to reduce overhead costs for you, as the owner.
There can also be a learning curve if the business isn’t exactly the same as yours. Have a plan in place for who you need to hire, who you need to train, what that will cost you, and what that looks like.
“When it comes to integrating businesses, one thing that I’ve found works best is to incentivize management teams to find extra profit or extra margins,” says Harbour. “If it’s their idea, and they’re incentivized on the outcome, they will go and overdeliver. Even if it’s not working, they’ll work until midnight to make sure it works because they’ve put their name to it.”
Carefully Consolidate Teams
When should you merge companies and when should you keep things separate?
“I’m very against centralization,” says Harbour, “but you can optimize certain things. If one of the businesses has a really good accounts team, you may be able to move the accounts over to that business, just by hiring a few extra people.”
Don’t Overleverage Yourself
“A lot of people getting into mergers and acquisitions the first time around over-leverage,” says Harbour. “They borrow too much money from banks or financial institutions, then they personally guarantee that leverage. Leverage is a bad idea in many ways, especially when it comes to small businesses which are tremendously volatile.”
Instead, Harbour says that buyers should look to create asymmetric risk.
“If you had to compare the price you pay versus the risk you take, we would almost always lower the risk even if it means paying a higher price,” he explains.
It helps to look at the financing part of the project through the lens of creative financing. This can be anything from seller financing, retained equity, royalties on future sales, and consignment of existing inventory. Anything that will mitigate the risk on your end is worth your consideration.
Cut Out the Middleman When Sourcing Companies
When it comes to sourcing companies and negotiating with potential vendors, cut out most of the professional advisors.
“You can spend a lot of money with advisors,” says Harbour. But this isn’t always the best approach.
“These advisors often encourage you to over-leverage, encourage you to overpay, and in my experience don’t really add any value to the process,” he explains. “If you’re looking for businesses in a specific sector, just reach out to business owners that you know in that sector and have a chat. See what their plans are, their goals are, what their plans are for the company, and see if there are opportunities available there.”
Part of our strategy was to create a detailed profile of the types of companies we were looking for and then do outreach to brokers. Rather than waiting for something to come on the market that appealed to us, we have several people that are actively reaching out to companies on our behalf.
Don’t Count On It Until It Happens
Finally, try not to get so caught up in the prospect of an acquisition that you neglect your company.
Studies have shown that over 50% of buyers spend between 10 -20 hours a week searching for 6-12 months to find a suitable business to acquire. Even though you may feel that you know all the players in the space, it will still take time to strike a deal, secure financing, and ultimately close the deal.
It’s important to note that there’s a good chance that the first deal, or second, won’t go through, so don’t get discouraged. If you’re caught up to the point of desperation, where you’ll do anything to make the deal work, then you’ll be tempted to offer more money, and may risk paying over the odds for the company. Instead, make sure you focus on the day-to-day happenings with your business.
“Give more time than you’d expect to make it happen,” says Harbour. If you think you can do it in a year, it might take three.”
Merger and Acquisition Websites
For entrepreneurs who are looking to get started with mergers, there are a number of helpful websites out there.
When using these websites and analyzing businesses, it’s important to carefully evaluate whether they’re a good fit. For instance, if you’re looking at the listing, and they are getting most of their revenue from AdSense, but you have existing products that you can sell to them, you may be able to instantly boost the site’s revenue. All factors must be considered when analyzing these acquisition websites.
Here are a few buy-and-sell sites:
Flippa allows users to buy and sell affiliate sites, SaaS businesses, applications, blogs, digital services and so much more. The best part? Some live listings start in the mere hundreds. If you can figure out what can best be leveraged to benefit your business, this website is a potential goldmine for your small to medium business. One handy feature on this site is that you can narrow it down from profit margins, where you see the net monthly profit of the website in question.
(Source: Digital Exits)
With a 94% closing rate, it’s hard not to be tempted to use Digital Exits for your merger or acquisition operations. Listings on this website are organized and attractive, with a clearly stated focus on the business, pricing, revenue, and income. While this website has fewer listings than Kippa, it has very serious business acquisition clients.
(Source: Side Projectors)
While navigating through Side Projectors does take some getting used to, the beauty of this website, with its focus on specifically buying and selling side projects and businesses, is that these usually come with very specific audiences and niches. This is an excellent opportunity to hone in on a Facebook page or a Shopify business that has grasped a demographic you were hoping to reach with your business.
We also have Exchange, Shopify’s marketplace for buying and selling e-commerce businesses. Sellers can create public or private listings. For sellers, just click the “Sell your business” option to obtain a valuation and then create your listing. Search business types, including drop shipping, partner stores, and staff picks as well.
Why Mergers and Acquisitions Work
Mergers and acquisitions can be tremendously rewarding, and a great way to achieve exceptional growth fast, but if you’re looking to get started with mergers it can be difficult to know where to begin. This is perhaps one of the main things that holds many entrepreneurs back from taking this route with their operations. Instead, they focus on marketing and sales and miss out on this opportunity. But if you’d like to get started with mergers, then don’t let a lack of knowledge hold you back.
There are plenty of experts and entrepreneurs out there who have taken this route before and are willing and ready to help. Jeremy Harbour’s Harbour Club Events is a great place to start. It’s a community, and an experiential training course that shows you the fundamentals of how to find, buy, and sell businesses. There’s even an app where buyers and sellers can connect, allowing them to brainstorm, share ideas, and ask questions. It’s also a great place to connect with sellers (or buyers).
Take the time to pressure test synergies in real-life scenarios. Look beyond the analytics, think about how it will affect your employees on the ground and your customers as well. As with anything else, the risk can be worth the reward, just be vigilant in your analysis.
Looking to get started with mergers and acquisitions? See: The challenges of merging multiple businesses.
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