By Edward L. Fixen
When it comes to developing an exit plan and advance planning to sell a business, many small and mid-size business owners tend to overlook the benefits of growing their business through acquisition. Growing an existing business using strategies to increase sales and improve operations (i.e., organic growth) should be a constant, on-going goal of any business. However, many of the most successful, high-growth businesses have succeeded by combining organic growth with growth through acquisitions. Mergers and acquisitions aren’t just for Fortune 500 companies, even small and mid-market companies should consider and evaluate growth through acquisition. With enough patience and research, a good acquisition candidate can be found in any industry, in any price range.
The benefits of growing through acquisition include:
- Acquisitions can produce desired growth results much quicker than traditional organic growth strategies.
- Effective means of developing a competitive advantage by acquiring companies to address existing weaknesses or needs.
- Proven method of rapidly growing sales and income by acquiring new customers.
- Strategic acquisitions can be an effective means to diversify your customer base and/or enter new markets to reduce reliance on any one customer or industry.
- Acquisitions can be accomplished on a leveraged basis with financing to produce a return-on-investment often superior to traditional organic growth results.
Acquiring customers and diversifying your customer base through acquisition is a time-tested method to more rapidly grow a business than could be accomplished through organic growth. Whereas revenue growth exceeding 40% to 50% would take many years for most businesses, this goal can be accomplished in less than a year through acquisition. Of course, the increased potential benefits of acquisition also come with increased risk compared to organic growth. The financial and organizational burden to your existing business increases dramatically as the size of the acquired company increases. To mitigate the risk of acquisition and growing too fast, it is sometimes recommended to acquire a company 1/3 to 1/2 the size of your existing business.
Acquiring a business can be an excellent way to develop a competitive advantage within your industry. For example, acquiring a niche competitor providing a related service that your business doesn’t currently offer can provide an immediate competitive advantage over your competitors. As an example, we had a customer that had a high-precision CNC manufacturing business that acquired an electronic discharge machining (EDM) company that it had previously outsourced the process to when necessary. By acquiring this related business, the business expanded its potential customer base, improved quality control, improved schedule control and improved overall profit margins in the process.
Many small and mid-size businesses have customer concentration issues where their largest one or two customers comprise an excessive percentage of revenue. Acquisition of another business can be an effective means of quickly increasing revenue and income while strategically adding customers to diversify your customer base and reduce business risk.
From a financial standpoint, acquiring a business can be leveraged and achieved with financing to make it very attractive from a cash flow and return-on-investment perspective. Small and mid-size business acquisition financing can be obtained through conventional bank loans in some cases or SBA lenders in many cases. Other alternative financing sources include seller financing or mezzanine financing. For an established business owner looking to acquire a similar business with adequate cash flow, down payments can be as low as 25%.
Author: Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid-size, privately-held businesses throughout Southern California. Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB). Ed can be reached at [email protected].