Acquisition Strategies – Think Small to Go Big

Acquisition Strategies – Think Small to Go Big

On several occasions, I have met or worked with entrepreneurs that built valuable businesses by effectively executing several small acquisitions. These companies have been in industries such as staffing, insurance and financial services as well as electronic and light manufacturing. Several of these companies reached enterprise values of well over $30M+ by generating EBITDA %’s that were higher than their industry norms.

Here are some key points to their collective acquisition strategies targeting smaller business:

Smaller revenue or cash flow businesses– many focused on companies with low revenue (less than $5M) and/or low EBITDA (less than $500K or even unprofitable). These companies are often below the radar screen of bigger companies and many of these companies don’t have many exit options. Often very small company have margins that are better than much larger ones.

Companies in smaller geographic markets – I recently worked with an acquirer that focused on buying small companies in Tier II cities. He found that even thought many of these businesses were smaller their EBITDA was higher (as a percentage of revenue). This could be due to less competition. Similarly, niche industries may have small operators but again good margins. Conversely, I have seen a number of companies do a good job of building revenue through acquisitions but they acquire lower EBITDA margin businesses and often are not able to make the margin improvements they believe are possible. Thus they are growing revenue but not enterprise value.

Variable based pricing and/or multi-year payments – Several companies negotiated purchase prices based on retention of current customers or future EBITDA multiples. In addition, some negotiated payment terms that extended over 1-3 years and a few as long as 5 years. Longer payment terms were most predominately used when selling owners were seeking an exit from the day to day business with some remaining focus on a small focus on sales and marketing. All that said, many buyers ultimately chose a single price to be paid at closing rather than deal with the complexities of paying over time.

Its interesting to note that many of these companies successfully grew through persistent searches for acquisitions but not necessarily an aggressive ‘roll up’ strategy of acquiring or merging many companies at the same time. The point of this is that acquisitions, even of smaller companies, can drive profitable growth and increases in enterprise value. If you considering acquisitions, don't be afraid of 'thinking small' with only a few acquisitions completed it can turn into real growth both in terms of revenue and more importantly enterprise value.

Read Our Other Blog Post:  Corporate Financial Planning: The Value of a Process Change

What Our Clients Say:

“Chris is a very intelligent out of the box thinker. He presented us with financing options far exceeding the traditional bank proposals in the past. He spent enough time to understand the issues surrounding our need so he concentrated on the options that would be pertinent to us, significantly reducing our work on the project. The next time we have a need, I am confident we will discuss it with Chris first.”

Shannon Strunk

Owner, Baber's Inc. , Pascagoula MS

"Chris took the time to understand our business – which is unique. I felt like we didn’t have to keep going over things.   Chris was very responsive and explained things.  He translated our business and growth strategies  into a business plan that was understandable by others.  He handled the information well and was able to run with things once he got up to speed on our business."
 
Reece Pierce
Owner American Medical Seminars
 
“Chris helped us look at many different types of financing alternatives and helped us find a new capital provider that increased our funding limits and released some of my personal collateral.  As our business began to grow rapidly, Chris also helped us modify our financing terms with our new capital provider.  Since that time, Chris has helped us evaluate acquisitions, set long term and short term financial goals and serve as an on-going financial advisor.  I enjoy working with Chris and I trust that he and his team have my best interests at heart.”
Doug McReaken COO, Media Riders, Houston TX
 
 

“I spent years doing research and speaking to advisors, investors and banks. I could find no support for the kind of transaction I wanted to do and believed could be done. That is, until I stumbled upon Lantern Capital. Just one phone call to Chris Risey and I heard the words “it absolutely can be done”. He then helped make it happen. I will be forever grateful to Chris for his counsel, expertise and hard work in leading us to our goal.”

Dan Florenzo

CFO at One Call Concepts, Inc., Baltimore, MD

 
 

Chris Risey

Acquisition Strategies – Think Small to Go Big

On several occasions, I have met or worked with entrepreneurs that built valuable businesses by effectively executing several small acquisitions. These companies have been in industries such as staffing, insurance and financial services as well as electronic and light manufacturing. Several of these companies reached enterprise values of well over $30M+ by generating EBITDA %’s that were higher than their industry norms.

Here are some key points to their collective acquisition strategies targeting smaller business:

Smaller revenue or cash flow businesses– many focused on companies with low revenue (less than $5M) and/or low EBITDA (less than $500K or even unprofitable). These companies are often below the radar screen of bigger companies and many of these companies don’t have many exit options. Often very small company have margins that are better than much larger ones.

Companies in smaller geographic markets – I recently worked with an acquirer that focused on buying small companies in Tier II cities. He found that even thought many of these businesses were smaller their EBITDA was higher (as a percentage of revenue). This could be due to less competition. Similarly, niche industries may have small operators but again good margins. Conversely, I have seen a number of companies do a good job of building revenue through acquisitions but they acquire lower EBITDA margin businesses and often are not able to make the margin improvements they believe are possible. Thus they are growing revenue but not enterprise value.

Variable based pricing and/or multi-year payments – Several companies negotiated purchase prices based on retention of current customers or future EBITDA multiples. In addition, some negotiated payment terms that extended over 1-3 years and a few as long as 5 years. Longer payment terms were most predominately used when selling owners were seeking an exit from the day to day business with some remaining focus on a small focus on sales and marketing. All that said, many buyers ultimately chose a single price to be paid at closing rather than deal with the complexities of paying over time.

Its interesting to note that many of these companies successfully grew through persistent searches for acquisitions but not necessarily an aggressive ‘roll up’ strategy of acquiring or merging many companies at the same time. The point of this is that acquisitions, even of smaller companies, can drive profitable growth and increases in enterprise value. If you considering acquisitions, don't be afraid of 'thinking small' with only a few acquisitions completed it can turn into real growth both in terms of revenue and more importantly enterprise value.

Read Our Other Blog Post:  Corporate Financial Planning: The Value of a Process Change

What Our Clients Say:

“Chris is a very intelligent out of the box thinker. He presented us with financing options far exceeding the traditional bank proposals in the past. He spent enough time to understand the issues surrounding our need so he concentrated on the options that would be pertinent to us, significantly reducing our work on the project. The next time we have a need, I am confident we will discuss it with Chris first.”

Shannon Strunk

Owner, Baber's Inc. , Pascagoula MS

"Chris took the time to understand our business – which is unique. I felt like we didn’t have to keep going over things.   Chris was very responsive and explained things.  He translated our business and growth strategies  into a business plan that was understandable by others.  He handled the information well and was able to run with things once he got up to speed on our business."
 
Reece Pierce
Owner American Medical Seminars
 
“Chris helped us look at many different types of financing alternatives and helped us find a new capital provider that increased our funding limits and released some of my personal collateral.  As our business began to grow rapidly, Chris also helped us modify our financing terms with our new capital provider.  Since that time, Chris has helped us evaluate acquisitions, set long term and short term financial goals and serve as an on-going financial advisor.  I enjoy working with Chris and I trust that he and his team have my best interests at heart.”
Doug McReaken COO, Media Riders, Houston TX
 
 

“I spent years doing research and speaking to advisors, investors and banks. I could find no support for the kind of transaction I wanted to do and believed could be done. That is, until I stumbled upon Lantern Capital. Just one phone call to Chris Risey and I heard the words “it absolutely can be done”. He then helped make it happen. I will be forever grateful to Chris for his counsel, expertise and hard work in leading us to our goal.”

Dan Florenzo

CFO at One Call Concepts, Inc., Baltimore, MD