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.
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