The most obvious way to grow revenue is organically – with existing products and sales channels, in the same market and with your established team. This isn’t easy, organic growth is hard work – it takes a lot of blood, sweat and maybe a few tears. It could mean recruiting a new salesperson who will take time to become productive, developing and marketing a new product, or even opening a new office in a different geography. Either way, it’s a slow burner that takes time, and that’s even if you get it right first time.
But organic growth is not your only option, you could also acquire another company, simply adding its revenues to yours. Acquisition isn’t the right strategy for every business and it’s not always an easier option, but there are plenty of advantages that could make it the right one for you.
Let’s take a look…
1. Growth will rocket overnight, increasing market share
No matter how good your sales team are, the fastest way to grow your business will always be through acquisition. Acquiring a competitor will increase your market share, and all of a sudden, your long-term goals quickly become mid-term goals.
Some businesses use this approach to become market leaders in their sector, fending off the competition.
2. Power of multiples – it’s all about the EBITDA
When a company is valued, although other factors are considered such as industry and structure of the business, the most common method used to determine the sale price for a business is calculating a multiple of its EBITDA (earnings before interest, taxes, depreciation and amortisation). EBITDA is a measure of a company’s ability to generate operating earnings. Generally, the rule of thumb is, the smaller the businesses EBITDA, the lower it’s multiple that provides the sale price.
As soon as you combine two or more businesses, the EBITDA will automatically increase, so if or when you come to sell your company down the line, your multiple will be bigger and the valuation on your business will be bigger too. You may also have other exit routes, as a bigger business will attract even bigger fish in the market.
Take a look at the example below:
If the EBITDA multiple isn’t right, as a result the Return on Investment (ROI) will be lower. For an acquisition to work, the expected ROI must be much higher to compensate for the higher risk when compared to organic growth.
3. Synergies and opportunities to creating a better business together
No two businesses are identical, the synergies that come from working together are extremely powerful. A competitor may have a strength that you just don’t have in your business and vice versa, this collaboration will only enhance your product or service.
A good example may be that your business has a marketing team in-house, and the other doesn’t, but they do have access to a new market and better supply chain. Together, with your marketing support focusing on the markets in which they already have a strong footing, you can deliver increased organic growth, potentially at a lower cost.
4. Let’s talk economies of scale and increased buying power
Simply being bigger comes with its benefits; from better access to capital, lower costs as a result of higher volume, to better bargaining power with distributors and suppliers, or even bringing your supply chain ‘in-house’ so you retain control and keep hold of the profits.
5. Diversify, diversify, diversify
Whether an acquisition diversifies your customer base or delivers you new products or services, not having all your eggs in one basket will spread the risk to your revenue streams. If one revenue stream collapses like it did for many businesses when Covid began, an alternative stream can stand its ground or even see an uplift. This can only be beneficial to your business.
6. Gain access to talent
Right now, in the UK, finding the right talent with the right skills and cultural values is hard. In many industries, the market is competitive and good candidates can have multiple offers on the table.
If your competitor has people within their business with the skills that you lack within yours, an acquisition could solve this problem.
But equally, the biggest always have access to the best talent. Ambitious people want to work for the best in the market, either way, acquisition can solve capacity that you may have.
So, is acquisition the way forward for you?
Buying a business can be a stressful, let’s face it, emotions can run pretty high. We know this because we’ve bought businesses ourselves and have supported many clients over the years.
Although acquisition comes with many benefits, it’s not for the faint hearted as there can be many challenges along the way too. We’re not here to just do the technical stuff, from finding the right acquisition, raising funds right the way through to completion, we’re here to challenge, encourage, keep everyone calm, and ultimately help you achieve your goals.
If you have ambitions to grow your business, talk to us to see if acquisition if the right way forward for you. To arrange a private call or meeting email your dedicated Client Services Director or confidential@djhmittenclarke.co.uk.
