Growth Through Acquisition | O'Keeffe and O'Malley

Growth Through Acquisition

May 29, 2020

Growing your business through an acquisition can offer a faster road to your goals, whether you simply want to increase revenue from your current product or service offerings or the acquisition allows you to tap into an entirely different segment.

Once you’ve determined your goal, it will be important to set parameters in order to focus your search. For example, if it is your first acquisition, a business that is located nearby might be the best choice. If it is within 100 miles, you’ll be able to respond quickly and move personnel between businesses, if necessary.

These parameters will vary depending on your particular circumstances, but there are also many considerations that apply to any business owner who wants to invest in another business. Below is a sampling of things to consider:

  • First, identify the industry of interest. You may decide to acquire in your exact same industry, or you may decide to branch out into a complementary business. Buying a company that allows you to cross-sell your existing products/services with the new business will add significant value.
  • Within your industry of choice, specify whether you desire business-to-business, business-to-consumer, or a combination of the two.
  • Decide the business sizes you would consider buying, from the smallest to the largest in terms of revenue or EBITDA. Do you have a target for EBITDA as a percentage of revenue? It’s best to aim for higher percentages.
  • Develop a plan to determine how you will locate acquisition targets. An M&A professional can help you put in place the process to identify, communicate with, and manage the process through negotiations and closing.
  • In addition to your M&A advisor, identify other parties on your acquisition team and make sure everyone is on board. You’ll need an attorney to handle the legal aspects and a CPA to manage due diligence and tax considerations. You may decide to involve others within your organization in the process, as well.
  • Determine whether you prefer a business that is not capital-intensive, or if you are open to one that is capital-intensive.
  • Decide if you want to purchase real estate with the business or if you prefer to lease.
  • Establish how much cash you are willing to allocate to a down payment, with the balance of the price being owed to the bank and possibly the seller. Ideally, the seller will carry a small portion of the purchase price so they have an investment in the success of the business going forward.

Once you have established your primary criteria, use the following guidelines to help you narrow down your options:

  • Customer diversification is important. Ideally, the business will have many customers, with no more than 20% of their business with any one customer. This minimizes the risk if a customer leaves.
  • Product and service diversification is equally important and serves as protection in the event of a downturn in any one sector.
  • Make sure the business isn’t overly dependent on one or two suppliers, and that there are other options.
  • Businesses with recurring revenue streams and long-term contracts with customers have more value.
  • A scalable business model could allow you to double revenues without doubling overhead.
  • Be certain that the business is not solely dependent upon the owner or just a few key people. Someone who is staying with the business must be able to run the company if it is not being merged into your existing business.
  • If the business is labor intensive without specific and unique skill sets, it will have less value.
  • Businesses that have survived or thrived during the current pandemic will have more future value.

These are just some of the many issues to consider when acquiring a second business. Your M&A professional can help you devise a plan that suits your unique circumstances. For advice on any aspect of buying or selling a business, contact O’Keeffe & O’Malley at 913.648-0185.