27 Sep Preparing for a Strategic Acquisition of Your Start-up
I recently read an article explaining that two of the top seven reasons why businesses fail in the first years of inception. Among them were poor management and a lack of capital. Both of these issues can easily be swallowed up in a strategic acquisition if the acquiring company has the capital to make a strategic acquisition.
If a company is ready to make an acquisition here are a few things that should be considered. If a current business is running and profitable then the skills and capabilities to make the acquisition are probably in existence. Whether the acquisition target is a struggling business of a profitable enterprise, the ability to acquire the business and move forward could be found in the existing model. In the acquisition it would be wise to include the target directly into the existing business model that is proven to be profitable. This can be done through a well-trained business manager who is willing to relocate if relocation is necessary.
The next key point I would bring up is that the target’s overhead can often times be nearly eliminated. I recently spoke to a business owner who made an acquisition earlier this year, and during our he said that when he acquire the struggling business, who was his competitor for nearly a decade, he nearly eliminated the entire overhead and added all of those costs to the bottom line of the income statement. Now he is looking to sell his business and will more than likely profit greatly from the acquisition made earlier this year. While the acquiring company may not be able to eliminate the entire overhead he will more than likely benefit in a similar way.
Another point is that most companies, depending on the industry and future projections of cash flow, will sell for an EBITDA multiple of approximately 4x. That alone is a return on the capital of 25%. Then if some of the business expenses will be excluded from the expense column then moved to the bottom line then the return on the capital could be even higher. Of course these profits will be earned due to the hard work of the acquiring company.
One last point is that acquiring a company can make a business more competitive. One business owner Deal Capital is working with just contracted a large amount of work approximately eight hours from his current enterprise. In order for him to fill the requirements of the contract he would have to bear the costs of sending a team to the location for a large amount of time and tie up a large amount of his assets. The expense of hauling the employees and assets to and from the location will draw heavily on the profits from the contract. By making an acquisition into an existing company located closer to work site he can drive more business to a company already established and drive higher profits to both branches.
There is a myriad of reasons to make an acquisition just as there is a myriad of reasons why not to make an acquisition. Business if full of risk opportunities and if you are looking to expand, rather than starting from the ground up we recommend you buy into a business that will provide a current and existing steady revenue stream.