The worst part of our work is when we receive a call from a business owner looking to sell their business because it has lost momentum. And, often with it, they have lost drive as well. However, under detailed investigation, these are normally signs of a business with a failed growth strategy.
Lack of growth is a significant problem for selling a business. It normally means that the value of their business has reduced and is not attractive to most buyers. The market’s perspective is that if a business stalls, a downhill slope is most likely to happen next.
Most business sell, merge or fold. No-one wants to be in the third category, so demonstrating growth is critical.
We instinctively know that growth is a vital part of sustaining a valuable, saleable business. But what is the best method of growing a business?
Certainly, it is not accidental that every ambitious business owner has this question at the forefront of their mind when considering medium term planning. Yet, when it comes to answering this challenge, most entrepreneurs focus attention on organic growth.
The various strategies this can involve are relatively obvious, such as:
Part of the reason these growth strategies are so prevalent is they rise out of statements such as: “if we could double production, then our direct costs per unit would fall and margins will rise” or “with more sales, we can increase turnover and therefore profitability” yet all too often, projected increases are not realised.
There can be any number of reasons why. Perhaps there is not enough demand to increase supply? Maybe potential customers already know your product, and a bigger marketing budget just increases spend? Foreign markets many not behave like this one, and may not value your products? Perhaps you are setting up in competition against successful incumbents with a stronger reputation?
If only it were easy to bolting on an existing market, or product line, or customer base, or management team. Whisper it quietly, but that’s exactly the rationale with mergers or acquisitions.
The strategy for growing through merger or acquisition is based on external, rather than organic, growth. It is common practice for large corporations, but is a strategy which is still under-utilised by most small businesses.
This type of growth requires a change of mindset in how to approach expansion. It often needs raising of finance, and significant immediate growing pains. However in many respects it is less risky than investing in organic growth.
Let me illustrate. A client of ours in the property sector, started acquiring business which had significant local presence, with contracted and retained business. Our client knew that competing directly with these smaller business would be expensive, need marginal pricing to win new clients, and, even then, these may several take years to compete. It was easier and more effective to approach such companies, to discuss merger or acquisition.
With two acquisitions so far and others in the pipeline, they were able to retain the existing business relationships, add immediate growth to their accounts, and increase profitability through synergies by merging customer service, administration and finance.
They are projected to make back their full investment within 4 years, and have added a significant seven figure sum to their turnover far more quickly than using an organic approach. Thereby achieving significant growth within their company.
Unlike acquisitions, mergers can often simply involve share sale or swap, with little or no payment being needed. For this reason they can be a viable growth strategy for companies even where there is little lending or capital available.
Of course on paper all mergers seem attractive, and it is fair to say that there are risks when it comes to choosing companies to approach. However organic growth strategies also have significant risks and generally don’t provide the same levels of return or the ‘fast start’ of a merger.
Therefore, if your goal is a successful merger, it pays off to commit to the process. Don’t just look at businesses currently for sale, as you will only be seeing 2% (or fewer) of the opportunity. You need to reach as many potential merger clients as possible, avoid being left with few or no options, and make sure that when it comes to the final negotiation, you are the ones with the most options.
Sometimes the most attractive businesses are harder to capture, and command more of a premium when it comes to fees. Yet, a good merger is priceless when it comes to giving your company momentum and growth for your exit in a few years time.
If you want to discuss what that kind of approach may look like for you or your company, then call us on 01962 609 0000 to discuss your situation, ask questions, and see how you can grow your business through acquisition.
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