The easiest way for SMEs to add £1m+ in revenue?
Ask any M&A advisor or business broker the quickest way for your client to grow and they'll invariably recommend the business makes an acquisition. When it comes to retail therapy, what's there to not get excited about? You pays your money, you gets a shiny new toy.
Your client can avail synergies to cut costs and improve profitability, the diversification reduces risk and reduces exposure to market fluctuations; and the client gets immediate access to the growth needed to satisfy shareholders (not to mention the cashflow to pay higher accountancy fees).
The cherry on the cake is the possibility of removing a competitor and thereby removing some downward pressures on price while improving the business' bargaining position with suppliers.
The perfect solution!
What makes an acquisition easier said than done?
The three primary obstacles are:
1. Finding a quality target at a reasonable price: This is what used to present me with the greatest difficulty when I was "on the hunt". Even putting price considerations aside temporarily to focus on quality and suitability of the target, the task is immense. At one point I even invested in developing my own software tools to "scrape" the various portals where businesses are listed for sale - portals such as the Dynamis property, BusinessesForSale.com - to automate the process of collecting and semi-filtering the thousands and thousands of listings going online every day. It's not easy.
2. Financing the purchase: Once a few targets have been identified comes the tricky task of agreeing value with the vendor before paying for the purchase. Vendors often have an "all cash" expectation, but whether they do or not they'll likely be a cash component to the purchase, a cash component that needs to funded.
3. Vetting the target: How do you protect against being sold a pup? What is due diligence going to cost? How often are you going to sink costs into DD to assess potential acquisitions given that those costs can't be recovered if the process doesn't culminate in a successful buy?
Is there a way around these obstacles?
I'm going to ask you to consider an odd suggestion - buying the type of business that most others don't want: one-man bands. One-man bands are businesses that are heavily reliant on the owner. They may have employees or sub-contractors, but very little authorityin the business, if any, is delegated . We in the UK have no shortage of businesses like these. Most make just enough to pay the owner a salary. These are effectively jobs, not businesses.
However, there are exceptions. There are one-man bands making oversized profits. The delivery of profits far in excess of what equivalent firms are generating is usually because of some unique quality the owner possesses. Many of them clear six / seven figures in revenue with extremely healthy margins. When these businesses come to market, the driver tends to be a change in the owner's personal circumstances rather than a flaw with the business. It could be bad health, the death of a spouse, or some other tragedy.
But these businesses suffer from the same impairment as other one-man bands - their reliance on the owner makes them difficult to sell and severely depresses the price. For larger firms, the "key person discount" that buyers factor in can be 20%-30% of the price the business would otherwise achieve. For one-man bands, according to statistics compiled by people who track these things, the key person discount can be 70% or more.
This creates an opportunity for the canny investor. There's still the problem of replacing the owner, which I'll address shortly, but the prospect of acquiring a very profitable business at a third of its value (or less) can be very tempting... if you can make the business work for you by successfully integrating it with yours and benefiting from its order flow and revenue.
But do businesses meeting the above description even exist?
I'm aware of one business for sale in the south-east, in the construction sector, with a turnover of a million, and profit in excess of £150K. It would normally sell for £500K - £750K given its strong brand, IP and tangible assets. But the owner is seriously ill and is willing to accept a fraction of the price and even part-finance the deal. In theory, the right buyer could add £1m to their own turnover, and a nice chunk of earnings, for a cash outlay equivalent to less than what they'd make from the acquisition in the first year itself!
Another business, in London, fitting premium blinds at very high margins and making £100K+ after all expenses including a salary for the owner-manager, has an owner who needs to leave the UK and who is highly motivated to sell. To sweeten the deal he's even offering a component of seller financing i.e. to defer part of the price to be paid out of future profits. For a headline figure equal to 2x annual earnings, and subject to negotiation on what percentage will be paid in cash, an investor could acquire not just a sound business, but one that is showing steady and significant growth year-on-year.
(These are real businesses currently on the market. Contact me if you wish to be put in touch with either of them.)
Opportunities like these can found by registering your interest with UK business brokers most of whom you'll find here. A word of caution, though: if you are not very, very specific with the criteria you set out when registering with business brokers and business transfer agents you could get inundated with large volumes of businesses that come nowhere near your stated requirements.
Replacing the irreplaceable owner
The fly in the ointment is that the owner is indispensable. He'll of course play down just how critical his involvement is - all vendors do - and he'll emphasise that the business could continue on the current growth trajectory even with new owners in charge.
I suggest you call him out on this.
If the acquisition makes sense for all reasons except this one, lay the responsibility for transition on the vendor and tie payments to the successful integration of his business with yours. Clear targets and goals need to be set and terms need to be negotiated. But if he can meet the projections and successfully deliver your business the growth you're seeking, it'll be worth every penny of the highly discounted price you've agreed to pay.
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After doing an undergrad degree in accounting (India) and reading for an MBA in finance (USA) - in addition to taking professional exams in Cost & Works accounting and in Banking - I decided that this is all too complicated. So I spent 35 years buying and selling small businesses, and running them.
My full time occupation now is...