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E-Class 11

The Ultimate Fast-Growth Strategy

Ever dream of the really big sale price for your business? In this eclass we show you a simple yet powerful strategy to achieve this. It also happens to be a fantastic way to grow your business rapidly.

By the end of this eclass you will have your eyes opened to an advanced strategy that many high level entrepreneurs use to make big money with business.

In essence this strategy is a very quick way to massively add value to a business and for this reason it can be a great way to get top price for your business when you come to sell.

A lot of small businesses seem to think that the best way to grow their business and ultimately get the big sale price is by franchising (see eclass 36 to see whether this is for you or not).

However, in our opinion this is a much better (and simpler) way that most small business owners don’t consider or use. Yet this is a favourite strategy of all the savvy successful entrepreneurs we know because it is so effective.

So let’s continue and see what it is all about…

Growth By Acquisitions
Roll-ups, merger and acquisitions, bolt-ons, growth by acquisitions? You may have heard these terms before and thought it all sounds a bit corporate and too big end of town for a small business owner, BUT it’s actually quite simple.

Quite simply it is just buying up a like business and adding to your existing business. This is a strategy you start implementing well before you sell up. You literally “Bolt” another business onto your own with a view to selling out the combined entity for a much bigger sale price than if you had sold just your single business.

In general you look at buying a business smaller than yours and the idea is to add to the two companies together, enjoy the benefits of costs saving synergies across the combined companies and increasing the net profit. This means you can show a buyer that you’ve got something bigger now and the other important reason this works so effectively is that (in general) as net profits become higher, sales multiples of businesses can increase significantly.

So why is this so powerfully effective?
By rapidly and very aggressively growing your business through acquisitions you massively leverage your businesses value quickly and simply.

You not only get associated cost savings but you can often greatly increase the net profit very easily.

Now once you combine this with the fact that a business is sold on a multiplier you can start to understand the power. Consider that if you can purchase a business on a low multiplier and then bolt it to your existing business making it much bigger and better business, you can then sell on a higher multiplier and you have suddenly created a lot of money through the power of massive leverage.

Some other key advantages to consider of bolting businesses together:

By buying up potential competitors you become much larger and dominant in your marketplace.
Being larger can give you more market power on pricing and cost savings with suppliers
A bigger combined business is much more attractive to buyers because it is usually considered more dominant, more stable, and less competition (you bought them out!)
A bigger combined business will often open up your final sale to more and better qualified buyers who have more money e.g. the bigger corporates and private equity groups who are cashed up and desperate to buy will be interested (see eclass….)
A bigger combined business is a more attractive deal to more serious buyers which means more competitive bidding and higher offers for the business can be achieved

So how does it work?

The best way to illustrate how it all works is to go through a sample deal…

Let’s say you had an existing business – a manufacturing business with sales of $400,000 and a net profit of $120,000. Now normally this would mean you could sell out for around say $200 – $300K (a multiplier between 2 to 3 times). This is a good solid business to own and sell.

However, just say you want to get much more than this sale price so you decide to apply the strategy we are talking about here.

So you find another business in your industry that’s turning over $200,000 – half the size of your existing business. In our experience of being involved in deals this size there are typically lots around this size and they are quite easy to identify and find.
Your Business      New Business
Turnover     $400,000         $200,000
Gross Profit        $200,000     $100,000
Expenses     $80,000     $70,000
Net Profit      $120,000       $30,000

Value      $200-300K      $30,000

Because they are much smaller their relative expenses are still quite high compared to their turnover and so their relative profits are correspondingly small. This is where the opportunity for massive leverage lies.

Now, as a buyer this new small business is only worth a 1x multiple because the net profit is so small. (once net profit get below $50,000, average businesses with high expenses generally don’t sell on more than a 1x multiple). This means you can buy this business for $30,000 and add it to your existing business.

Let’s watch what happens now!

You’ve now added instant sales overnight -your combined turnover now = $600,000

By combining the two companies you should be able to share most overheads and eliminate and/or reduce many expenses.
When Combined:
Turnover     $600,000
Gross Profit     $320,000
Expenses     $100,000
Net Profit     $220,000

Value  Now:      $660,000

Note the New Net Profit and Valuation!

Consider that the net profits of the businesses before combining them was only $120,000 and $30,000 = $150,000 when operated as separate entities.

After being bolted together the net profit is now $220,000!

The final upshot is that by bolting these two businesses together you now have lots more cash flow and profits and now your business is worth 3x = $660,000! – Your business is now worth more than double it was before!

Read this before proceeding!!
There are two important rules you need to know before you rush out and start acquiring another business to bolt onto your own:

Rule #1: Must be a business that fits financially
Don’t overextend yourself financially doing this, i.e. don’t go out and buy a business that is larger than yours – this rarely works effectively. You could easily bite off more than you can chew!

Make sure you acquire businesses that are smaller than yours and in general try and stick to buying up businesses that are much smaller.

Rule #2: Must be a business that fits strategically
The new business acquisition must fit strategically. Stick to buying up companies that naturally fit yours which usually means acquiring businesses in your own or very similar industry. For example if you’re a manufacturing business, don’t go out and buy a café!

Remember that you want those cost saving synergies to be available and by ensuring it is a strategic fit you will have the ability to share staff, resources and overheads between the two companies.

How to Buy Up Your Competitors…
So are there any competitors that you know in your industry that you could approach with a view to buying out?

Keep in mind that generally you want to try and get them for next to nothing. Now obviously they are going to want to sell for top price – at the end of the day it just comes down to negotiation.

Don’t let them know that you are desperate to acquire them. Instead be smart! Sometimes you will need to be very subtle! In your approach be prepared to walk away if they want too much.

You will be surprised how many will be interested in selling out to you if you make it easy for them -remember, they are not making much money out of their little businesses and you will find many of them secretly dream of closing the doors and moving on anyway. These are the ones you want!

There are times when it’s worth paying a premium for competitors!
It’s not always about getting businesses really cheap. Maybe we should take a lesson from Warren Buffet, one of the world’s richest men. He likes to buy really good quality businesses and he’s prepared to pay a good price for them.

Sometimes it’s worth paying the premium for it. This is usually the case when combining the two companies will clearly make a huge difference to the bottom line and if it allows you to really dominate in your industry.

Remember also that the reverse may happen to you i.e. you may be approached by a competitor to see if you want to sell out especially if your business is of high strategic value to another company.

This can be a great opportunity for you to sell at a great price especially if you’re prepared and ready to go. This is yet another great reason why you should always set your business up strategically for sale from day one – keep in mind that to a competitor doing a roll up it means that immediately they get a very valuable asset that can help them dominate the industry quickly they will be willing to pay a premium for that.

Further Advancing this Strategy
Now that you understand the basics of this strategy we will talk about some other ideas that you can use to further advance the effective use of this strategy.

Online Businesses
This is an ideal strategy to apply to websites -building your own online empire!
Basically if you are in a niche, go out and find other websites that are also in your niche and buy them up. You can rapidly have a nice portfolio of related sites that all dominate your niche.

This can be highly effective because it can be so cheap and easy to buy up websites

Websites for an Offline Business
This is a powerful strategy to combine with both online and traditional offline businesses. Simply start acquiring websites that relate to your offline business. Again this is a cheap and easy strategy to quickly get you lots of traffic and help you dominate the search engines (where your clients are looking for you) for your offline marketplace.

Deliberately Sell Out to A Big Corporate or Competitor
You will find that lots of big corporates use this growth by acquisitions strategy and especially publicly listed companies. They do this because they’ve reached market saturation especially here in Australia where our market is a lot smaller.

So one of the easiest ways for them to get new sales is to simply buy out other companies in their industry. In effect they are literally just buying sales. Sometimes they won’t even bother about the net profit.

Interestingly -and I’ve sat with CEOs of publicly listed companies that have told me this—their shareholders demand it. They don’t have a choice. If they’ve got cash sitting in the bank, there is a lot of pressure for these companies to spend that cash. They need to do something with it and something effective. Buying up competitors and sales is often seen as an effective use of the money.

So just by knowing and understanding this we suggest that when it comes time for the big sell up of your business, why not set your business up to be the be the target company of a large company looking to grow by acquisitions.

How to turbo Charge this strategy!
If you really want to ramp up this strategy then here’s how: Get investors on board to help you buy out your competition and grow even more rapidly through acquisitions Investors love this kind of strategy because it works so well!

So if you can see opportunities in your industry to do this, then why not get investors on board. They will provide the funding which means you can go much faster and buy up more businesses in your industry. This is exactly what many high level entrepreneurs look to do and there have been many big success stories here in Australia through doing exactly this.

In Conclusion:
In this eclass we wanted to open your mind to this strategy and get you thinking about it as an option to implement in your business. Don’t just think of it as something that the big companies do, you can do this at any level.

You don’t have to be a magnate to start doing this, although you can rapidly become one as you get more proficient at this!

Just keep it in your mind that this is an opportunity for you too. Maybe start thinking about this strategy as you look around your own industry.

If you know that there’s a business or website out there that you could potentially “bolt” into your business, I would highly recommend you consider doing this.

Remember: It’s about finding the right business. Do it smart. Make sure it’s a strategic fit. Don’t overextend yourself.