In many industries, it is very difficult to grow organically. There are a couple of reasons for that. First, it’s hard to find good salespeople. You generally have to steal them from a competitor and, if the salesman is good, the competitor will pay them well and work hard to keep them. Even if they come to work for you, they may not bring along a lot of customers. Secondly, unless your industry is growing fast, you have to take new business from a competitor. Why is the customer going to switch to another supplier? Unless they are unhappy, it may take a deep discount to get the business. That isn’t very profitable.
The difficulty of growing organically makes growth by mergers and acquisitions attractive. You acquire the other company and merge it into your business. You not only gain the sales and profits of the business you acquire, but you probably increase your profits by more than the profits of the business you acquire because you eliminate some costs. You may also gain people that can help you grow organically.
Another benefit of growing by acquisitions is that the value of your business can grow significantly. By increasing the sales and profits of your business, the value increases and by being a larger business, the multiple paid for it goes up also.
The larger the business, all other factors being equal, the higher the multiple of EBITDA it is likely to sell for.
Exhibit 1.3 p6, Private Capital Markets, by Robert Slee, 2011
If you are like most businesses, you don’t have the time and people to do acquisitions. We have the expertise to help you put together and execute a grow by acquisitions strategy. Learn more about our process. Contact us to discuss it.