Achieving Breakthrough Growth
Regardless of the kind of business we
own we all come to work every morning with the same question, “How do I
grow my business?” In broad terms companies have two choices. They can
grow organically through new products, new distribution channels, or new
salespeople. In the best of cases organic growth can generate 15% to
20% revenue increases annually. Or they can grow by acquiring a
competitor or supplier. Acquisitions can generate 30% to 50% annual
growth at equivalent costs with substantially less risk. Let’s examine
these alternatives.
For example, one client owns a copier
sales and service company. He’s managed to build a solid business with
15 years of hard work. Last year he generated $260K in cash flow on
about $1.3 million in sales.
He knows he needs to grow. He’s
capable of doing it himself. He happens to be an excellent salesman,
having closed virtually all the company’s current clients, and he’d love
to take on the challenge. But all of his time, and then some, is
occupied running the business and taking care of existing customers. He
considered hiring a new sales person but he’s concerned about the
cost. Let’s take a look at what those numbers look like.
Attracting the right sales person will
require a compensation program including a base salary, commission,
travel and entertainment (T&E) expenses, and some benefits. A
quality hire with a successful track record will require a $40K base,
10% commission on new business revenue, T&E in the neighborhood of
$600 a month and some benefits including 2 weeks paid vacation and a
company contribution to health care insurance. We can “ballpark” fringe
benefit costs conservatively at about 15% of base salary or $3,000 a
year. My client believes a successful sales person should generate
about $500K in first year revenue. So he’s looking at total selling
costs of $40K salary, 50K commission, $7,200 in T&E, and $3,000 in
fringe for a total of about $100K.
It’s not surprising my client has been
reluctant to pull the trigger. One hundred thousand dollars is a lot of
money. And there are no guarantees. Half of all copier sales people
don’t make quota. If revenue production actually comes in at $250K
instead of $500K, first year selling costs jump to from 20% to 30%.
There is a better alternative. Instead
of hiring a saleperson with all the uncertainty that entails, an owner
can purchase a competitor and acquire their revenue. Let’s see what
those numbers look like.
Most businesses are sold on a multiple
of cash flow. Copier sales and service companies with $500K in revenue
sell at a multiple of about 2 times cash flow. An acquisition target is
probably generating $100K in cash flow on revenue of $500K. At 2 times
cash flow the purchase price for that company will be about $200K. “Wait
a second”, you say. “Two hundred grand is twice the cost of the
salesperson.” Not exactly. Completing the purchase will require a
downpayment of 20% of the sales price or $40K. The remaining $160K will
be financed either by a bank at 7% over 7 years, by the seller at about
5% over 7 years, or a combination of both. Assuming bank financing at
the higher rate, debt service will be about $2,400 a month or about
$29,000 a year. So the acquisition will cost about $69,000 in the first
year compared to the $100,000 cost of the salesperson,
The second year looks even better:
$29,000 for the acquisition (just the debt service) compared to $100,000
for the salesperson! Remember that the acquisition’s cost of goods sold
and fixed costs are paid out of its existing book of business. And
there are other benefits to the acquisition:
- A portion of the purchase cost will be amortized over time generating more cash flow and a tax deduction.
- Some of the acquisitions’ costs, administrative costs are one example, will be redundant and therefore can be eliminated after the acquisition is completed, generating additional cash flow.
But by far the most significant
advantage of the acquisition is the reduction of risk. When you buy
$500K in revenue you get $500K in revenue, not a litany of excuses you
might get from your new salesperson about why sales didn’t close.
In fact, if my client has $100K a year
to invest in a new salesperson he can probably buy about 50% more
revenue, approximately $700K, through an acquisition for the same
cost. That’s an increase of 53% on his $1.3M book of business in one
year!
ROI has a solution….
If you want to achieve breakthrough
growth at significantly reduced risk, ROI can help. We’ve developed a
Proactive Acquisition Search Service (PASS) designed to help companies,
or individuals, to acquire companies. We:
• develop a list of potential targets that meet our Client’s acquisition criteria.
• contact prospect companies to ascertain the owner’s willingness to sell
• meet with acquisition owners to evaluate the opportunity
• develop an opinion of value on the acquisition to share with Client
• attend meetings with our Client and acquisition owners
• assist Client in configuring an offer,
• support Client throughout the due diligence process,
• assist Client in the generation of a purchase and sale agreement, and
• assist Client to secure financing for the purchase.
Please contact us at 781-682-6209 to learn more about the program.