Consider an Acquisition for Growth
With a tight labor pool and more access to capital it’s a good time to consider acquiring a business. It’s a strategy that provides a predictable way to add new revenue, quality employees, customers and new products or services.
A common misconception among business owners is that this is a more expensive option for growth and that they don’t have the financial resources to pull it off. The biggest obstacle in regards to financing has been a lack of collateral. For most businesses, their most valuable assets are customers, talented personnel, and intellectual property which is classified as “goodwill” or an intangible asset. In the past, banks have preferred real estate, accounts receivable, inventory or equipment as the primary means of securing a loan. Lenders are starting to recognize that cash flow is generated from intangible assets.
If you are evaluating your options for growth and expansion, it’s probably worthwhile to run the numbers and compare acquiring a business to the organic approach. What would be the cost to purchase 100, 500 or 1,000 new customers? Hire 5, 10 or 20 new employees with a proven track record? Open an office in a new market? Add a new product line or service? There’s a good chance it will cost more and take much longer. Another consideration is the ability to increase profits by consolidating back-office expenses and other redundant overhead.
The best part of using an acquisition for growth is the availability of capital to finance the transaction. There programs that will allow you to borrow up to $1.5 million against “goodwill” and 90% of the purchases price. In many cases, a seller note can also be used to reduce the out of pocket cash required.
If you were to purchase a business at a price equal to 3 to 5 times annual earnings using a ten year term loan, an acquisition can provide positive cash flow and increase profitability in the first year! It’s big reason lenders prefer to provide financing for acquisitions as opposed to working capital. Investing in new employees or new products and services may or may not result in new revenue or profitability. The timeline is also less predictable.
There are several ways to find businesses to purchase but your best bet is to contact a professional business broker to assist you in identifying the best acquisition targets for your business. They also help in structuring a transaction and negotiating a fair purchase price. For assistance locating a business broker contact us at firstname.lastname@example.org and we’ll refer you to a professional specializing in your industry.