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Growth Methods Used by Buyers

We often hear from founders who feel they have hit the ceiling with what they can do with their companies. They are burned out.

Buyer groups in the market see this as an opportunity, and often use one of two strategies when planning an acquisition.

One involves bolting together several smaller companies into a larger entity. Without making many changes, the larger entity theoretically will produce a bigger bottom line.

Another tactic is to buy and build. This is harder to do, but involves seeking efficiencies, building a more sophisticated sales program and tightly managing to achieve higher profitability.

Both tactics can hit the same goal: multiple arbitrage, a process that grows the value by increasing both the bottom line and the multiple that is applied to it.

Here’s a completely theoretical example that may be helpful in understanding: Company A sells for a 3X multiple. After one of the strategies above is employed by the buyer, the bottom line or EBITDA is doubled. The company might now demand a 5X or 6X multiple.

Here’s the point: a larger bottom line attracts higher multiples. Since the company is more profitable, and the multiple is higher, the new transaction value will also go up.

Contact us to learn more about consolidation trends and business transition options[LV1] . By using a good M&A process like the one we use, you may find there is more interest in your business than you expect. A single unsolicited offer rarely produces the best value.

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