The Best Businesses to Acquire
When acquiring a business, you want to look for a so called diamond in the rough.
This is basically a high cash flow business that is generally absentee or easy handover, with minimal time spent, for a great deal and value.
These are extremely rare to find, so let’s move down from there to understand what you can get that isn’t exactly the above.
Obviously you want something that is high cash flow. What’s more important is the multiple of EBITDA or the percentage of revenue.
Every buyer should have a different formula based on what their expertise is, and what value they are bringing to the business.
For instance, a buyer might have automation software. If there is a business that has a lot of expenses that can be automated with your software, then you should worry less about the profit margin, and focus more on revenue side acquisition, because you will be streamlining expenses. Therefore the sales is more important and the expenses that the current owner is spending is less relevant to you.
Where can you trim bloat, and streamline expenses to maximize profit?
However, most businesses are based on a multiple of EBITDA. That will vary based on a few factors, but most importantly it ranges based on industry, how absentee or owner reliant is the business, is the cash flow passive for a sustainable period of time, and what risks are associated with the business.
This EBITDA multiple will generally range from 1x to 10x.
1x EBITDA would be a business that is very owner reliant, and it is clear that the owner is driving the business.
10x EBITDA would be software tech with passive income, where the product is generally doing the work and handoff can be done easily. The system or business is highly transferrable meaning changing hands is no big deal and not a lot of work and everything will go smooth after handoff.
Most businesses fall within that range, and most businesses will never see above 4x EBITDA.
Occasionally, you will hear a business in the news that was acquired for $50M or $22 Billion. Tech business that hit headlines are not your metric or gauge.
These are rare gems.
These are outliers that don’t follow the norm of the M&A world. These are simply put ‘crazy valuations’ that we do not set rules around.
For instance, Snapchat, Slack, Facebook, Instagram, YouTube, etc. are examples of businesses with crazy valuations based on cash flow multiples, and this is generally ONLY seen in tech.
You might have one of these businesses and if that is the case, it is based on potential and monetizing the user base or customer base, and this business is a laggard meaning they have not monetized the user base yet because their position strategy was to be acquired by a company who could do the monetizing.
Instagram WAS a good deal for Facebook in hindsight, even though it was a crazy valuation, but only because Facebook was able to envelope it in to their ecosystem and eventually monetize off of it using their ads platform.
Any other business NOT named Facebook might have struggled with the acquisition and turning a business that was lacking cash flow from its users into a profit.
But Instagram would not have sold for less than what they acquired for at that time.
So sometimes you need to overpay even if you are the only game in town simply because the seller is a hard ass.
Obviously you can play chicken and wait it out, but someone else could scoop it up.
So obviously timing an acquisition is a variable factor to account for in your acquisition processes.
For our buyers, there are generally two types of acquisition models we recommend to our client seeking something.
- Buy a business that has good metrics where you can get a good deal. You will do your due diligence and make sure the business has some solid strengths and the weaknesses can be overcome by some solution., First, you can structure an acquisition with the right dollar amounts out of pocket. What we suggest is to place an upfront payment that makes sense to the seller while you incorporate an earn-out that incentivizes everyone and/or gets the seller to agree to the upfront amount being lower than the asking price. Rarely will a deal go through at $0 or limited money upfront. We will help you create a strategic ply towards acquiring something where you get a good deal whilst not losing the deal. We also help our buyers incorporate a transition period that helps the takeover go smoothly. As experienced brokers, we understand what the checklist items are prior to acquisition and after acquisition.
- Buy a business that is smaller (or larger, although we generally recommend smaller) than your existing business that ties in to your ecosystem. A great acquisition will be in acquiring a business that encompasses some elements that you do not have that will grow your business. For instance, a business that has a great marketing system in place where you struggle with marketing or leads would be a great business to take over. Or, you can add a business that has a deep product line on their portfolio, if you have a boatload of leads and prospects or customers that just need more products from you. There are a lot of instances like this that make sense where you can expand through acquisition in a strategic way. You do not want to overextend yourself, but this is a great way to approach an acquisition. Fitting something within your ecosystem is quite possibly the best acquisition you can make if you are very serious about your company.
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Leader in Acquisitions with Expertise in Representing Sellers & Buyers on Deals
Jarbly is a leader in acquisitions with expertise in helping with listings, negotiations, LOI's, asset purchases, company purchases, and real estate purchases. JARBLY has access to high net worth individuals if you are on the sell-side and businesses that may be of interest to you if you are on the buy-side.