The Small Business Growth Strategies of Tycoons
Let’s get down to how tycoons make money in the deal-maker’s game of buying and selling companies. The big pay day comes when a company is finally sold. To sell a company at a profit requires that you increase its value while it’s in your possession. (Value creation is an ongoing topic in this course.) Increasing value entails growing the business to increase its value. In other words, you want to “fatten up the hog for market,” as they say in the agricultural industry.
Let’s take a look at why bigger is better when it comes to business.
Why Bigger is Obviously Better
Small businesses suffer from a long list of weaknesses which serve to keep their valuations low in the vast majority of cases. Most of these weaknesses can be attributed to a lack of capital. When capital is lacking a company will suffer in a myriad of ways. It won’t be able to afford professional management. It won’t be able to attract talented and highly-motivated employees. It won’t be able to quickly jump on new opportunities for growth or profit. Indeed it will have to watch most opportunities simply roll by and disappear over the horizon.
However, the worst part for the owner comes at the end when he or she decides, after 20 or 30 years, that it’s time to sell, pocket a few million, and retire in comfort, and then discovers that the business may not be worth anymore than the cost of the furniture, fixtures, and equipment priced at fire sale prices. Something like 80% of small businesses never attract a buyer at sale time.
Having access to capital can solve most of the problems faced by small enterprises. Capital helps them to:
– Hire professional managers
– Attract better employees
– Break through critical mass barriers
– Attract bigger customers
– Market more effectively
– Purchase in greater volumes for price breaks
– Achieve economies of scale
– Expand into new markets
– Broaden the product line
– Build a recognized brand
– Take advantage of breaking opportunities.
The list of benefits could be lengthened but I believe that you get the idea, so let’s move onto the rationale for considering growth through acquisitions.
The Tried & True Business Growth Strategy
Enter the tycoons. They make their money by fattening up and grooming companies to be attractive acquisition candidates for bigger businesses assembly-line style. Think of most industries as a four level pyramid with the Fortune 500 at the top. Next come the upper and lower middle market levels. Finally, at the bottom you have the most heavily-populated tier: small business.
Tycoons view small companies as products rather than as businesses. They see them as products that can be bought cheap, patched up, given a new coat of paint, and then flipped for a large capital gain to a player higher up the industry pyramid. They develop systems for doing this over and over. In some cases they do it thousands of times of a career. Obviously, this is a team sport with the tycoon playing quarterback.