acquisitions

James Ling on How to Transition From a Dull Industry to a Sexy One the Fast Way

If you should conclude that you are in the wrong industry and need to switch, there are two basic ways to make the transition. One is to start from scratch and go the startup route.  The downside here is that it’s typically the long slow way to a payback on your investment. The odds are also against you as they are with most startups. The other way to achieve a transition is to buy your way in by acquiring an existing business which then serves as your beachhead in the new industry. You then focus on expanding the beachhead and moving inland. Think of the D-Day Landings as a good analogy for this growth strategy.

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Growth Strategies: Marketing or Acquisitions?

Under some circumstances it makes far more sense to build a company through the acquisition of competitors than it does by attempting to grow organically with more marketing. Take, for example, most businesses which have a subscriber revenue model. Think of ISPs, cable system operators, cell-phone service providers. If an ISP, for example, wishes to start growing at a more aggressive rate it has two basic choices. It can ramp up its marketing efforts and budgets or it can explore a growth through acquisitions strategy.

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How to Buy a Business: Buying Your Competitors

Most small businesses struggle with excruciatingly slow growth because after the first year or so of operations during which they attracted the market’s low-hanging fruit. Once this segment has been tapped the situation turns into one of trench warfare where they are fighting for new customers one at a time with competitors. The costs of this strategy can be high while the payoffs are low.

One way to break out of this demoralizing situation is to buy up competitors to acquire their customer base at closing.

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Growth Strategies to Maximize Your Company’s Valuation at Selling Time

During my first year a broker, we were called by a gentleman who was interested in selling his company. Since owners typically don’t want their employees to know that they are thinking about selling the company, we agreed to meet at a nearby coffee shop. I went to the meeting with a senior broker from my firm who had worked as a banker in a previous career and could quickly calculate the probable worth of a business in his head. The seller turned out to an elderly gentleman of about 65 – 70 who had started and built the industrial supplies wholesaling business over thirty years. After the three of us hadexchanged a few pleasantries, the senior broker jumped straight into the key questions. How much owner’s income is generated by your business? The owner replied “about $100,000.” The broker then asked him how much he had in inventory. About $500,000 was the reply. At this point the broker fell silent for a minute as he crunched the numbers in his head. Finally he spoke, “The best advice I can give you then is to sell the inventory off for $300,000 to $400,000 and then shut it down. You’ll get more that way then if you try to sell it as a going concern. At best you might expect a multiple of 1.5X or 2X on owner’s income.”

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Entrepreneurs and Small Business Owners Can Use Acquisitions to Double or Triple Their Customer Base Overnight

Oftentimes it’s easier to significantly increase your customer base through the acquisition of competitors than it is with the more commonly used marketing route.  Anyone with at least a modicum of business experience appreciates just how challenging it is for an established business to grow its customer base by 10% per annum if it relies solely on marketing efforts.  On the other hand, the acquisition of a competitor can double, triple, or quadruple your customer base at deal closing. Continue reading

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