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You’ve established a well-structured company with a consistent cash flow, and you’ve built an efficient management system. No longer do you need to delve into every operational aspect – you can steer your business from a strategist’s perspective. Yet, the question of further growth arises.
For instance, in the United States, if a small company generates half a million dollars annually and the founder is still deeply involved in operations, such a business can potentially sell for no more than $500,000. When I state the company is worth half a million, I’m referring to the inherent business value, excluding property, equipment, and materials – these elements are assessed separately.
However, this capital can be exponentially increased. It’s not only possible, but it’s also prudent to do so. The challenge lies in many not knowing how to proceed. In this article, I share advice that once helped me break financial constraints and elevate my business to a new level.
Identifying the Right Time to Level Up
Typically, a business commences with an idea that the owner is eager to bring to fruition. This is followed by tests, hiring employees, making the first profits, and so forth. Subsequently, the founder focuses on growing the profit while ensuring the company runs smoothly. A time comes when the owner needs to step away from operations to focus primarily on business development. The reward for the owner at this stage is a steady and predictable cash flow and the opportunity to implement their own ideas – the ultimate goal for most owners. It’s clear that over time, the company accumulates certain value, which depends on the team, the processes, and their efficiency.
RollUp: Acquire a Competing Company
A strategy widely employed in business is the roll-up strategy, a type of merger and acquisition. The principle is straightforward: if a business owner is confident their competitors haven’t structured their businesses as effectively, they buy out these companies and integrate them into their own. The founder’s primary company then becomes a platform for all others.
The financial aspect of roll-ups can be illustrated like so: let’s assume competing companies earn significantly less, say around $300,000, not half a million annually. Due to the lower efficiency of such businesses, they sell at a multiplier of 2, not 3. You can attract a partner, secure financing, and purchase this competing business.
Getting a partner on board for such a purchase is feasible as the risks are relatively low, especially compared to investing in a startup. After all, you’re buying a company with an established cash flow, a particular market value, etc.
Game Changer
Growth will be rapid if you’re well-equipped in terms of management and have a well-tuned management system. By integrating more and more companies into your own, you centralize certain functions and introduce the know-how from your platform company into the rest. All of this is not just to expand the size of the companies but also to enhance efficiency and foster the growth of new businesses.
Doubling the total revenue in three years is entirely feasible. Consequently, when you acquire, for instance, 30 companies, the turnover will not just increase by 30 times, but by a whopping 60. This will catapult your company to an entirely new level. Despite this, it remains well-organized and managed by employed executives.
Paradoxically, you have multiplied your wealth, despite initially acquiring companies at a factor of 2. Now, the consolidated company can be sold at an annual multiplier of 8 of the yearly earnings. This is because you are now dealing with an entirely different type of buyer.
What Companies to Buy?
Small companies, which require constant owner intervention and participation, sell at a low multiplier for this reason. After all, only those who don’t mind diving back into the operations will buy such a business.
In contrast, larger companies are more self-sufficient: they have employed management, and the workflow has long been established. Such businesses do not depend on the personality of the owner, which makes them attractive to funds and individual investors. There is genuine competition for these companies, they are not difficult to sell, and the multiplier varies from 2 to 8 times annual earnings.
What’s Next?
Implementing the RollUp strategy, you can swiftly transition from capital earnings of $1.5 million to $100 million, and this isn’t an exaggeration. Naturally, you will need knowledge, partners, and investors. However, such a strategy is entirely realistic and fair for a business owner. You’ve built and fine-tuned an organization within the company, invested hundreds of hours of your time, and worked to create a functioning model. Now, you can extend this model and generate even more funds.
Alex Visotsky is a co-founder of Business Booster. The accelerator which since 2009 designed to help companies achieve effectiveness and systematization.
With over 7200 pieces of training delivered, Alex Visotsky has helped numerous companies all over the world to implement the Business Operating System into their organizational structures, which lets them run and scale their business without their owners’ participation.
He is the author of multiple bestselling books, including “The Business Owner Defined”, “Small Business. Big Game” and others that have globally sold more than 130,000 copies.
