Growing A Regional Firm
A local services firm, which does about $4 million per year in revenue, wanted to grow into a significant regional firm. However, the company’s leader was unsure about how to accomplish that goal.
The firm operates a competitive, price sensitive and fragmented industry with business rivals including national, regional and small firms.
The Challenge
The business leader wanted to grow the company fast and considered the pros and cons of accomplishing that goal through simple organic growth.
However, organic growth is labor intensive (salespeople), price and margin sensitive and very dependent upon effective marketing to fill the pipeline of opportunities. It is also time intensive and would take more than seven years.
The Solution
In contrast, growth through acquisition would be a much faster way to grow the company in the region.
Since many of the firm’s competitors were small business, reporting less than $1 million per year in revenue and were cash-flow companies — operating from month-to-month and quarter-to-quarter — there were a number of potential acquisition opportunities.
The primary asset of a small business is its customer base, which is where the growth through acquisition opportunity lies.
Essentially, the acquisition focused not on the management, but on the types of customers the firm wanted to acquire.
A criterion was established to evaluate the types of customers: were they long-term customers or was there a high turnover of customers? Did the customers align with the firm’s preferred target markets? What kind of credit risks were the customers?
A third party was brought in to provide anonymity when searching the market for opportunities. This party also functioned as the negotiator at the table when structuring the deal.
Competitor awareness and marketplace intelligence also enabled the firm’s leader to make initial selections of prospective acquisition companies. Additional due diligence was possible through opening a dialogue with the prospective candidates.
After the small businesses were investigated and the findings were validated, a structured deal was offered. The deal was based on the candidate’s customer retention and future earnings. While there are no guarantees with a customer base when management changes hands, the firm wanted to ensure the asset they were buying remained an asset.
The costs to acquire another business were minor in comparison to the return on its investment. The key was a strict adherence to pre-determined criteria, due diligence and a strong negotiating posture.
The firm’s leader shared how its acquisition strategy doubled business within three years and also significantly increased profits.
This column is based on the conversations of local business leaders who meet regularly in an informal group to solve their challenges through collaborative brainstorming, experienced input and hard work.
Ken Cook is Managing Director of Peer to Peer Advisors, an organization that facilitates business leaders helping each other. You can reach him at kcook@peertopeeradvisors.com.
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