There are plenty of ways to grow a business, and plenty of ways to sell a business. But what many business owners don’t realise is that the best approach might be to do both at the same time.
The idea that selling part of your business to a capital partner could lead to a much bigger payday down the track might seem counterintuitive. After all, if you run a successful operation, you might not see any reason to change what’s working for you.
But with an experienced and trusted partner by your side to help you get the most out of it, your business could be capable of growth that you didn’t even realise was possible.
How selling a part of your business could lead to rapid growth: An introduction to the ‘Anchor + Acquisitions’ model
Meet Bob. He owns a business, Bob’s Widgets, with an EBITDA (earnings before interest, taxes, depreciation, and amortisation) of $1 million. In a general industry, Bob’s Widgets is probably worth around $3 million to $5 million (a 3-5x EBITDA multiple).
Now meet Sarah. She’s a smart professional investor, who proposes acquiring half of Bob’s Widgets at a 4x multiple. Bob isn’t sure about this – he can sell plenty of widgets by himself, thank you very much – but Sarah explains that she intends to use Bob’s Widgets as an ‘anchor’ to acquire other bolt-on businesses to take the overall business’ growth to new levels.
Bob accepts, taking home a $2 million cheque. Bob still owns half of the business at a share value of $2 million, and Bob’s Widgets is now an anchor for further acquisitions.
Over the next several years, Sarah executes her proposed strategy and acquires several additional ‘bolt-on’ businesses for Bob’s Widgets. For ease of maths, let’s assume Sarah successfully acquires four businesses, each generating $500,000 EBITDA at a 3x multiple. These businesses are cheaper for Sarah to acquire than Bob’s Widgets because they’re smaller, representing an instant upside from a valuation perspective. This is called valuation arbitrage.
If left alone, the combined entity would be a business generating $3 million EBITDA per year. But remember, Sarah is a smart investor. She helps Bob through a series of business improvement and growth activities, drawing out synergies and cross-sell opportunities through the transfer of knowledge, tools, networks, people, overheads, infrastructure and skills across the businesses she’s acquired. Bob, who thought he knew all there was to know about selling widgets, learns a thing or two.
Sarah usually manages to achieve multi-fold improvements in these situations, but for the purpose of this illustration, let’s assume that Sarah and Bob achieve a modest 33 per cent uplift in bottom-line profit.
Now we’re rolling, and Bob’s Widgets is a strong medium-sized business generating $4 million in EBITDA per year. A business of this scale in a general industry would be re-rated to a higher valuation multiple. We’re going to continue being conservative here, so let’s say Bob’s Widgets is now valued at $20 million (a 5x EBITDA multiple).
Through the acquisitions, Bob’s share of Bob’s Widgets has been diluted down to approximately 20 per cent of the combined entity. But Bob is laughing, because his share is now worth $4 million.
Let’s assume all these events take place in a span of five years, after which Bob decides to sell his remaining shares. How did Bob do?
If we factor in the initial $2 million cheque, plus the dividends Bob would have collected from the business over the five years (growing linearly from $500,000 in the first year to $750,000 in the last year), and the final sale price for Bob’s remaining shares, Bob can now go into retirement with total proceeds of $8.5 million. That’s more than double the original value of the business at the time he accepted Sarah’s offer.
Sarah is happy, too – but you should keep in mind that this was all based on conservative estimates, and total proceeds far exceeding this example are quite common. In reality, you’re likely to see EBITDA uplift exceeding 50 per cent, and re-valuation multiples larger than 6x EBITDA. In that case, Sarah could have left Bob with total proceeds greater than $10 million.
In another scenario, Bob could have decided to invest alongside Sarah on the bolt-on acquisitions, keeping his 50 per cent ownership stake undiluted. In this case, Bob’s total proceeds could have been an awesome $16 million – four times larger than the original business value, even after discounting a total of $3 million in acquisition costs.
Why partner with an experienced investor?
Now that you understand how an ‘anchor and acquisitions’ strategy can increase the value of a business, you might wonder why you’d need to partner with an experienced investor to execute such a strategy. In other words – why couldn’t Bob have done all that himself?
For one, partnering with an investor will provide you with access to flexible capital. But more importantly, partnering with a smart investor means you benefit from their knowledge and expertise.
The truth is that while most successful business owners are experts in their fields, that doesn’t make them experts in mergers and acquisitions. Being aware of the benefits of an acquisition strategy is one thing, but being able to identify the businesses that are right for that strategy is a specific skill.
The due diligence necessary for any successful acquisition requires a tremendous amount of work, and that work has to be done at a high standard. At PieLAB, our commercial and financial due diligence has a 152 point checklist, and that’s just one very small component of the analysis we do when we acquire a business. You can read more about how we decide which businesses to invest in here.
Partnering with an investor can also grant you access to an extensive network that you would never have been able to tap into on your own. At PieLAB, our executive team all have years of experience across a range of sectors and industries – and that’s just the start of what we can tap into.
On top of our executive team, we can call on our PieLAB CEO Council, made up of CEOs and entrepreneurs who have all been incredibly successful in their fields, and our wider network of 80+ PieLAB investors.
This gives us a foothold in a wide range of industries and an intimate understanding of the landscape of each of those industries. But it also means that when we enter into a conversation with a business, the chances are high that we’ll know someone who has worked in that industry before – someone who knows how the industry works, and can give us insights that prove invaluable at the negotiating table.
A smart investor like PieLAB can also provide you with advice and practical tips that will help elevate your business and accelerate your growth. Sometimes, this can simply be a matter of opening the management team’s eyes to what’s possible and inspiring them to dream bigger. But it’s also about providing tangible tools and skills to enable that growth.
You don’t need to do it alone. With a smart investor by your side, you can achieve outcomes you never thought were possible – and set yourself up to live your dream life in retirement, or whatever you plan on doing next.
If you’re ready to start exploring your business’ potential for growth or wondering about the best way to sell your business, get in touch with the PieLAB team today.
