4 Models for Building Value Through Acquisitions

If you think buying another company is an easy shortcut to growth, you need to think some more.
4 Models for Building Value Through Acquisitions
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Founder, Quiet Light Brokerage
5 min read
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Harvard's MBA program introduced a new course in 2013 titled "Entrepreneurship Through Acquisition." As the title describes, the course delves into case study after case study on how to exercise a career in entrepreneurship by sourcing deals, negotiating and executing on the acquisition of a small business.

In fact, multiple universities now offer similar courses teaching entrepreneurship through acquisition strategies.

Related: How to Position Your Business for a Strategic Acquisition

It's not just the universities that are turning their attention to acquisitions, either. Deloitte notes that 2018 is off to the hottest start since the early 2000's in the corporate acquisitions field.

While many entrepreneurs envision themselves as the grinders who build their visions into society changing enterprises, there is a growing group of entrepreneurs who are looking to the acquisitions space. These entrepreneurs are building value at an incredibly rapid pace.

Buying provides a faster ROI and lower relative risk.

According to Harvard Business School's senior lecturer Shikhar Gosh, 75 percent of VC backed firms fail. Less than 1 percent of VC backed firms become "unicorns" according to CB Insights.

While the startup world experiences high failure rates and relatively low success rates, entrepreneurs who follow an acquisition path tend to see significantly higher rates of return with nearly 80 percent of acquisitions reporting themselves to be profitable after a few years.

This might just be the most appealing benefit of buying a business rather than building a business: the path to a solid return on investment is significantly faster and significantly less risky in most cases.

In addition to ROI, buying a business rather than building a business immediately puts you in a business that is established and proven to have some lasting power -- at least in most cases. 

This isn't to say that building a business is a bad option. In fact, for many entrepreneurs, building a business is the only option to really see their vision accomplished. But unless you are filling a huge need, or unless you see the opportunity to build an industry, building value through acquisitions can offer a faster and more sure route to entrepreneurial success.

Four models to build value in acquisitions.

Like any endeavor, building value through acquisitions requires that you have a strategy and a plan. In general, there tends to be four distince models buyers use when looking for a deal.

1. The turnaround.

In this model, buyers are looking for a business that is in complete disarray with the plans of turning its fortunes around. Buyers are able to create immediate value by simply fixing up the existing systems.

Usually in a turnaround acquisition, the person (or people) selling the business are just looking to get out before they lose all of their value. For a savvy buyer, this can be a great opportunity to buy a business with solid foundations for a relatively small investment.

Related: 6 Things Big Companies Look for When Buying Your Startup

Obviously, this model is best suited for people who know what they are doing. You have to have a lot of confidence in your ability to do what another owner -- an owner who has more intimate knowledge of the business you are buying -- was not able to do.

2. Eternally profitable.

Eternally profitable businesses are those cash cows that will always make money because there is no obvious threat of new technology coming in to the industry and causing the business to bottom out. Growing these businesses is more of a long game and comes through the slow building up of equity.

For many entrepreneurs who pursue acquisitions, their strategy focuses entirely on looking for these types of opportunities. Of course, they aren't alone, either. A lot of people would love to own a business like this. As a result, the prices for these businesses can be significantly higher.

To make things more difficult, people who own these types of businesses often don't want to sell as they will usually generate more earnings by holding onto their businesses.

3. High growth company.

A high growth company is more or less the opposite of the kind of business you would find in the turnaround model. These businesses have remarkable numbers in terms of growth, revenue and earnings. The existing owners are typically overworked and know that they are sitting on something quite valuable, so they often demand a fairly high asking price.

Buyers should be cautious of high growth companies, however. Oftentimes rapid growth is a result of being in a marketplace early, and that growth is not sustainable. But if that growth does continue, these can be highly valuable acquisition targets.

4. Platform company.

In this model, a buyer takes his or her skill set and applies it to an existing infrastructure in order to take it to the next level. This can take a few forms. In some cases, an entrepreneur might know what they are good at and look for businesses with deficiencies in those areas. For example, an operationally minded entrepreneur might look for a business that is profitable, but ineffcient. Alternatively, a marketing-minded entrepreneur might look for a business that is well run, but lacks marketing expertise.

Related: The Benefits of Buying a Business vs. Starting Your Own Company

When building is better than buying.

Pursuing business ownership through an acquisition strategy definitely has clear advantages, but there are a few cases where building a business makes more sense. For some entrepreneurs, they want the experience and the thrill of building a business from their vision rather than adopting someone else's vision and trying to make it more successful. In these cases, building from scratch makes a lot of sense.

But if your goals are to build value through business ownership, it's hard to argue with the immediate returns and boost that comes with acquiring an existing business.

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