Acquisitions Can Help You Scale, but Come With Risks Sometimes the only shortcut to growth is through acquisition, but can you afford it?
Opinions expressed by Entrepreneur contributors are their own.
Editor's Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business -- and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub. This week, we're discussing Hoffman's theory: to succeed, entrepreneurs need a good idea, good timing, money and luck. But more than that -- they need grit. Listen to this week's episode here.
If we leave out the minuscule number of rapid-growth companies, most businesses grow at a fairly slow pace. We have worked with hundreds of businesses in our careers and find that even successful and profitable organizations more normally grow at less than 15 percent per year. If that sounds disappointing to you, think about other measures of growth, such as the Dow Jones, S&P or Consumer Price Index -- over the long term, all have grown below 15 percent per year on average. And, as Jackie Nagel of Synnovatia points out, if you grow at 15 percent each year for five years, you will double in size.
Businesses grow in a variety of ways. For most, there aren't shortcuts -- they grow organically through sales and marketing efforts at a pace in line with their industry's market. If the market is growing faster than average, all things being equal, they may enjoy a bump in growth. If the market is slow or declining, the company may need to take market share from others in order to grow. Taking market share through clear messaging and effective marketing can grow your business. However, seeing growth rates in the 20 to 30 percent range is unlikely even with the best message. No, to see substantial growth, you probably will need to scale. Scaling will most likely require you to create additional markets by entering new geographies, developing different products or entering fresh industries. While the rewards to scaling can be great, so are the risks.
We are partial owners of Dodson Property Management and have worked as the company's consultants since 2010. Duke Dodson started the company in 2007 when he couldn't find a firm to manage the rental homes he owned. He was looking for a company that specialized in single-family property management in the Richmond, Va. area. Not finding one, he realized he had stumbled onto an underserved market and Dodson was born. Duke grew Dodson organically for several years, from a handful of properties to more than 1,000 under management by 2013. This impressive growth was the result of Duke's drive and business savvy and was helped by an economy that boosted the property management industry. However, as our economy began to recover from the recession, the rental market slowed. Duke and his team realized that they would need to venture into different markets and geographies to continue their growth.
In 2011, Duke hired a person to both develop new business and then manage properties in the neighboring Williamsburg, Va. area. The company then bought a single-family portfolio in 2014 in Fredericksburg, Va. These were attempts to expand the business by entering different geographies. Both geographies are about 60 minutes outside of Richmond, so they were close enough for corporate headquarters to manage them with only a property manager located in the area. However, both portfolios limped along, not taking a foothold or seeing the kinds of growth enjoyed in the Richmond area. While the employees in the satellite locations were hard-working and experienced property managers, they didn't have the kind of expertise needed to grow a business.
Dodson had dabbled in the multi-family market but had not fully invested in this industry until 2016. This is when Duke made a bet. He hired a star in the industry that the company couldn't afford given the size of its multi-family portfolio. The company knew that this strategy would mean losses for a couple of years in this division. However, given his experience, and the lackluster growth in both Williamsburg and Fredericksburg, Duke was willing to make the investment in leadership. Tara Carter joined the Dodson team in 2016 and immediately started to transform the division. Duke and Tara focused on growing the portfolio, organically, but also through acquisition. In August of 2016, Dodson bought CoreRVA, increasing the number of apartment homes under management to more than 1,500. Since this acquisition, Dodson has continued to grow its portfolio to more than 2,500 and the multi-family division became profitable nine months ahead of predictions.
Related: 6 Ways to Handle Rapid Growth
There is a chicken and egg decision for companies to make. Do you try to grow at a typical pace until the company reaches a size that will support top talent? This can be tough because until you get to a certain size it can be difficult to attract the large deals that will help you to scale. Organic growth tends to be slower and often won't support the type of leadership that is a critical component of scaling. Alternatively, you can take a risk and buy the leadership the organization needs to grow. However, your company will need to be able to withstand the losses generated by the expense of high-priced talent. If you can acquire other business for your new leadership to manage, you can shorten the timeframe. But, acquisitions are also risky. Dodson's acquisition and growth, along with its strong leadership, has made it a more substantial player in the multi-family arena. They are on a positive trajectory.
Lessons learned from the multi-family division have been transferred to both the single-family division and the commercial real estate division. In 2017 Dodson bought a larger portfolio in Fredericksburg to increase its profitability. Also in 2017, Dodson sold the Williamsburg portfolio because it could not find another suitable acquisition. Following the success of the multi-family division, in 2016, Dodson hired Ross Fischer as VP of commercial real estate. Again, Dodson has placed a bet on acquiring great talent that the company could not afford at its current size and then purchasing a portfolio for him to manage.
To scale at rates well above the industry norm, Dodson had to take risks in both leadership and business acquisitions. It had to be in a position and willing to sustain initial losses to support long-term gain. While the jury is out on this latest purchase, if history repeats, Dodson will be successful using its shortcut strategy for continued growth.