“If I buy his company and combine it with mine, I will control about 45% of the Nashville market. He says he is ready to retire and sell.” Taranda (not her real name) started her company in 2005 and turned the corner of profitability right before the recession of ‘08-’09. As we had hot chocolate one night at Starbucks, Taranda explained why she called me. “I almost gave up when the market went south in 2008 but my husband helped me stay focused, and here I am now with a growing and quite profitable business. However, I see an opportunity to do more and that’s why I want to make this acquisition. I’m telling you, it’s perfect for me. But, I don’t want to put myself at risk by doing something stupid in the process.”
Though not for the faint of heart, growing through acquisition can be a smart strategy, if the buyer is smart about the process. The buyer is usually going into debt to make the acquisition, and buying a business always brings a host of new people and problems to manage. Taking care of all that, while running the core business, is no easy feat.
Taranda told me her thinking. From 2011 through 2016, she said her new customer base grew by 8% per year. But in the past three years, new customer growth had slowed to about 3% per year, even though she was increasing her marketing expense every year. “This cost of new customer growth will drive me out of business if I’m not careful. I need a new strategy, and this acquisition looks like a good way to grow,” she explained.
The company Taranda was looking to acquire would increase her customer base by about 60%. “It would take me six or seven years to add that many new customers,” she said, “and since the owner is ready to retire, his valuation is reasonable. Buying his company will be a less expensive way of growing my customer base than investing in marketing for the next few years.”
Taranda knows she’s not likely going to retain all of the seller’s customers. “The way I’m working the numbers, I’m happy if we keep about 90%.” But in addition to adding new customers, she told me the acquisition would bring her two strong salespeople and an experienced office admin staff. “You know how hard it is to find experienced people these days. But here’s another thing that’s so cool about this deal,” she added, “because I’ve wanted a presence in the west end area of Nashville, and that’s where his office is located. I’m telling you, it’s just crazy, this thing is perfect on so many levels.”
It didn’t occur to me until I got home after our meeting, but Taranda and I never discussed the seller’s asking price. I guess she just took it for granted. Instead of obsessing over negotiating tactics to “get a good deal,” Taranda was focused on the why of the acquisition, the strategic reasons that drove her to seek it out in the first place. This is what I call a smart acquisition.
I’m not sure the deal will come together, but if I was a betting man, I’d sure give the odds to Taranda that she can make it happen. Her approach is wise, though not intuitive. When focusing on growth through acquisition, focus first and foremost on the logic. Get the strategy right, and worry about the price later.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The story above is true, but the names and fact patterns above have been changed to preserve the parties’ identities.
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