The Kickass Entrepreneur
  • About
  • Blog
    • All Blogs
    • Create Wealth (Investing)
    • Entrepreneur Interviews
    • Featured Top Posts
    • Growing Profits
    • Growing Revenues
    • Marketing
    • Positive State of Mind
    • Real Estate Investing
    • Retirement
    • Sales
    • Selling your Business
  • Book
  • Courses
  • Podcast
  • Resources
  • Contact
The Kickass Entrepreneur
Subscribe
The Kickass Entrepreneur
  • About
  • Blog
    • All Blogs
    • Create Wealth (Investing)
    • Entrepreneur Interviews
    • Featured Top Posts
    • Growing Profits
    • Growing Revenues
    • Marketing
    • Positive State of Mind
    • Real Estate Investing
    • Retirement
    • Sales
    • Selling your Business
  • Book
  • Courses
  • Podcast
  • Resources
  • Contact
  • All Blogs
  • Growing Revenues
  • Selling your Business

How to Expand Your Business Through Acquisition and Make a Killing

  • December 15, 2021
  • 2 comments
  • 9.2K views
  • 5 minute read
  • Jeff Wiener
Expand Your Business
Share
Tweet
Share

What I am about to explain is something I wish I had known much sooner in my business career.

I had my aha moment in 2017, by which time it was too late for me to take advantage of what I had just learned since I was in the late cycles of closing on the sale of my own business.

I was out for dinner with a friend who had made an acquisition of a competitor a couple of years prior. He explained the process, the numbers, the overall structure of the deal, and how he was going to profit from the transaction. In the end, it worked out exactly as he had planned. I was a curious bystander and learned throughout the process.

I have always had an aversion to debt. So much so that I never had a line of credit, my total payables were smaller than a 5 cm (2 inch) file folder, and all invoices were paid and nearly caught up every week. I had made three acquisitions throughout my business career, and all three transactions, although extremely successful, were paid for with cash.

I was raised to believe that debt is a bad thing. Now that I have seen many of my CEO friends expand their businesses with the strategic use of debt, I’ve since changed my negative debt perspective to the extent that an acquisition is accretive. When it is, and you do things right, it’s possible to make a killing.

In my friend’s case, he bought a business that was as large as his own from a revenue perspective. The EBITDA margins for the business he acquired were approximately 10%. Post-acquisition, he was able to consolidate several departments, streamline the business, cut expenses, and almost triple the EBITDA margins. When the two businesses (his initial business and the acquired business) were rationalized into a single entity, he was able to take advantage of economies of scale and improve the margins of the overall business.

How Does It Work? And How Can You Expand Your Business Through Acquisition?

In the interests of confidentiality, I’m not going to use the real numbers (and frankly, I don’t know the exact numbers anyway), but I am going to illustrate how this could work.

30 Days to a Better Business

I can teach you how to build a successful, profitable business, and turn that into millions in personal wealth.

Thank you for your interest in THE KICKASS ENTREPRENEUR'S GUIDE TO INVESTING. Three Simple Steps to Build Massive Wealth with your Business's Profits. Please check your email to confirm the book download. Form: 400529

There was an error submitting your subscription. Please try again.

We won’t send you spam. Unsubscribe at any time.

Let’s say your business has revenues of approximately $5 million a year with $500,000 in profits. You make an acquisition of a similarly sized competitive business so that, when complete, your two businesses combined now have $10 million in revenues and $1 million in profits.

Let’s say the business acquisition cost was 5×EBITDA, so you had to pay $2.5 million for the business ($500,000 × 5). Since you don’t have $2.5 million in cash sitting around, you borrow 50% of the purchase price and put down $1.25 million in cold hard cash. (Note: this can definitely work with more debt, but I digress.)

The day after the business transaction closes, you realize that you don’t need two office spaces, two separate accounting departments, two sales directors, operations managers, technical support managers, and so on. I’m not suggesting that you fire all the staff from the acquired firm, but I am suggesting that sitting inside the consolidated business, there are likely plenty of new redundancies. It’s those redundancies that are going to make you a lot of money.

Let’s say you’re able to remove approximately $500,000 from the business. If your labor cost is approximately 30% of the overall revenue ($1.5 million in yearly payroll), add rent costs, internet services, cleaning services, and so on.

Keep in mind that you paid 5× EBITDA for the business you just acquired. That being the case, you just managed to save $500,000 in the business, which at 5×EBITDA, translates to an increase in valuation of $2.5 million. Not too bad for an initial $1.25 million investment (your initial cash purchase).

If nothing else changes in the business, other than combining the two entities and rationalizing the expenses, your business now has revenues of $10 million and EBITDA of $1.5 million.

Before you started this process, your business had a value of $2.5 million. After the acquisition, your business has a value of $7.5 million ($1.5 million × 5).

You still have to pay the bank back their debt of $1.25 million (assuming you haven’t paid any debt back yet), leaving you with a business that has a market value of $6.25 million.

Enter Multiple Arbitrage

Something else interesting happens the larger your business gets, and it’s called multiple arbitrage. As a business scales above certain thresholds, the market of potential buyers expands, as do debt servicing costs, so not only does your business’s multiple improve but so does the cost of the debt itself.

It’s much harder to market and sell a business with revenues of $2 million. It’s easier at $5 million, $10 million, $50 million, and the larger the business, the larger the pool of buyers.

When your business had revenues of $5 million, you were only able to obtain a multiple of 5× EBITDA (for example), but now that your business has $10 million in revenues, you might be able to get 5.5× EBITDA. If your combined entity now grows at an accelerated pace post-acquisition, then you’re now talking about exponential returns on business valuation.

I spoke with a CEO friend who recently sold his business for 11×REVENUE. Not EBITDA, but revenue. His business was a rapidly growing SaaS business. My other friend, the one who I went to dinner with, was able to obtain 8× EBITDA as a result of multiple arbitrage and sold in the first quarter of 2018. His initial value was approximately 6× EBITDA, but the combined acquisition doubled his size and significantly improved his multiple. I have another friend who has expanded his business from $9 million in revenues in 2011 to $100 million in revenues in 2019 by playing these arbitrage “games”.

If deployed strategically, debt can be a good thing, especially if you are using it as I described above.

Good luck, and hopefully this blog helped you to better understand how to expand your business through acquisition.

By the way, and before you go, I write a weekly blog and focus on three things: 1. helping entrepreneurs expand their business, 2. improve profits, and 3. how to create wealth. You can subscribe here, and I also published a book during the summer of 2018. It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.

Are you a younger entrepreneur? Here’s another interesting article I wrote:

My Response to an 18-Year-Old Who Wants to Become a Millionaire by the Time He’s 30.

Some recent posts you might have missed: Three Accounting Ratios You Need to Measure Your Business By. How Does Your Business Compare?

Thank you for your interest in THE KICKASS ENTREPRENEUR'S GUIDE TO INVESTING. Three Simple Steps to Build Massive Wealth with your Business's Profits. Please check your email to confirm the book download. Form: 400529

There was an error submitting your subscription. Please try again.

Related Posts:

  • Now is an Awesome Time to Acquire Your Competitor And Make a Killing
  • How to Expand Your Business
  • How To Expand Into A Global Business
  • 7 Tech Strategies to Expand Your Small Business
  • 6 Overlooked Content Marketing Strategies to Expand Your Business 
  • 7 Digital Tips to Successfully Expand Your Online Business
Share
Tweet
Share
Related Topics
  • acquisition
  • entrepreneur
  • entrepreneurship
  • expand business
  • M&A
  • merger arbitrage
  • mergers
  • multiple arbitrage
  • small business
Jeff Wiener

Jeff sold his company to private equity in 2017 and is now semi-retired. Jeff spends time traveling and with his family, writing this blog, managing his real estate portfolio of apartment buildings,  overseeing his investment portfolio, investigating angel investments, coaching other entrepreneurs, and managing his private equity holdings. Jeff is currently on a couple of boards, one for profit, the other not for profit, and now helps entrepreneurs grow their business, profits, and ultimately, create wealth.

Previous Article
a couple receiving a set of keys
  • All Blogs

Inheriting the Property: 5 Most Vital Steps to Take

  • December 14, 2021
  • Rene
View Post
Next Article
Tesla Model S
  • All Blogs
  • Create Wealth (Investing)
  • Positive State of Mind

Is It Worth it To Own a Tesla? My Battle To Keep, or Not Keep My Tesla

  • December 15, 2021
  • Jeff Wiener
View Post
You May Also Like
Lawyer and accountant small business
View Post
  • All Blogs

The 8 Reasons Your SME Might Need a Lawyer

  • February 24, 2023
  • Meg Rivera
online casino
View Post
  • All Blogs

What are online games doing to standout from competitors?

  • February 21, 2023
  • Meg Rivera
Enjoying Retirement
View Post
  • All Blogs

Top 10 Best Places to Spend Your Summer Workstation

  • February 9, 2023
  • Meg Rivera
Investing in Multifamily Properties
View Post
  • All Blogs

How to Choose the Right Neighborhood for Your Family: A Guide to Making the Perfect Choice

  • February 7, 2023
  • Meg Rivera
home
View Post
  • All Blogs

6 Ways To Speed Up Your Home Remodel

  • January 31, 2023
  • Frances
medical form
View Post
  • All Blogs

How Can You Win Your Medical Malpractice Case With The Right Lawyer?

  • January 24, 2023
  • Meg Rivera
volkswagen
View Post
  • All Blogs

Volkswagen VIN Decoder and How Useful It can be

  • January 20, 2023
  • Meg Rivera
mom and baby
View Post
  • All Blogs

Introducing Your New Baby To An Older Sibling: Understanding The Psychology Of Sibling Rivalry

  • January 10, 2023
  • Frances
2 comments
  1. Pingback: 3 Top Reasons Why Startups Fail and How Not to Become a Victim | The KickAss Entrepreneur
  2. Pingback: How Can You Obtain A Greater Than 30% Year Over Year Compounded Return on Your Wealth? | The KickAss Entrepreneur How Can You Obtain A Greater Than 30% Year Over Year Compounded Return on Your Wealth?

Comments are closed.

Join 6,472 Entrepreneurs That Get My Business Building and Wealth Creation Posts by Email

I can teach you how to build a successful, profitable business, and turn that into millions in personal wealth.

Thank you for your interest in THE KICKASS ENTREPRENEUR'S GUIDE TO INVESTING. Three Simple Steps to Build Massive Wealth with your Business's Profits. Please check your email to confirm the book download. Form: 400529

There was an error submitting your subscription. Please try again.

We won’t send you spam. Unsubscribe at any time.

Recent Posts
  • Logistics Software 1
    Accelerating Your Business Growth: The Role of Logistics Software Development
    • March 20, 2023
  • crude oil 2
    Energy Futures: What to expect in 2023
    • March 17, 2023
  • man writing on board 3
    What is the Difference: Lead Scoring vs. Nurturing
    • March 17, 2023
  • group session 4
    Managing Wealth: 4 Reasons You Need to Opt for a Money Management Company
    • March 17, 2023
  • BUSINESS 5
    Planning to Start a New Business Abroad? These 11 Tips Might Help!
    • March 16, 2023
Featured Posts
  • Become a Decamillionaire
    How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
  • how to become wealthy
    The Entrepreneur’s Secret to How to Become Wealthy and Build a Personal Fortune
  • Most Profitable Small Businesses
    27 of the Most Profitable Small Businesses to Open in 2023
Categories
  • All Blogs (1,034)
  • Business (220)
  • Canadian Financial Products (4)
  • Create Wealth (Investing) (131)
  • Entrepreneur Interviews (25)
  • Featured Post for Main Menu (4)
  • Featured Top Posts (23)
  • Finance (55)
  • Financial and Investment Calculators and Economic Data (114)
  • Fitness (5)
  • Growing Profits (72)
  • Growing Revenues (115)
  • Growing Revenues (70)
  • Marketing (139)
  • Millionaire and Business owner interviews (3)
  • Positive State of Mind (68)
  • Real Estate Investing (17)
  • Retirement (13)
  • Reviews (12)
  • Sales (15)
  • Sell Me This Pen (8)
  • Selling your Business (13)
  • Starting a Business (1)
  • Startup Ideas (14)
  • Technology (112)
  • Top Products (4)
  • Uncategorized (54)
Follow us
Author
Jeff Wiener
Jeff sold his company to private equity in 2017 and is now semi-retired. Jeff spends time…

    CHECK OUT MY BLOG, AND SUBSCRIBE

    about
    The Kickass Entrepreneur

    Expand Your Business, Improve Profits, Create Wealth

    Expand your business, improve your profits, and create wealth. Each one of the three can be elusive goals. Follow the right steps, and you, too, can create financial independence. It is possible … you just have to take the right steps.
    NAVIGATION
    • About
    • Blog
      • All Blogs
      • Create Wealth (Investing)
      • Entrepreneur Interviews
      • Featured Top Posts
      • Growing Profits
      • Growing Revenues
      • Marketing
      • Positive State of Mind
      • Real Estate Investing
      • Retirement
      • Sales
      • Selling your Business
    • Book
    • Courses
    • Podcast
    • Resources
    • Contact
    TAGS
    apartment BATNA Business business failure business growth business sale Capitalization Rate CAP Rate cash cash flow Creating Wealth Discipline entrepreneur entrepreneurship excel extra cash Featured goal setting Growing Business investing investment real estate M&A marketing Marketing KPIs Mergers and Acquisitions | M&A | Entrepreneur Blog Millionaire millionaire next door mistakes MUR Peter Principle Profit profitability real estate retirement revenue Revenues sales sales management Semi-Retirement Blog | Entrepreneur Blog | Small Business Blog small business Stagnant stocks success Thomas Stanley wealth
    RECENT ARTICLES
    • crude oil
      Energy Futures: What to expect in 2023
      • March 17, 2023
    • deck of folders with insurance word on it
      Tips for choosing the right auto insurance coverage
      • February 17, 2023
    • holding laptop
      Tackling pros and cons of virtual reality tours when buying and selling houses
      • February 9, 2023
    • Rising gold prices concept. Investment in precious metals in the stock market
      The Pros And Cons Of Investing In Precious Metals
      • February 9, 2023
    • man looking at his tablet
      These Are The 7 Mistakes Six-Figure Earners Make
      • January 7, 2023
    • starting your own business
      6 Must-Know Tips For Starting Your Own Business
      • January 1, 2023
    The Kickass Entrepreneur
    • Coaching
    • Book
    • Blog
    • Contact
    • Privacy Policy
    • Terms
    • Disclaimer
    • Facebook
    • LinkedIn

    Input your search keywords and press Enter.