Everybody loves to find a bargain. That's especially true if you are hunting around for a company to buy. You're looking for that gem of a company where the current owner doesn't fully understand the value of what he or she has--and who might be willing to sell it for a mere two- to three-times earnings.
But, like purple unicorns, those kinds of opportunities are quite rare.
Thanks to the wealth of information online and available through advisors, most sellers know the full market value of their business. In fact, the most common issue buyers face these days is sellers who overvalue their business--sometimes to the tune of 10- to 12-times earnings--which makes making a deal quite difficult.
But there is a way that you buy your next company on the cheap. The secret is to find the kind of company where you can create significant value when you combine it with your own. The old 1 + 1 = 3 maxim.
Let me explain.
There are actually two basic ways that you can buy a company that will make the purchase price look cheap after the fact. Realize, you are going to have to pay a fair price to buy the company - your work after the purchase makes it a bargain.
The first way is to eliminate costs. When you buy a business, there can be immediate ways you can reduce expenses or overhead--say, by eliminating duplication or increasing efficiency. You might not need two HR departments, for example, or you might even be able to sell a building you don't need anymore.
By cutting those costs, you can immediately add potentially millions of dollars to your bottom line--which increases the value of the business beyond what you paid for it.
I used to do this regularly in a prior manufacturing business I ran, where we looked to buy businesses where we could eliminate costs by consolidating the other company facility into ours. When we did that, it always ended up becoming a great deal for our company.
The second way to buy a company on the cheap is to find a strategic fit that creates revenue growth.
While a lot of people buy companies with the expectation that they will grow revenues in the future, that's always a risky proposition to rely on.
Rather, your goal should be to find a business that makes a product or service that is complementary to what your firm offers in a way that the customers of both businesses will want to buy from each other. By cross-selling to both customer bases, you create healthy organic revenue growth.
For example, I ran a business in the HVAC industry that made temperature and humidity sensors. We then acquired a company that made pressure sensors for exactly the same market, but different customers. After the deal, we could then introduce those pressure sensors to our customer base--which drove up sales. At the same time, we could introduce our temperature and humidity sensors to their customer base, which also increased sales.
The result was that we saw a healthy bump in revenue that made the acquisition a great deal. We also consolidated the facility, which made it a super good deal.
Ultimately, the best deals are where you can achieve both eliminating costs and increasing revenue. Those are exciting opportunities and can truly make an acquisition look cheap after the fact, while also significantly boosting the value of your organization. While this may sound obvious, there are lots of companies looking to simply buy revenue on the cheap without thinking of the benefits of the combination.
So, if you want to buy a company on the cheap, look beyond the price tag to see where you might be able to tap into cost saving or revenue growth synergies instead.