Growth Through Acquisition: Buy the Metric You Need

TL;DR: Growth through acquisition means buying the customers, team, products or profit your business needs instead of only working harder for them. Start with the goal, not the target: the Acquisition Wheel matches each goal to a kind of company to buy. Owner operated businesses often sell at lower multiples than yours, which creates value the day they join your company. Then structure the deal well and plan the integration, because that is where roll ups win or fail.

Buy growth instead of only working harder

Most founders grow the hard way. More hours, more hires, more ads, and then they hope next year looks better than this one. There's another way, and it is one of the habits McKinsey found in the fastest growing companies. You buy the growth. You acquire a business that already has the customers you want, the team you need or the profit you're after, and the day that deal closes, it is yours. The tool I use to pick that business is the Acquisition Wheel: sort every possible acquisition by the goal it moves, then buy the one that moves the metric your business needs right now.

I have done hundreds and hundreds of startups, and I've done acquisitions, and I'll tell you the truth: acquisitions are better. Here's why. A business that already exists has gone through the hard part. It already has customers, and where there are customers, there are sales. It already has profits. It already has systems, employees who have been vetted, a brand people know and relationships with suppliers. A startup has to create every one of those from scratch. And there are so many more ways to fund an acquisition than a startup. I've cataloged more than 220 of them.

Start with the goal, not the target

Here's what most owners do wrong. They see a business for sale, they like it, and they start negotiating. That's backwards. The very first question is not what can I buy. It is what is my business trying to solve for right now, because once you know that, you know the kind of company to go find.

That's why I created the Acquisition Wheel. On the wheel, I sort acquisitions by the goal you are trying to achieve, and then you pick the acquisition that moves that goal: more customers, more leads, more capacity, a higher average order value, a higher lifetime customer value, a better profit margin, or innovation. Each of those has a category of company you can acquire to get it. Any major challenge you are facing in your business can be solved by acquiring from one of those categories.

The spokes of the Acquisition Wheel

More customers: acquire competitors. The business schools call it horizontal integration. If you sell blue jeans and you own 20% of the market, and you find somebody else who owns another 20% and you buy them, the minute that deal closes you have doubled your market share overnight. That's the power of an acquisition.

More leads: acquire media. Media is anybody who has already gathered the attention and eyeballs of your ideal customer. One of our companies sells dog toys and dog products, so we went looking for where we could find a lot of active dog lovers. We found one of those groups, with more than 100,000 members, and acquired it for almost no money. The last time I looked, we were selling about 100 items a day to the people in that group.

More capacity: acquire a team. If your people are already working double shifts and you need more capacity, you can go out and acquire a team. That's called an acquihire, and ask me how I know this one. At Digital Marketer, we wanted to build marketing software, so we tried to put our own development team together. It was a complete nightmare. We spent a few million dollars and ended up with software we could not use. So we found a contractor we were already using whose owner wanted to sell, and we acquired that company mostly to get the development team. The company was True Conversion, and that team went on to build several products for us.

More value per customer: acquire products and services. Let's say a customer spends $1,000 a year with you and stays for five years. They're worth $5,000 to you. Add the right product or service and get them to $2,000 a year, and you have doubled your sales with the same number of customers. Add something with recurring revenue, and they keep buying from you over and over without you having to sell them every single time.

More margin: acquire your suppliers and distributors. If you're making sales but not enough profit, look at vertical integration. We had a client selling about $60 million a year of jewelry who started out drop shipping. He realized the people manufacturing the jewelry were keeping a profit he could capture, so he started manufacturing, acquired manufacturers, and went direct to the customer instead of through retail stores. And a supplier doesn't have to be somebody making widgets. It could be the agency running your ads or the firm making your content. In almost every industry we look at, we don't like to see a margin under 20% if you want to get bought at the right price.

Innovation: acquire intellectual property. If your products are getting stale and competitors are coming out with cool new things, you can acquire intellectual property. That's what Apple did when it bought Beats, and the streaming service that came with Beats became Apple Music. Apple did not have to invent it. It bought it.

A real deal from the wheel

Let me give you an example of how this plays out. Digital Marketer was selling to small and medium sized businesses, and we wanted to go up market to enterprise companies. So we went looking for a company that already did that, and found the Online Marketing Institute. It had hundreds of courses, a sales team, a development team and a brand enterprise buyers knew. It went on our list from the wheel, and we kept watching it.

Then it ran into financial trouble and went into bankruptcy. I flew to San Francisco for the bankruptcy court auction, and the bids kept going up until they were about three and a half times what we were willing to pay. Somebody else bought it, but we stayed friendly with them, because you never know what's going to happen in a deal. Sure enough, about a year later they could not get the company to do what they thought it would. It became available again, and we acquired it. The wheel told us what to look for. Patience and staying friendly got us the deal.

The acquisition arbitrage most owners miss

Here's what's interesting. Across almost every industry we look at, owner operated businesses trade at significantly lower multiples than professionally managed ones. That's because an owner operated business gets bought as a job, and a professionally managed business gets bought as an investment. That gap is an opportunity, and I call it enterprise value acquisition arbitrage.

Let's walk the math. Say your company is professionally managed and would trade at six times earnings. You acquire an owner operated business with $1 million a year in profit, and you pay two times, or $2 million. The minute that profit is inside your company, it is valued at your multiple. One million dollars times six is $6 million. You paid $2 million, so you just picked up $4 million in value, and the seller still got a fair price for what their business was worth. That's the money.

And it compounds. If combining businesses takes you over $10 million in profit, you can move into a different group of buyers, ones who pay more because they buy bigger businesses.

Buy and build: structure the deal, then integrate it

Once you know what to buy, you have to figure out how to pay for it. That's the whole idea behind Zero Down. The way you split the price into its components, cash paid, seller financing, holdbacks and even equity, is very often worth more than the headline number. The headline number is what everybody fights over. The real magic is in the terms. I walked through the funding side in Deal Stack 101, and why structure beats price in the M&A playbook nobody talks about.

Then make acquisitions a program, not an accident. In that McKinsey work on the fastest growing companies, one of the things that showed up was programmatic M&A, which just means having a real, formal process for finding and doing acquisitions instead of waiting for one to fall in your lap.

The bigger thing is integration. To me, revenue and profit are not nearly as important as management and systems. When you look at why roll ups fail, it comes down to the integration level. Integration is bringing the companies together so they operate as one, and that goes to the systems you have to do it. So in diligence, ask whether the company has management strengths you don't, whether its culture complements yours, and whether it runs on the same back office systems as yours or can move over easily. And if the thing you are paying for is mostly software, read why the roll up math just broke before you write the check.

There's one more payoff. If you have two or three acquisitions you can point to, where you bought something and integrated it well, a future buyer sees a company that knows how to grow by acquisition and is easy to fold into theirs. That can show up in what somebody is willing to pay you.

Where to start

Start with the goal. Write down the one metric your business needs most right now, find the spoke on the wheel that moves it, and make a list of the companies in that category. Then watch them, stay friendly with the owners, and be ready when one becomes available. That's how you grow by buying instead of only working harder.

I walked through how to choose these acquisitions on Business Lunch, including when to buy competitors, suppliers, distributors and intellectual property: The Smartest Businesses to Acquire Next. And you can watch me take you around the wheel itself on YouTube: How to Grow Your Company by Using the Acquisition Wheel.

Picking, structuring and integrating these deals is a big part of how I work with founders through Consulting for Equity, where I am paid in ownership, not fees. If you are weighing what kind of partner to bring in for that, start with what founders need to know about consulting for equity.