Should you try to grow your business before you go?

A number of firms have asked us, “Should I try and grow through acquisition before looking to sell?” The fact that we’ve been asked a few times means that others must be thinking it.

Here are the things to consider before making a decision:

• Acquiring another business before selling your own can boost your valuation (more on that later), but it also adds complexity, risk, and can increase your time to exit.
• It’s not a shortcut. It’s a strategic move that requires serious planning.
• Whether it’s the right move for you will depend on your specific goals and circumstances.

If you do decide to grow before you go, it’ll take proper planning to achieve the results you want. So, it’s important that your eyes are open to the potential pros and cons of exiting this way.

The case for growing before you go

There are several potential benefits of buying and integrating a business before selling the one you currently own:

• Attract more buyers – If you acquire a business that expands your client base, improves performance, or strengthens your service offer, it could make your firm more attractive to buyers.
• Share sale more likely – It costs a lot in legal and compliance to buy a firm through a share purchase agreement (SPA). Growing in size increases your chances of buyers being willing to buy your business rather than just your clients (a much better tax position for you!).
• Command higher multiples – Larger firms are often perceived as more stable and lower risk. This could lead to more competitive bids, which may drive up the valuation multiple.
• Improved profitability – If you can get integration right and harness economies of scale, your profits go up, making you more attractive and increasing offers.

Why buying before you sell might be a terrible idea

So, is an acquisition the right solution? Sometimes it is. Sometimes it’s absolutely not.

Here’s why it might not be a good fit for your business:

• The need for significant cash or financing – You’ll need the capital to buy another business or the ability to raise finance through a bank, angel investor or taking in private equity. Debt could be expensive to service, reducing profitability. Bringing in investors (private or PE) can significantly change the dynamics of your business.
• A longer sales timeline – If you’re looking to exit any time soon, an acquisition is probably a bad idea. Acquiring and integrating a business takes time. It can often take nine months plus for an acquisition to complete, and a further 12 – 18 months to complete the integration. What’s more, potential buyers will expect evidence that this strategy has added value. In other words, they’ll want to see that the combined business is stable and profitable with potential to grow.
• Added costs – You’ll need to find funds to cover the legal and due diligence costs associated with buying a business. This is a lighter touch for asset purchases, but usually costly for share purchases.
• The risk of operational headaches and decreased value – It’s hard to integrate an acquisition. Even the firms who do multiple acquisitions a year struggle! It’s going to take time, effort and buy in from staff to get things lined up. If your acquisition is not integrated successfully, operational issues could damage your business’s performance, reputation, and profitability.

These potential “cons” of growing before you go could weaken your exit position rather than strengthen it.

How to make a “grow before you go” strategy work

As you can see, there’s a lot to think about before you buy another business to bolster your business valuation.

This can work, but only if you plan well ahead of selling and make sure you’re clear about:

• The commercial case – Does your planned acquisition complement existing operations? Will it add value for your clients and increase profitability? Do you have a clear integration plan that will ensure the combined business runs smoothly? These are essential questions you need to answer before adopting this exit strategy.
• Your timeline – If you need a relatively speedy sale, be that to fund your imminent retirement plans or a new venture, growing before you go may not be the best option. Acquiring a business can take up to 12 months, and integrating a new business may take several years. That’s before you even put your firm on the market.
• Your capacity to lead the integration – Successfully merging two businesses takes considerable time, effort, and expertise. You’ll need to provide strong leadership and a clear vision for the integration, while also keeping your original business running. So, it’s crucial that you’re honest with yourself about how much you’re willing and able to take on.

At Melo, our golden rule is that you need to be a great buyer before expecting to be a great seller.

Growth can boost value, but not if it ruins your profitability and business in the process.

Get in touch

The Melo team can show you what a good buyer looks like. We’ll also help you to weigh up the pros and cons of growing before you go so that you can make an informed decision about whether it’s right for you.

Drop us an email at hello@melo.co.uk or call us on 0113 4656 111.