In our final article on branching out your cleaning company, I want to discuss what many would consider the most sexy way to grow, acquisition. Acquisitions, or the purchase of another company, is something you read about frequently in the news, even in our own industry. For instance, ABM recently purchased GCA in an effort to gain a greater market share in the education sector. There is no doubt that acquisition can be a great way to grow, and grow fast. But is it right for you? While this is an incredibly complex topic, let’s break it down into three parts: the reasons for acquisition, the potential downsides, and whether or not an acquisition is right for you.
The Reasons For Acquisition
In our industry, reasons for acquisition can vary, but generally they can be lumped under the following three categories: accelerate growth, enter a new geographic market, or enter a new vertical market. Most experts say, and I agree, that accelerated growth is a terrible reason to acquire a company. While growth is always an outcome of acquisition, if not tied to entry into a new market (whether geographic or vertical), then it is ill-advised. As mentioned in the previous posts, entering a new market is tough. Often it takes business to get business, so if you don’t have a school but want to get into the education sector, that can be a huge hurdle. The same could be said of a new geographic location. An acquisition can give you an immediate foothold.
The Potential Downsides
The biggest downside is that statistically speaking, most acquisitions are failures. They usually do not provide the ROI desired, and growth via another method would have been better. Second, acquisition typically requires a strong cash position, something many companies don’t have. Most deals in the cleaning industry involve three layers of financing: bank, seller, and buyer cash. You need be ready to shell out 20%-30% of the deal in cash. So for instance, if you are buying a $1M company with a 10% EBITDA and a selling multiple of 5x, then the overall purchase price of the company would be $500k. Assuming you needed 30% down in cash, this would be $150,000. Finally, one of the biggest reasons for acquisition failure is culture fit. For those of you with blended families, imagine putting $500k on the line, requiring everyone to get along and work together, and you get the idea.
Is An Acquisition Right For You?
Let me offer three guidelines for determining whether or not an acquisition is right for you – three questions to ask yourself.
- Do you need to break into a new market and cannot make it happen via organic growth?
- Do you have the cash necessary to make the deal and COMFORTABLY continue your current operation?
- Can you identify a company of the right size and culture fit?
If you can confidently answer “yes” to the first two questions, then I would suggest speaking with an M&A consultant (someone like Pursant).
If this is a question you want to explore further, I would be happy to help. Feel free to email me at email@example.com