Posted on: July 10th, 2018
A middle market company looking to grow is in a similar situation as a sports team trying to improve in the off-season. There are a number of different ways for a team to improve: the draft, trades, free agency. None of these options is necessarily better or worse than another, it depends on the team’s situation and opportunities available. The same is true for an expanding mid market company. There are chances to grow organically via new product development or hiring a sales team, and there is also the option to grow through acquisitions. While organic growth is always considered, some firms fail to truly explore potential acquisitions, even though growing through acquisitions can provide many advantages that organic growth does not offer.
Often firms pursuing organic growth bring on a new sales team. This investment can be costly and take a while to pay off. It may take significant time before the team truly knows your products and the best ways to sell them. It can take years before the sales team starts producing at an acceptable level of closings. Often it is less costly and faster to acquire a target company with an existing distribution channel, to get your product to the market. Through cross selling your product into this acquired distribution channel, great product companies can scale in a faster and less risky way than building a sales team from the bottoms up.
When you acquire a company, you receive the target company’s distribution channel, and also their sustainable cash flow. The new distribution channel and added cash-flow momentum increases your power to launch new products and to create larger ticket bundled products. The key advantage of gaining the new distribution channel is that these customers are not new leads. They are now your existing customers who already have a relationship with the acquired company. Selling to an existing customer has a far greater success rate than trying to find new customers.
The target company’s cash flow can also be useful in raising the funds for the acquisition; cash flow lenders will base their loan amount on the EBITDA of both the acquiring and target company combined. As the size of the combined company increases, the lending market access increases as well, giving the company more funding options into the future.
Acquisitions are not equal across all industries. Some are better suited for growth through acquisition. Technology is a prime example of an industry where growth through acquisition is the norm. Commonly, companies with new technology will seek out various regional distribution companies with dated versions of their new products. Accomplishing this essentially gives the acquiring company their target market as existing customers. This technique is also common in industries emerging for the first time—companies are looking to “land grab” to establish their presence across several regions, creating their network of relationships before a competitor can.