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Have you ever considered buying a business to rapidly expand the size and profitability of your business? Perhaps you have thought about it as part of your growth strategy, but you were nervous about the risk or the process.
As members of The Corporate Finance Network, we can support our clients through a buy and build strategy, with a streamlined process and market-leading business intelligence.
This article explains why strategic acquisitions can be an excellent way to also address and mitigate existing challenges, weaknesses, or threats in your own company.
Why Size Matters in Business Valuations
Purchasers typically use a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) or a multiple of revenue to assess the value of a company.
The multiple varies depending upon several factors, such as the sector, growth prospects, market conditions and the potential purchaser’s assessment of the risk.
If you are looking towards your own exit in the coming years, you will want to maximize your own valuation.
The Impact of Business Size on Valuation Multiple
One significant factor that can influence the valuation multiple of a business is its size. Larger businesses often command higher multiples in their valuations. This is due to several reasons:
1. Economies of Scale
As businesses grow, they benefit from economies of scale, reducing per-unit costs and increasing profitability -making them more attractive to buyers and leading to higher multiples.
2. Market Presence and Brand Strength
A larger business typically has stronger brand recognition, a loyal customer base, and a higher market share. These factors enhance perceived value, leading to higher valuation multiples.
3. Stronger Management Structures
Businesses heavily reliant on a single individual – often the founder – can raise concerns for potential buyers, as the company’s success may depend too much on that individual. A larger business with a capable management team ensures continuity, making it a safer investment and increasing its valuation.
4. Diversification of Revenue Streams
A company that generates revenue from multiple products, services, or markets is less vulnerable to economic shifts. This diversification reduces risk and enhances valuation.
5. Better Access to Capital
Larger businesses typically have access to a broader range of financial products and capital markets, enabling them to secure funding on more favourable terms. This financial strength is reflected in higher valuation multiples.
Strategic Acquisitions: A Path to Faster Growth
Acquiring another business can be a powerful strategy to increase the size of your business and, in turn, its valuation multiple. However, not all acquisitions are created equal. The key is to identify and pursue acquisitions that align with your growth objectives and address existing challenges, weaknesses, or threats.
Conclusion
Expanding your business can significantly enhance its valuation multiple and drive long-term growth, so that you achieve the most successful result when it is your time to exit. Organic growth is difficult and takes a long time, whereas growing through strategic acquisitions is much faster and impactful.
By addressing operational weaknesses, expanding market reach, enhancing product offerings, gaining competitive advantage, and realising financial benefits, the right acquisition can transform your business and unlock new opportunities.
If you would like to understand more about buying businesses, financing the deal and how we measure and mitigate potential risks during the process, please contact us to discuss.
