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Buying a business, the quick and easy guide for MSPs. Part 3, Chapter 3A.

The type of business you want.

Opportunities abound and so clarity and focus are essential, otherwise wasted efforts or overwhelm are likely. When it comes to growing a business portfolio, rather than just maintaining a lifestyle choice, some B2B business industries are simply better than others to be in. In the SME arena, it’s easier to consolidate and scale an IT support business, accountancy practice, or training provider, for example, where systems and processes can be replicated than a meat processing plant.

Think in terms of simplicity around systems, scaling, and duplication. Depending on your circumstance, your criteria will change, although the following bullet points are largely useful rules of thumb when selecting a business to acquire. For the remainder of this text, we’ll assume we’re talking about acquisition for growth in the same industry for the same clients, rather than a strategic purchase, for example, purchasing a supplier. This being the case, a target company should ideally have the following criteria. The business should own an asset. When the business has an asset of some kind, it’s likely you can get finance for it. Therefore, you don’t have to risk or tie up your own capital. Assets that you can finance against include property, stock, equipment, trade debtors and future cash flow. Future cash flow will ideally be protected with contracts. Indeed, the contracts are often the primary reason a purchaser is interested in the business, otherwise the clients could walk away as soon as the business is sold.

Recurring revenue. To reiterate, cash is king. And consequently, if your clients pay you monthly, ideally by direct debit, then you are better equipped to weather storms, leverage the cash flow for finance, and increase prices and sales throughput with less resistance. Premium pricing. Businesses that rely on price alone to differentiate typically need to be big to be profitable, which can carry its own risk and may be outside the reach or requirements of many SME owners. However, those businesses that tend to carry good profit margins are likely to lend themselves to easy financing. Wider margins provide a safety buffer. New, old, and franchises.

There are three main types of business opportunities to consider when seeking to expand by acquisition, namely franchises, start-ups, and existing businesses. Given that franchises are the most strictly controlled in terms of operations and marketing, we will not be considering them here. Start-ups do not enjoy many of the benefits that an established business has, such as proven products, services, systems, processes, cash flow and, crucially, clients. For these reasons alone, start-ups are also discounted here. For this study, we are only looking for established businesses to acquire, ideally at least a couple of years old, that have proven themselves to be potentially viable, even if they are distressed. These will add the most value to your portfolio for the least amount of risk and cost.

Typically, when people look to acquire another business, it will be to create some kind of synergy with existing staff, clients, suppliers, or other enterprises that the buyer owns. Same industry, same clients. These businesses are in exactly the same industry as yours because you’re looking to grow by acquisition as part of your growth strategy. This is the bit we’ll be discussing in this text. Consolidation of smaller businesses can prove very profitable.

Complementary industry, same clients. These are the ones that complement your existing company. This company sells different products or services to your existing company, but has access to the same type of customers that you want. For example, IT support and telephony are two different services that can share the same clients, or at least a significant proportion of them.

Lastly, different industry and different clients. These are in a different industry but may have a benefit to the rest of the portfolio. For example, an IT support company might buy a software company for strategic reasons as it uses a particular CRM or platform that all its other companies can use. Or it might be more cost effective to buy a supplier than simply keep paying a premium to that supplier for goods or services.

MSP Marketing in bite-sized bits. It’s easier than you think with MKLink. To get more of MKLink’s MSP MBA Marketing and IT training resources, make sure that you’ve registered for your account for free now at www..mklink.org.