What You'll Learn...
- Why buying other businesses is a smart choice for founders
- The kind of business you should look into buying, and what to avoid
- How much money you should be making to even consider acquisitions as a strategy
- The benefits of inheriting another company’s talent
How I discovered the power of acquisitions
I had been trying to build and grow online businesses for a few years when an interesting thought struck me:
What would happen if I just bought another company? Other people do that, right? Why not me?
Most people don’t consider growth by acquisitions to be “real” growth. By purchasing another business, it feels like you’re somehow… cheating. But for me, it was an exciting new possibility.
I considered the opportunity in terms of organic growth and inorganic growth. I could try to grow my business 10% a year by organic methods, or I could just buy another business and get that growth instantly, inorganically. The latter sounded good to me, so I gave it a shot.
My first acquisition was a bit of a disaster. I bought a competitor’s online business for $40,000, paying $10,000 over four months. It was similar enough to my business that I knew I could get the business to generate about $10K a month immediately.
However, my business had recently started experiencing bottlenecks. We couldn’t fulfill our services. And we were using the same back end for our competitor, so they started running into the same bottlenecks.
Not a great start.
Undeterred, I built my savings back up and tried again. This time around, I bought an Amazon affiliate theme business and with it was able to generate sales to supplement my business. I used cross-promotional strategies, writing articles to promote themes and ranking my own site in Google by doing so.
There were issues, of course. A theme broke for a while, the owner shut it down, and I had to consult a different developer to work on the theme.
But ultimately, I generated profit.
Was it a huge, runaway success? Not quite. But I’d made enough to keep going.
I started making other small acquisitions that went well. And I blogged about my experience. Over time, that blog grew an audience.
One day, a reader asked me if I’d buy a business and run it for them, which is how Onfolio started. We’ve acquired additional businesses since then and I’ve learned some things along the way.
Just be careful with businesses that are particularly complex. If you get the sense that it’ll be hard for you to learn how to manage it, be very careful. You may end up spending more time and resources than it’s worth.
How to decide if acquisitions are for you
Acquisitions are a great way to build wealth quickly. But first, you need to verify that an acquisitions strategy is right for your company—and that the businesses you’re considering would work well for you.
To make sure an acquisition is the right move, follow these 4 steps:
Step 1: See if businesses similar to yours exist
If you’re the only business of your kind, that’s a rare and exciting opportunity! You may have other avenues to grow. Before you take on another new business, think about exhausting your organic growth options, like hiring a new marketing VP or creating some new products to expand your portfolio.
If you see similar competing businesses, though, an acquisition could work for you. Especially if you can find one that is compatible with your business model, similar to the the Amazon affiliate theme business I’d purchased.
Just be careful with businesses that are particularly complex. If you get the sense that it’ll be hard for you to learn how to manage it, be very careful. You may end up spending more time and resources than it’s worth.
Step 2: Examine your revenue
I have a rule of thumb: If you’re making less than seven figures, you should grow your business through channels other than acquisitions. At this size of business, you’re unlikely to find an affordable competitor that would provide enough of a positive difference for your business.
If you’re at the seven-figure mark, you can definitely start playing in the acquisitions space.
If you’re making eight figures or more, get serious about buying others— it’s one of the fastest ways a business of your size can grow.
Step 3: Think about your talent needs
Evaluate your current team needs. Are you in the market for more talent? Does your current talent lack a particular skillset your business needs? An acquisition can resolve these problems in a low-cost, simple way.
Consider for a second the real cost of interviewing, hiring, and onboarding. Think about how many salespeople you have to churn through before you find your star player. Through an acquisition, you can inherit an existing team that’s already talented and skilled, along with that star salesperson.
Additionally, that team can plug in knowledge- or capability-related holes that you might have in your other businesses.
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Step 4: Run through the first year
I recommend running through all the logistics of what it would be like to make this particular acquisition for the first year.
Here’s an example: Say you’re an email marketing agency with decent management, and you’re considering buying a conversion rate optimization agency with a founder who wants to exit. If you have an existing team that can run this agency, it may make complete sense to merge those companies. But if you need to hire someone else to run the agency, and taking on that extra expense no will no longer profit your business…well, you might not want this one.
If the costs quickly stack up higher than you hoped, either look for a better opportunity or wait until you’re in a better position to buy.
Step 5: Consider other risk factors
At Onfolio, we pass on a lot more businesses than we buy. There are a handful of common deal-breakers for us:
- Their business requires a level of expertise we don’t have to manage it
- Recent hits from search engine algorithm updates that haven’t yet impacted the listed earnings, leading to a misleading valuation
- Businesses that hinge on the owner’s specialized knowledge, making it tough to hand off
- Replacing an owner who essentially volunteers substantial work—like content creation, networking, or sales—would significantly inflate the cost and, consequently, the buying multiple
- A disproportionate amount of their website traffic funnels through a single webpage
- We interviewed key members of their staff and everyone had a different story of what was happening
At the heart of our decision-making is the balance between risk and opportunity cost.
Most often, our decisions boil down to risk assessment. Opting for riskier acquisitions is the quickest path to losses in this arena. That said, predicting the potential of a business is often a coin toss—we’ve been surprised in both directions.
If you’re making eight figures or more, get serious about buying others— it’s one of the fastest ways a business of your size can grow
Grow your company to its full potential
For many founders, there’s no better way to increase revenue than by taking on other businesses.
Sure, you might be able to eke out greater margins by optimizing your Facebook ads or adding more services. But at some point, there’s only so much low-hanging fruit you can pick.
Realistically, you won’t be able to use organic methods to jump from $10 million to $20 million in revenue. You could achieve that with just one acquisition! And you could go from $20 million to $50 million in just two or three.
Buy thoughtfully, think about more than just the sticker price—and you’ll put your business further ahead than you thought possible.
