Last week I was in Austin, Texas. I was asked to come out to present to a group of distributors on market trends. We discussed mergers and acquisition trends in the automotive aftermarket. We discussed collision repair, paint distribution, and parts distribution trends. We also discussed the role of private equity and institutional investors in the industry. It was a blast! Most importantly, we discussed four simple ways to increase your business value.
Note: The spring conference circuit is heating up. Over the next few weeks I’ll be speaking in Biloxi, MS, Atlanta, GA, Atlantic City, NJ. If you are in or around any one of those cities please hit REPLY and let me know. It would be great to meet up person to person.
When operating a business, there are effectively four simple ways to grow a business. Beware, while these approaches may be simple, that does not mean they are easy. But the most successful companies in the industry consistently focus on all four of these items.
- Organic Growth
Organic growth, or also referred to as same store sales growth, is growth in topline revenues from existing store locations. Organic growth can come from existing the capacity at existing locations, increasing the number of customers or number of transactions at existing locations, and generally selling more from your business’s current base of operations. It is one of the more common areas I see business owners focusing their resources. And rightly so, as Mark Cuban says, “Sales cures all ills.”
- Efficiencies and Cost Reductions
Increasing the value of your business is more than just increasing top line sales. Ultimately, the value of your business is predicated upon increasing free cash flow. While there are many ways to value a business, ultimately all valuation metrics return to cash flow.
Efficiencies and cost reductions can be considered a type of organic growth, as the business is organically increasing the amount of free cash flow generated. But efficiencies can also increase sales while also driving down costs. Whereas organic growth is focused on increasing cash flow by increasing top line sales, efficiencies and cost reductions are focused on decreasing costs to increase cash flow. Regardless of the definition, this is the second most common approach I see to increase the value of your business.
- New Developments
New developments are a type of inorganic growth whereby a company expands into a new market, or new location. Often referred to as a “brownfield” or a “greenfield”, these new developments are started from scratch, or near scratch.
Because the topline growth is coming from a new location not previously part of the company, the new development is referred to as inorganic growth. New developments can be a cost-effective way to increase the value of your business. But while the overall cost may be lower than an acquisition, for example, the time required to get a new development up and running may offset the cost savings.
Acquisitions, or buying another company, is a tried and proven way to increase your business value, especially in industries where the overall growth is muted. While often perceived as overly risky or expensive, the reality is that when executed properly they can be a very attractive way to increase your business value.
Many of the most successful investors in the world built their wealth by employing an effective buy-side acquisition strategy (think Warren Buffett, Carl Icahn, Henry Kravis). As someone recently quipped to me, ‘Buy for 5x and sell for 10x. Seems like a no-brainer to me.”
Which is right for you?
While each approach above has its own benefits and risks, the most successful companies in the industry actively pursue each of the above four strategies. A successful growth strategy to increase your business value requires all four, otherwise your business becomes unbalanced. Often I see business owners default to organic growth and cost reductions, completely neglecting the transformational effects that both acquisitions and new location development has on a business.
I want to help you
I started Supplement because I wanted to help you. I want to help you increase your business value. I built an advisory practice to do exactly that. Hit REPLY and let me know what you are working on. I’ll tell you where I think I can help. And if I don’t think I can help you, I’ll tell you that too. I reply to all the emails I get, especially the witty, funny, or outlandish ones.
Until next week!