The use of M&A has been a recommended way to grow a business.
Nonetheless, not all businesses want that. And excellent question to ask is, "is growth for growth's sake the only idea"?
There are many compelling reasons endorsing it as the finest technique.
Big organizations are in top positions. Large companies both have better financing and access to new money. In addition, they're able to negotiate better deals with business partners. The gigantic businesses generally can survive the largest business cycles. Often customers think of these larger enterprises as being better suited to supply their needs. Large businesses can withstand their competitors easier. Most of the time, it's easy for them to retain advisers and consultants. New employees are much easier for them to attract and train. Most big companies can give better benefits. And, the list goes on considerably.
Most investors look on the larger companies as being more valuable than smaller ones. Their large size makes for splendid economics. Case in point, they can tackle the biggest projects successfully. These large companies generally have a pile of cash in reserve. Most of the time a big business can expect higher multiple from potential investors.
Let's look at an illustration.
Suppose we have two smaller businesses, one generating $10 million with a profit of $1 million. The second slightly bigger company with a topline of $20 million and a bottom line of $2 million. [willing tovestors] might be willing to invest 3 1/2 million dollars for the small company and in the neighborhood of $7.7 million for the slightly larger business. This assumes that each of these two small companies is priced at a multiple of 3.5 times profits. Earnings are calculated prior to taking into consideration interest, taxes, depreciation; and, amortization. This calculation is generally considered EBITDA. Added together the two enterprises are valued at $11.2 million. That total is the mathematical value of the two businesses if they were purchased separately.
However, when the two businesses are joined together a person would expect a smaller operating cost. Generally on account of of the reduction of duplicate departments and functions. These savings would include items like rent, salaries etc.. So, let's assume a $600,000 overall reduction. This means that EBITDA would increase from $3.2 million to $3.8 million total.
Plus, it's likely the multiple will also increase. The total top line would now be $30 million. The multiple might go up from 3.5 to 3.75 or 4.0. This could increase the total price up to nearly $15 million. That calculates to an extra $3-$4 million. That's a pretty attractive increase and could cause the two owners to join their businesses.
Of course, there are many warning signals connected with M&A's activities even though the extra money is very very attractive. This means it is a wonderful method to use to grow a company and a business' value.