Hi there, it's Carl Allen.

Last month, I talked about buying your first business and the three main criteria you want to consider in how you do those deals.

Today, I want to look at two types of deals that you can do as an entrepreneur doing leveraged buyouts (LBOs) once you’ve done your first deal.

First, we're going to talk about bolt-on acquisitions, which also can be called tuck-in acquisitions. That's where you already own a business in some sector and you acquire another business that you will legally fold into your business to make a larger one.

There are some massive benefits and advantages to doing that…

Benefit No. 1 is that you can scale up very, very quickly using bolt-on acquisitions.  

If you own a $1 million per year revenue business today, it might take you two or three or even five years to double that to $2 million.

But if you owned a million-dollar business and you went and acquired another million-dollar business, and that took you 60–90 days to complete, then you're able to double the revenues in your combined business inside a much shorter time frame.

Benefit No. 2 is – if you're clever – you buy a business in a complementary market.

Let's say you own a software company. You sell your software to small businesses that pay you licensing and maintenance fees. Typical stuff.

So that's you're current business. A complementary idea might be to buy an IT services company. Because your software customers are also going to need IT services as part of what they do.

If you go out and buy an IT services business and you combine that with your software business, then you can do two really, really cool things.

  1. Cross-sell — Now you’ve got software customers who will buy your IT services from your new IT services company. And the customers you've just inherited from the IT services company, they'll probably also buy your software. With cross-sell revenue, it's kind of like a 1+1=3 model. You've got your software revenues, you've now got your IT services revenues, and when you cross-promote those products and services across the two customer bases, you're going to get incremental revenue as well.
  1. Cost consolidation — When you combine your two businesses together, there's going to be a lot of cost consolidation. No. 1 is going to be the owner's salary. Their salary, their bonuses, their 401K, their pension contributions, any kind of insurance they had — you're saving all that money, which is an instant massive increase in your bottom line. You can also put those two businesses inside of the same office, so you’re saving on rent, taxes, utilities, maintenance, insurance, permits – all that stuff as well.

Then there’s the personnel shift…

What I’ve found in my 27 years of buying businesses and doing bolt-ons is that there's a big change in the energy and focus that goes into a company once you've acquired it. That’s when the weaker employees — the dead wood, as we call it — typically head for the door.

When those employees leave, you’ll find you don't need to replace them because you’ve got employees in your existing business. That's additional costs you've saved, and additional cash flow that's going to hit you're bottom line.

On the other hand… the positive, focused and best employees all want to stay. Because they've been crying out for a new leader to come in and inject that passionate energy, and drive, and focus, and growth into the business.

So those are the major reasons you should do bolt-on acquisitions.

Now let’s talk about something called a roll-up.

A roll-up is where you're doing multiple smaller deals in the same sector and combine them to create that bigger operation. It works very well in the healthcare industry, for example.

You can buy up lots of different, say, chiropractor offices, optometry businesses, dental practices, physical therapy facilities (or even gyms, spas and those types of businesses) and bundle them together.

This works in lots of other industries as well. And what's really good about a roll-up is that as you put them all together, you get incredible synergy and scale.

Take a coffee shop — coffee shops are a great idea for a roll-up. The average coffee shop might be doing $200K per year in revenues and $30K–40K per year in profit.

Well, that one business has a lot of one-off costs, that all independently-owned businesses like that need to have. Somebody to do marketing, help with cleaning,  take care of the bookkeeping, HR, insurance and taxes…

The list goes on.

But let's say you buy 10 coffee shops and you put them all together. All of those one-off costs can be centralized.

You can have one bookkeeper doing the books for all 10 businesses. One HR person who’s managing the contracts and employees at all 10 locations. You’ll probably get massive discounts on insurance, cleaning contracts and all sorts of different things.

You're also going to have a lot of synergy in terms of sourcing. Instead of buying coffee beans for just one store, you're buying coffee beans for 10 stores, which will get you a much better pricing and payment terms. The same goes for all your supplies.

With a roll-up, you're able to take massive costs out of these combined operations, which means your revenues goes up. And your percentage of retained cash flow — your percentage of profit in that combined entity — goes up much, much faster too.

With roll-ups, if you create a chain or group of these businesses, they can still be independently owned with their individual brands, or you can rebrand them with a new name.

Once you get to 10 or 15, you'll have a group of businesses that's a lot more attractive to a potential buyer. No one is going to buy that one lone coffee shop. But they will want to buy when there's 10 together, or 15, or 20, or more.

So not only does a roll-up give you a lot more cash flow, it will also make your business a lot more optimized, more organized, and more attractive to a future buyer.

That’s all for today.

Until next time, bye for now.

Carl Allen

Carl Allen
Editor & co-founder, Dealmaker Wealth Society

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