For a long time M & A's has been a good technique for getting big fast.
However, not everyone wants that A very important question to ask is, “is growth for growth's sake necessary”?
There are really quite a few answers that illuminate the advantages.
Large companies are in superior spots. In fact, they are better funded since their choices for finding new money is greater than small business. Furthermore, they all receive outstanding deals with everyone. The largest businesses generally can withstand the largest business cycles. Customers look on these large companies as being a better able to supply the requirements they have. Large businesses can fend off their competitors with greater ease. They can afford better high-priced consultants and the best advisers. They are more able to support and train the newest employees. Big businesses can give better benefits. And, to list goes on considerably.
Large companies are considered to be more valuable in general. Their bigness makes for excellent economics. This is true when it comes to successfully completing projects of all sizes. They generally have an abundance of cash in reserve. In general they can expect higher multiples from potential investors.
Let's examine an example.
Suppose we have two businesses, one generating $ 10 million producing a profit of $ 1 million. The second company has a revenue of $ 20 million and a profit of $ 2.2 million. Investors would be willing to invest 3 1/2 million dollars for the small enterprise and in the vicinity of $ 7.7 million for the larger business. This assures that each of these two businesses is priced at a multiple of 3.5 times earnings. Earnings are calculated before considering interest, taxes, depreciation; and, amortization. The combination of those elements is generally considered EBITDA. Together the two companies are worth $ 11.2 million. That total is the mathematical value of the two companies if they were purchased one at a time.
If the two companies were combined together they would have lower cost of operation. This is primarily due to the reduction of duplicate departments and functions. These reduction would include physical space, employees, managers and all the other associated costs. For our specific example we are going to assume a reduction of $ 600,000 annualized. This means that bottom-line earnings would increase from $ 3.2 million to $ 3.8 million in total.
Furthermore, it's likely the multiple will go up as well. The overall revenues would now be $ 30 million. The multiple could increase from 3.5 to 3.75 or 4.0. This could drive the price up to as much as $ 15 million. That means an extra $ 3- $ 4 million. That's a pretty attractive increase and could cause the two owners to combine their entities.
Of course while there are many warning signs associated with mergers and acquisitions activities. The large amount of money is very very attractive. For that reason it is a gorgeous methodology to use to rapidly growing a business and a businesses value.