I was recently asked to come out to Austin, Texas 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.
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, or also referred to as same store sales growth, is
growth in top line revenues from existing store locations. Organic growth
can come from increasing the capacity at existing locations, increasing
the number of customers or number of transactions at existing locations,
and generally selling more from your business’ 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 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 top line 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 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.