I want to talk about one of the single biggest mistakes that I made when acquiring $16.5 million in revenue in existing businesses over time, 10 years.
If I were to do it all over again there’s a couple of things that I would change.
After acquiring the initial $16.5 million in revenue is where we started then we shifted to growing it from there.
Looking back there are two things that I would do differently.
The first would be how I approached the acquisitions. I approached it thinking that I could buy all these businesses in different verticals and be diversified, running it like a micro private equity fund.
What ended up happening was once I bought the first company, I ended up selling it and then using those proceeds to go out and acquire six other companies in three completely different verticals. And two of those grow through acquisition in that vertical.
All of that combined ended up being 16.5 million.
Now, my first lesson was that had I focused on one single vertical and bought all 16.5 million a little bit at a time, it would have been a way better strategy.
There’s a couple of reasons why when you build a company that has 16 and a half million in revenue and you run it for a couple of years and grow to 20 million. It’s an easier number to talk about. So, in a $20 million company with $4 million in EBITDA, then the value of that company is significantly higher than if you had four or five $1 million businesses. That is even more valuable than sixteen $1 million businesses.
The reason why is because:
You get multiple expansion. As your company grows, the earnings grow, as does your ability to pique interest from institutional capital.
There is a lot more demand for businesses that are generating 3 million or more in earnings before interest, taxes, depreciation, & amortization (EBITDA).
The more the earnings grow, the higher the valuation of those earnings become. This is what is referred to as a multiple expansion which is where as you grow and get bigger the same dollars are worth more upon an exit.
When the Netflix film “Print the Legend” opens, Brad Feld, one of the most renowned venture capitalists in Silicon Valley, opens with a quote: