Take Five #135: Is it better to buy a high-growth company or a low-growth company, and more
Top five must-reads this week in the world of SMB acquisitions and operations
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Take Five #135: Is it better to buy a high-growth company or a low-growth company, and more
1. 4 capital allocation options (#3 and #4 are in the thread)
2. How to create a custom criteria list to evaluate how a business aligns with your goals and priorities
Every investor is unique. Some prioritize growth potential, while others value stability or alignment with personal values. My criteria reflect what I find most important, and I encourage others to create a framework that suits their specific priorities and circumstances.
One important consideration is the distinction between a lifestyle business and a growth company. A lifestyle business often provides steady income and may require minimal operational demands, whereas a growth company will likely demand significant effort but promises higher financial returns. Understanding which type of business aligns with your goals is critical.
At the top of my list (shared in the table) is revenue growth and, more importantly, the cash flow it generates. Steady, recurring revenue signals financial stability, while diversified income sources help mitigate risk. A business overly reliant on a few key clients can be risky, whereas one with a well-diversified customer base serving unmet needs offers resilience and greater long-term value.
Find the rest of Jon Haworth’s post here.
3. Boring Business of the Week: Commercial Landscape Maintenance
4. Is it better to buy a high-growth business or a low-growth business?
When pursuing an ETA strategy, it may seem like a smart move to purchase a company that is growing rapidly because of the promising future valuation or revenue of the business. However, buyers beware. High growth company acquisitions can come with the following challenges:
Challenges of Entrepreneurship Through Acquisition of High Growth Companies:
1. The Customer Conundrum
At first glance, attracting a flood of new customers may appear to be the ultimate success story. However, the rapid influx of new patrons can quickly become a double-edged sword. New customers bring with them a myriad of demands and expectations, often without the loyalty and historical understanding that existing clients possess. This can create a delicate balancing act, as you strive to meet these evolving needs while maintaining the satisfaction of your loyal customer base.
2. The Management Maze
High-growth ventures demand a level of management expertise and effort that can be nothing short of herculean. The exponential increase in customers, sales, and operations requires a finely tuned managerial approach. Neglecting this crucial aspect can lead to operational chaos, customer dissatisfaction, and even internal burnout. It's a relentless juggling act that can prove overwhelming without the right leadership in place.
Find the rest of Langston Tolbert’s article here.
5. 24-year-old software engineer acquires accounting firm for $2M, now nets $1M/year
The firm was also massively undercharging its clients.
Zach plans to do a 25% price increase to fix this (which still makes them one of the cheapest providers in the area).
In total, he’s able to:
Pay himself a $120k/yr salary on W2
Keep the seller on board for $200k/yr
Pay his debt service of $250k/yr + principal interest
Meet payroll for the staff
...and still net over $1 million in pure profit!
This is an insane return — even half of that would 3X to 4X his initial investment in the first year.
Zach now runs the business remotely, and staff handles the day-to-day.
Read the rest of Acquisition Ace’s post here.
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