M&A, Shortcut to Business Success By William Cate July 2004 [http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]An operating business has two options, grow or die. Every company owner must choose grow once they have revenues.
The two ways to grow your company are (1) to reinvest company profits or (2) to make acquisition of cash-producing assets with company profits.
The acquisition strategy is (a) less risky, (b) grows company faster and (c) is thirty times more profitable to business owner over twenty years.
Reinvesting company profits is a slow and risky process
The company owner gambles each year that reinvested annual profit will increase revenues and profits following year. If demand for company's product exceeds supply, owner will use company's profits to increase supplies. If company's production capacity exceeds demand, reinvested profits will be used to increase market for company's product or service.
External variables, like competition, local government policies, global economics and even technology advances can easily undermine best of tactical annual business decisions. My belief and experience tells me that few business owners can sustain annual growth over time, without having a few serious setbacks.
Let's test this out
Here's an example. Let's assume that business owner wins every annual investment gamble over 20 years that owner runs company. The private company owner starts with a company grossing US$1 million each year and successfully gambles annual 20% reinvestment profit. In five years, company should be grossing US$2 million. In twenty years, company should be grossing US$8 million. Again, this means 100% success each year with no nasty surprises or setbacks of any kind.
Bank loans, another possibility
Most business owners soon realize that they can leverage their annual gamble by borrowing money from a local business bank. This increases their risk, but potentially compounds their gross revenues over twenty-year time frame.
Assuming business owner can borrow their annual gross revenues each year at 7% interest, they will net 13%/year on borrowed funds. Their borrowing gamble over 20 years should add about 65% to company's annual gross revenues. So company should be grossing about US$13,200,000, twenty years later.
The problem is that a company borrowing its gross revenues always risks loss of company. Assuming that borrowing company's gross revenues is an even money bet, it's a bad bet. The borrowed funds don't double gross revenues of company in twenty years.
Private equity investment?
The alternative for private company owner is to seek a private equity investment in company. Again, figuring a 20-year 100% winning streak, company's gross will be a multiple of investment. However, if company owner sold a fair percentage of company for tha private equity money, in twenty years owner would receive same amount of money for their business as if there hadn't been private equity investment in company.