How to … Build wealth with “Buy & Build”

There are millions of words written about starting a business, but far fewer about buying one. There’s a ton of help if you’re looking to start a business, but next to none when it comes to buying or growing one.

There are millions of words written about starting a business, but far fewer about buying one. There’s a ton of help if you’re looking to start a business, but next to none when it comes to buying or growing one. It seems there’s a perception that all you need to do with a business is start it, then you run it forever and that’s that. And some people do, and they’re quite happy doing that. However, I’d assert that a far better approach to success and happiness is buying a business. Why? I’ll tell you …

Five key benefits of buying a business

Buying a business will get you to your goals faster, because you’re not messing around running more adverts, doing a bit of Instagram, getting one customer today, losing a customer tomorrow. It allows you to build something quickly rather than grow it organically. You can benefit from the work others have put into the business you buy and you’ll achieve your goals faster than you would ever do if you were doing this all by yourself.

Buying a business will take the guesswork out of business growth. The guesswork is in, how do I get from where I am to where I want to be? If you have an acquisition mindset you’ll look at where you are currently – let’s say, £300,000 revenue or £500,000 revenue – and ask yourself, ‘How do I get to a million?’ Well, why not just buy a business that bridges the gap between where you are and you want to be? Then immediately, you’re there!

Buying a business will get you out of the day-to-day ‘doing’. Being the ‘doer’ is stressful. You don’t just have to worry about yourself and your actions, you have to worry about everybody else, as well. If you buy a business – or several businesses – you can put in a management team to deal with all of that for you. Later in this issue, our article ‘Be a Dealmaker, not a Doer!’ looks at this more closely.

Buying a business will allow you to sell your business at a higher multiple and for a larger amount. If you work on your business and grow it to a bigger size – increased turnover, more customers, more staff – you can sell it for a larger amount of money. I think that stands to reason, doesn’t it? If you have a larger business it will sell for more money. Now, here is an idea I want to seed in your mind: what if that large business was a combination of several small businesses that individually have low value? We’ll talk more about that shortly.

Buying a business will reduce your stress levels. Trust me, it will. It’s not all about the money, but the money very much helps. If you have enough money to cover your needs and wants, that immediately reduces your stress levels.

The buy and build strategy

Most people dream of being wealthy, and the idea of being a millionaire is incredibly seductive. If that’s you, then good news: the buy and build strategy is the fastest way to wealth possible.

A buy and build is exactly what the name suggests; you buy a number of smaller businesses and combine them to make a bigger business. Why? Because it’s the easiest way to own a big business worth a high amount. Organic growth – building the business customer by customer through marketing activity – is a much slower process.

Why do we want a big business? Simple: because it’s worth more. A large business is worth more than a small business because it has proven scale and performance, and presents a lower risk to an acquirer. A large business has proven itself. It’s doing, say, £10 million of sales rather than £500,000, so it’s worth more. An acquirer of a small business takes more risk.

You can buy small businesses for low amounts, consolidate them – that is, combine them into a group – and then sell the resulting large business for a high amount, much more than the combined worth of the individual small businesses.

This is a really important point, so let’s look at an example.

  1. Businesses are often priced using a multiple of their annual profit, and the lower the profit, the lower the multiple. You can buy a small business for 3 times annual profits, but you can sell a large business for 8 times annual profits.
  2. That means a small business you buy for 3 times annual profits becomes immediately worth 8 times annual profits when you put it into your group. You make money instantly.
  3. Let’s put some figures on that.
  4. You buy a small business with an annual profit of £100,000.
  5. You pay 3 x £100,000 = £300,000 to the seller.
  6. You put that business into your group.
  7. It’s now worth 8 x £100,000 = £800,000 to someone else, if you were to sell the group.

Do you see the power of that approach? You just made £500,000 by buying a small business and adding it to your group.

Then you do it again.

Buy and build is a favourite strategy

That is exactly why buy and build is a favourite strategy. It’s the fastest way to build value, achieved by doing nothing more than buying a business and putting it into a group.

And here’s something to bear in mind: you can actually buy a business bigger than the one you currently own.

I think a lot of people assume they have to buy businesses smaller than their current one, maybe because they think they won’t be taken seriously by the seller if their existing business is smaller than the one they want to buy, but no; a fast way to business growth is to buy businesses larger than yours. It’s fine to do that.

The goal of the buy and build strategy is to buy a collection of small businesses, each at a low price, and combine them to create a large business with a high value.

It’s a winning strategy and the only one you’ll need.

Top 10 Tips For Buy and Build

  1. Buy a business rather than starting a business – it’s an easier, faster and less risky way to build wealth.
  2. If you have a business and have a target of where you want to be, financially, look for a business – or businesses – to buy to take you over the line. It’s faster than organic growth.
  3. Don’t try to do it all. Get out of the day-to-day running of the operation if you plan to focus on business acquisitions – let the acquisitions become your job.
  4. A big business is worth more and will sell for a higher multiple than a small business, so set your goals with that in mind.
  5. Don’t be put off by the small size of a business – small businesses increase in value immediately they are added to the group.
  6. If you add a business to the group and it doesn’t ‘fit’, you can sell it.
  7. You can acquire as many businesses as you like and add them to your group.
  8. Even if you have a small business now, there’s nothing to stop you buying bigger businesses – you aren’t restricted in any way.
  9. If you buy a big business it will cost you more than buying, say, three small businesses, but when you combine the three small businesses in a group they could be worth the same or more as that original big business.
  10. Buy and build is a winning strategy – it’s the only one you will ever need.

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With very many things that we do, before we jump into it, it pays to spend a little time thinking about what we want to get out of it. Embarking on a business-buying adventure is no different.

The Best Types of Business to Buy

You might think that the best types of business to buy are the ones everyone is clamouring for, the hot and trendy businesses, the beautiful ones. I think that’s misguided and you need to change your mindset.