Whether you already own a business or not, mergers and acquisitions (M&A) are the best way to grow your existing business or launch your entrepreneurial career. The caveat for new entrepreneurs is that you want to have some sort of business skill to leverage in an acquisition, even if it’s something as simple as consulting on what you enjoy.

Now, why should you care about M&A? The COVID-19 pandemic was the start of the perfect storm for the M&A market and business buyers. COVID-19 put brick-and-mortar owners through unwarranted hardships and even forced many of them to close down or pivot. And whether they admit it or not, the 2020 pandemic contributed to the burn-out of many business owners, which is one of the major reasons for selling.

The next significant factor that will make the 2020s better than the 1980s is the growing number of retiring baby boomers. According to the Urban Institute, the number of Americans ages 65+ will more than double between 2000 and 2040 and reach 80 million seniors. And most business owners don’t have a succession plan, motivating them to accept more seller financing instead of closing their business down. But more importantly, this means that there are more businesses that need to change hands than there are buyers.

Lastly, the straw that will break the M&A camel’s back is the looming recession that everyone is warning about in 2022. Business valuations and multiples significantly drop during a recession lowering the capital barrier to entry that’s needed to close a transaction. This being an M&A publication and not an Economic one, we’ll leave it at that.

Hopefully, we teased you enough to be interested in M&A and this post will make sure that you leave with actionable strategies for growth via M&A and deal examples.

The Hub And Spoke With A Platform Business

The hub (platform business) and spoke model focuses on growing a core business via strategic acquisitions.

Here are a few examples:

• A YouTuber could acquire Facebook groups, email lists, and meetup groups.
• A real estate brokerage could acquire construction companies, investment firms, and real estate software.
• An auto mechanic could acquire collision shops, tinting companies, and tire shops.

Of course, competitors will always be one of the first in line as potential acquisition targets. But an even better option is to look at your income state and who you pay the most money to and consider acquiring them. Your expenses could include marketing, legal, accounting, software, and manufactures.

Acquiring your hub’s expenses will hit at least 3 birds with one stone; it will lower your COGS, give you a new complementary revenue stream, and a list of more acquisition candidates. And as you acquire more spoke acquisitions, the moat around your hub will only get bigger, giving you a unique cash cow or exit opportunity.

In terms of M&A exits, there is a well-known arbitrage between lower-market deals under $10M and deals between $10M and $100M. For deals under $10M, you can expect to pay a 2-4x multiple of EBITDA, and on deals over $10M, private equity will pay a 12x multiple. This means that you can acquire at a low multiple and exit for a 12x multiple when you cross $10M in sales.

2 common acquisition types/strategies in the hub and spoke model are rollups and bolt-ons. A bolt-on is what it sounds like you’re acquiring a complementary company to bolt onto your hub. Marketing and lead generation agencies are perfect for this because they can go out and acquire the businesses that they specialize in and instantly start driving sales.

The second one is an acquisition strategy known as a rollup. Where the buyer has a holding company and acquires subsidiaries or companies under it that are the same type of business and in a fragmented industry. A fragmented industry is an industry with many SMBs that you can acquire for a low single-digit multiple.

The Hub And Spoke Of Digital Traffic

With the world going digital, marketing and getting leads for your business has become more competitive than ever before. Luckily the same hub and spoke model above can be used on digital traffic assets like websites, social media, podcasts, and even YouTube channels.

Digital traffic deals are usually smaller in size and more approachable for first-time acquirers.

And if you want examples of these types of deals, here are a few listing sites:

• Micro Acquire
• Empire Flipper
• Tiny Acquisitions

The strategy for acquiring and owning your own digital traffic involves identifying all the congregation points for your customer avatar.

Then engage in the community or do your due diligence to make sure that the asset is something that can drive more leads to your core business. Once you’re positive, reach out to the owner, and ask them how the target asset is doing.

Pro Tip: If you want to tap into a traffic source, someone else does too, and they can be used as a sponsor to pay for your acquisition.

Here are a few examples of a hub and possible traffic spokes:

• A law firm could acquire local meetups, legal blogs, and social media groups.
• Our own digital magazine could acquire social media groups, email lists, and pixeled accounts.
• A local grocery store could acquire Amazon FBA stores, localized social media groups, and local publications.

Again, if you’re on the fence about M&A, dip your toes into some sweet and freshly acquired traffic.

Pro Tip: Use escrow.com when acquiring digital assets to protect your capital along with a bill of sale.

The Condensed M&A Process

From a 2,000 ft view, M&A consists of 4 steps:

1. Set your criteria and strategy
2. Search
3. Fund
4. Close

Now let’s go over each step. You want to set a strict criteria for what a good deal looks like to you so that you can filter through all the deals and noise in the market. Not having criteria and checklist will make you the equivalent of Alice In Wonderland.

“Alice: Would you tell me, please, which way I ought to go from here?

The Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don’t much care where.

The Cheshire Cat: Then it doesn’t much matter which way you go.

Alice: …So long as I get somewhere.

The Cheshire Cat: Oh, you’re sure to do that, if only you walk long enough.”

An emphasis on “long enough” searchers can take years to close their first deal, and everyone would agree that the sooner that you find a good deal, the better.

Once you have a criteria, it’s nothing but good old sales and business development. And if you have a sales background, this is your time to shine. Make sure to make the calls, send the emails, network like crazy, and make your dream 100 hit list. While we’re talking about numbers it is normal for 5/100 to reply and for 1 of those 5 to turn into a deal.

Once you have a deal, you have a few options for funding it:

• SBA loans
• Commercial loans
• Seller Financing (You pay the seller off from the free cash flow of the business over time).
• Sponsors for marketing assets
• Hard Money
• Private Lenders

Funding and due diligence can take time so leverage the rest of the resources in our blog to ensure that you don’t skip any steps. And make sure that your Letter of Intent (LOI) is for at least 60-90 days. An LOI is a non-binding contract that gives you exclusivity to a deal, and you’ll need it for most funding sources.

Once you have the capital in hand, you want to double-check all your due diligence with your accountants and lawyers before signing the purchase agreement.

Don’t Let This Once In A Lifetime Opportunity Pass You By

If you use any of the strategies in this post to close a deal, we would love to celebrate your success with you. Let us know about it on social media and email us at x.com.

And remember that mapping out your hub and spoke acquisition strategy on a whiteboard is free and only takes a few minutes.

Once you have your hit list use our M&A lifecycle post to help you set your criteria and take the sales process seriously.

Use a simple CRM like Pipedrive to keep you organized and remind you to follow up. Business isn’t static or linear, so if someone says no today, there are a plethora of reasons why that might change in a few months.

But more importantly, subscribe to The Acquisition Aficionado Magazine for the latest M&A news and activity without all the distractions of a web browser.

If you want a seat at the table with all the movers and shakers in the M&A space, subscribe to The Acquisition Aficionado Magazine. Click here to get your FREE copy, with all the latest M&A activity.