Growing by acquiring

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

While revising his business plan earlier in the year, Guy Katz had come up with the exciting idea of increasing his revenue by acquiring an existing business. What he didn’t know was that if he didn’t do it right, he’d risk losing rather than making money.

Guy Katz had been an advisor for over twenty-five years and routinely made around 600K annually. A few months ago, he’d heard Brendan Steadman, an old friend, was interested in selling his book of business. Brendan’s business was smaller - generating around 70K annually - but Guy had tremendous respect for Brendan and knew that his clientele was solid. The idea of adding 70K to his top line in one single maneuver appealed to Guy, who for the last few years had felt he’d hit a revenue ceiling.

When Guy first talked with our coach, he told explained that he and Brendan were in the middle of negotiating the deal and had hit upon a contentious issue - the price. Brendan wanted four times the cash flow and Guy thought that was high.

“I’d like to recover my investment sooner,” Guy told me. “Four years is too far out for me.”

In our discussion so far, our coach noticed that he had only heard Guy talk about the cash flow and the buyout price. That narrow thinking concerned him. There were many other issues to consider in evaluating whether the deal would have a positive or negative effect on Guy’s business.

Our coach asked Guy, “how does Brendan’s clientele compare to yours in terms of client profile?”

“It’s not the same level of clientele. I focus on executives and business owners. Brendan’s clients range from mid-level managers, salespeople, contractors. They’re more like my C and D clients, clients I’ve carried with me from my earlier years in the business.”

“What’s your plan for servicing these clients?”

Guy looked at our coach with a blank look on his face for a moment before adding, “I’ll handle the service work.”

“Have you looked at what impact that is going to have on your time?”

“I know there will be an investment of time, but I don’t think it will be anything overwhelming. My two assistants are trained to handle a lot of the issues these clients are going to have - change of address, change of beneficiary - that type of thing.”

Our coach was getting more concerned by the minute. “Guy,” he said, “I’m talking about service in a much larger sense. What’s your plan for developing this clientele? You have to grow it, not just maintain it. In fact, if you think you can simply maintain the client base and count on the 70K every year, you’ll be in for a rude surprise. Each of those clients is an individual with constantly changing needs and circumstances. You have to look for ways to deepen the relationship with each one; otherwise, they’re likely to drift away from you over time. Plus, as their advisor, you have to have a clearly defined plan for what your relationship with these clients is going to be, and you have to communicate that plan to them. What can they expect from you? What service are you going to provide? Is it going to be the same as Brendan’s service? If not, how is it going to differ?”

Our coach could see Guy’s eyes glazing over. “I haven’t gotten there yet,” he said defensively.

“But you’re negotiating price,” said our coach. “What I want you to realize, Guy, is that your investment in Brendan’s business is more than what you will pay for in hard dollars. You have to consider your time commitment. But because time is a limited resource, you have to explore the opportunity cost.

“Guy, how many days of the year are you focused on activities that generate revenue.”

After some calculation, Guy came up with a figure of 115 days.

“With annual revenue of 600K, that puts the value of your productive days at roughly $5200 per day. On such a day, how much of that is face-to-face time with clients?”

“About six hours.”

“So that puts your hourly rate at around $870. When you are actively doing the things that lead to revenue - i.e. when you are face-to-face with high-quality prospects or clients - you can consider yourself making just under $900 an hour.”

Guy seemed impressed by the value of his own time. “My lawyers don’t even charge that much,” he laughed.

“It certainly goes to show you that any time you spend not face-to-face with prospects and clients who fit your ideal profile is lost opportunity. My concern is the time investment you are going to have to make in Brendan’s clientele. Because that clientele is a notch or two below your own client base, you’ll have to recalibrate the value of your time. When you service Brendan’s book, your hourly rate might drop to $500 or even lower, bringing down the overall value of your time. And if the demand for your time takes you away from your current level of activity with your higher-level clients, you may find yourself working harder for less money.”

“So you don’t think I should do the deal?” Guy asked.

“No, I haven’t said that. I think you need to look at the acquisition more strategically. You can’t just think of the incremental revenue. You have to look at the overall impact on your business. How is it actually going to affect things like profitability? And, just as important, how is it going to impact the quality of your life? Are you going to find yourself running hard for no good reason?”

“How could I make the acquisition work?” Guy asked. “I mean, if Brendan’s clientele is going to bring me down, I shouldn’t bother at all.”

“One way it makes sense,” our coach explained, “is to bring on a sub-producer to service Brendan’s book. In fact, this strategy might actually increase the value of your time if this sub-producer also takes over servicing some of your own C and D clients, freeing you up to work more frequently with your highest value clients.”

Guy nodded, approving the idea. We explored this strategy further and came up with a plan whereby Guy would payout 40% on new sales to the sub-producer, whether those sales came from Brendan’s book or Guy’s own client base. Because the sub-producer would work full-time in the business, Guy anticipated growing Brendan’s book from 70K to 100K or more annually. An additionally 50K to 80K would come from Guy’s clients. This way, the sub-producer would have the opportunity to make 70K for themselves, and Guy’s business could net up to 100K.

Guy loved the idea of being able to add incremental revenue in a way that freed up rather than ate up his time.

Guy ended up acquiring Brendan’s business and doing so for a 3-times multiple instead of four. He hired a sub-producer who has been doing all the sales and service work for the business’s low- to middle-tier clients. Five months in, the sub-producer is on target to generate over 150K of revenue in his first year.

Lessons Learned

Guy learned four important lessons about acquiring a book of business:

• Even though acquiring a book of business would add incremental revenue to your top line, the acquisition could still have a negative impact on your business.
• In evaluating the acquisition, consider the investment of your time (both before and after the acquisition) and any opportunity cost, not just the monetary investment.
• Knowing the value of your own time is necessary to properly evaluate an acquisition.
• A good acquisition is one that is grounded in a sound strategy and increases, rather than decreases, the value of your time.

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The Covenant Group is referred to by many as the place entrepreneurs go to become Business Builders. They are considered to be thought leaders and have authored the best-selling books, The 8 Best Practices of High- Performing Salespeople, The Entrepreneurial Journey, and The Business Builder.