Why Buy and Build
Buy and Build Strategy
One way of improving your business value and increasing your return on investment is to buy another similar business.
- Improves your profitability, your knowledge, synergistic savings will reduce overhead and running costs
- Improve your business value. A larger business will normally be sold at a larger profit multiple
A business owner runs a business with a turnover of £1milliion and makes a profit of £100,000.
He then buys a similar business which has a turnover of £1 million and makes a profit of £100,000. (He pays £200,000 for this business – 2 x multiple of profit).
By using his knowledge he identifies opportunities of reducing the combined overheads, thus increasing profitability by £30,000.
A new larger company has a turnover of £2 million and achieves a profit of £230,000 (15% improvement).
If he was to sell this larger business, he may well be able to achieve a higher multiple, let’s say 2.5
The value of their business is now £230,000 x 2.5 = £575,000 (a 43% improvement – £575,000 compared to two businesses selling for £100,000 profit x multiple of 2 x 2 businesses = £400,000).
- Use your knowledge to increase profitability
- Remove duplication to reduce overheads.
- Increased profitability x increased larger company multiplier = significant growth of your asset