ASE Weekly Take Off 14
How Startups Can Acquire (M&A) To Speed Up Growth And Self-Fund Their Runway
Hello Friends!
Startups always struggle with raising capital; many founders find themselves garnished with the title of investment banker for months before seeing any money hit their account, if at all. Luckily there is a different path that involves acquiring other companies to self-fund your runway.
While this may be more difficult in the high-tech industries with very specific deliverables and mediums, everyone else only needs a healthy acquisition target with a 2x + debt coverage service ratio (DSCR). For example, if you take out a $5M SBA loan to buy a company with a monthly debt service of $43,000.00. Your target company should have at least $86,000.00 in monthly free cash flow to cover the debt service 2 times per month.
And now, instead of spending a year trying to raise capital, you just spent a year optimizing a $5M asset that can fund your runway. At the same time, having a financially healthy company gives you access to a plethora of financial architecting options like factoring, revenue-based loans, inventory financing, bonds, credit, collateral/leverage for loans, and government programs like Employee Retention Credits (ERC).
If you make a strategic acquisition, you’ll now also have customers, tools, systems, contracts, and a larger team to leverage for your startup efforts.
When acquiring a platform company, most entrepreneurs will acquire based on a customer avatar, geography, industry vertical, intellectual property, hobbies, costs of goods sold (COGS), or previous experience.
Many of these apply to a startup, but the end deliverable will probably be the most significant deciding factor.
Finding Complementary Companies and Assets
The best thing to look at is businesses that your startup will soon rely upon (bolt-ons), for example, suppliers, manufacturers, marketing agencies, or consultants.
Another excellent and less expensive acquisition opportunity is marketing (digital traffic) assets.
You can buy websites, videos, email lists, pixels, Amazon listings, Etsy stores, eBay stores, podcasts, social media groups, and even YouTube channels!
This is a great option, even for high-tech startups. If you can acquire a cash-flowing website or traffic asset with debt, it won’t deter the team from the main objective as much as a full-blown acquisition.
And if the seller likes your startup’s mission statement, you will most likely be able to negotiate better terms or even zero out-of-pocket deals.
Circumventing The Risk Of Failure
90% of startups fail for a number of reasons, including the team, marketing, business model, the market, COGS, and runway.
Acquiring circumvents all of this and does a complete 180-degree turn, giving you a higher than 90% chance of success if the company can support the debt service and you don’t run the company into the ground!
So next time that you find you’re self-paying multiple six figures to an investment bank and capital raising consultant consider what the outcome would be if you used that money as the 10%-20% downpayment on a business acquisition loan instead.
Lastly, we all have a friend or two that needs an intervention, and this short article should do the job for you, so share it with a friend in need!
Source:
https://acquisitionaficionado.com/blog/how-startups-can-acquire-ma-to-speed-up-growth-and-self-fund-their-runway/
Post Of The Week
Our Digital Rack is now live at the bottom of our home page.
If you missed out on a previous issue, fear not and download what you're missing!
https://acquisitionaficionado.com/
Deals Of The Week
Here are all of our off-market companies for sale and a list of vetted business buyers:
https://docs.google.com/document/d/1wU2ZctV_KZnNDPpS_NNpLNp2nhNMLxOn5YbVZIwlyQU/edit?usp=sharing
Best viewed on PC for a clickable table of contents on the left.
And bookmark the link it's a live Rolodex!
Financial Architecting Tip Of The Week
“Industrial revenue bonds (IRB) are municipal debt securities issued by a government agency on behalf of a private sector company and intended to build or acquire factories or other heavy equipment and tools.
IRBs were formerly called Industrial Development Bonds (IDB)."
Source: Investopedia
During the pandemic, our manufacturing deficiencies became clear, making this an excellent capital injection option for manufacturing companies.