The January 2011 issue of Mergers & Acquisitions, published by ACG, had an article by Tamika Cody titled, “Franchisor M&A: Distressed Play or Growth Opportunity.”
One point I got from the article is that it confirms the strategy that a larger company has more exit opportunities. You get into business to get out of it. It’s not a family member or even a friend; it’s a business. Your exit becomes easier and more profitable if you’re larger and have larger profits. A related factor is that the larger the business the higher the multiple (of profits or EBITDA). A $3,000,000 business with 10% profits may get a 3-4 times multiple. A $15,000,000 may get a 4-5 or larger multiple. (I made these numbers up based on generally accepted guidelines. Keep in mind there are a lot of other factors that come into play when determining value and price.)
Over the years I’ve had quite a few clients who are small businesses looking to grow by acquisition. One deal closed early this year. The owner realized his industry is not on a fast growth curve and one of the best things he could do for his retirement and exit strategy was to buy market share. He then becomes more attractive to a larger company in a few years.
It happens with franchisors, franchisees and independent small businesses. Gobbling up market share by buying other companies not only benefits you with larger sales and profits (and the ability to have more management staff so you can concentrate on strategy not tactics) it also increases the price you’ll get when it’s time for you to sell.