Buying your second company
March 13, 2023 ⋅ 5 min read
In the fall of 2020, I accidentally acquired a doggy daycare after a decade of working with tech startups. Within six months, it was clear that my partner and I had created a really interesting opportunity through that acquisition, and we started to explore the idea of intentionally buying a second location. If you’re a business owner, here’s why and how exploring expansion through acquisition might be your fastest path toward growth.
Buy vs. Build?
We’d gone back and forth on just leasing space and building a second location from scratch, but our first acquisition had gone so well that we thought there could be an opportunity to try it again. We’d even entertained the idea of quickly selling the business we’d just bought to make a quick penny but ultimately landed on expansion as a better strategy.
Map Out Your Targets
We mapped out every daycare in our area we thought might be a business we could grow. I created a simple Airtable database, had one of our admins start googling everything within 20 miles, and we now had a target list. Today, you can completely skip this step with the help of Baton, utilizing its extensive database of existing businesses.
One of the first contacts was extremely interested in selling. That was easier than we thought! It was a very different kind of operation - the business was much less mature, but it would give us a bit more of a head start vs. building something from scratch.
It worked once, so why not twice?
We quickly realized that our first acquisition was smoother than we realized. This second target would require a lot more investment into the infrastructure of the business, and the real estate was a lot more important and complex than what we had been dealing with in the first transaction. Valuing a business is a science, acquiring one is an art. We could make the math work here, but the deeper we dove into the acquisition process and the nuance around all the possible risks, the more the deal fell apart. While it stood up on paper, we had to dive into the mud to really understand what was happening.
A big part of what we were “buying” with this second acquisition target was a lease. Sadly for the seller, we were excited about the business, but we couldn’t make the lease work. We walked away. We had put all our energy into that due diligence process and were left again staring at a list of targets and starting the search from scratch.
In hindsight, it’s easy to see we put all our eggs in that one basket. As we’ve pursued more acquisitions, we’ve made sure to have more irons in the proverbial fire - leaving us less inclined to try to push through a deal that may not make sense because we are simultaneously pursuing other opportunities.
After revisiting our target list, we soon had another potential seller interested. This deal turned out to be much larger than our first acquisition, but the seller hadn’t been that deeply invested in the idea of a sale when we contacted him. He had some understanding of what businesses like his were selling for, and we had an understanding of what we felt would be a fair price. Having a tool like Baton where we could map valuations against industry standards together would have been invaluable in that negotiating process.
What about COVID?
COVID has made valuing any retail-focused services business really challenging. Normally, we’d look at the trailing three years of financials to understand the health and growth of the business. In both our acquisitions, we were really left looking at pre-covid numbers juxtaposed with the more recent months where life had returned to some semblance of normal. Sellers want you to only consider their pre-covid numbers, and as a buyer, we wanted to factor in the risk posed as the business was still ramping back up. Again, having a tool like Baton to understand how other businesses had rebounded in our industry would have been really helpful.
Buying may be cheaper…
We modeled out what we could do with this facility, and the seller made a very clear point: “you’re buying something you think you can grow faster than if you built it from scratch.” And he’s right. An acquisition makes sense for your business if you think it can catapult you forward faster than using capital to grow more traditionally/organically. Most small business owners don’t really consider buying as a way to expand, but for us, it turned out to be a much faster path to growth than building something ourselves.
In the doggy daycare world, the facility is the key to the business - so we skip the long buildout process through an acquisition. At the same time, having some kind of customer base to build on means you’re generating revenue much more quickly than you would if you opened your doors and started marketing a new company.
When we finally closed on that location, the transition took a bit more time than our first purchase. We rebranded the company and made massive operational and business model changes. Slowly, we started to see revenue creep up. Now we’re on a path toward the kind of growth we were hoping for when we bought the facility, and all that happened in about half the time it would have taken us to even open the doors on something we built from scratch.
If you want to grow your small business, the traditional path is to expand organically. I’m proof that there’s another path through acquisition, and Baton has all the tools for first-time business buyers to explore what that might cost and how to go about exploring expansion through acquisition. Sign up below to learn more.