New Venture Lab: Equipping Christian Entrepreneurs

When I started my property management company, I got things rolling by acquiring three firms and combined them into one and then began focusing on organic growth off of that launch platform.  The shift from an acquisition growth strategy to an organic growth strategy was not my original intent, rather, it was in response to the lessons learned in the first two years of buying and integrating the first three companies.  I got an email today from another CEO in my industry that was interested in selling his company to me.  I'm not interested.  Read on to understand why.

One frequent question I get from aspiring entrepreneurs is the one about whether they should buy an existing company or start one from scratch.  Both of them have merits, so the answer is usually, "well it depends."

The benefits of buying an existing company include the fact that you are starting off with many things already in place (to varying degrees):

• Proven concept
• Existing product or service
• Existing customer base
• Existing operation
• Existing revenue
• Existing employees
• Processes in place
• Existing market recognition
• Existing culture

But, before you jump into it with enthusiasm, those same upsides can also have a downside:

• The proven concept may be outdated or in decline
• The existing product or service may be experiencing less and less demand
• The existing customer base may be difficult to serve, unprofitable or hard to manage
• The existing operation may be loaded with issues to be resolved
• The existing revenue  may be flat, declining or at risk
• The existing employees may have lots of issues, demands and bad character and work habits
• The processes in place may be outdated, overvalued, broken and over-hyped
• The existing market recognition may be a bad reputation rather than a good one
• The existing culture may be problematic and in need of a complete overhaul

One of the issues that I've seen over the years with all of the acquisitions that I have completed is that the effort I end up going through to reshape the company, the employees, the customers, the product or service is about the same if not more than the effort I would go through to start from scratch.  But I also know how very difficult it is to get something started from scratch, so a good compromise is to start with a base of business, such as a small acquisition and learn all of your lessons and make all of your mistakes on that small base and then once your product/service and strategy are perfected, you can grow from that base.

Another issue with an acquisition is that your are playing defense the entire time.  You basically pay the seller a lot of money and then you hope and pray that you can hang on to all of the value and make it pay off.  The average purchase price for a company is five times earnings (usually expressed as 5X earnings).  That means you are paying the seller for the next five years of earnings for the business.  Therefore if the business does not grow, it is year six prior to you start making any money on the deal.

Of course starting a company from scratch is very difficult in that you are starting with nothing and you have to build everything, but at least you are building it your way.

The reason I started off with aquisitons with my property management company was that a big part of my strategy was to develop the "killer app" for my industry, a software application that would be so far advanced that we would leapfrog the competition and have a value proposition so distinctive that we would carve out a market leadership position in terms of our service offering.  In order to develop software, I have found that it is always best to have a group of customers that you are developing the software for, rather than developing in the blind.  Hence the initial acquisitions.

From the beginning, I underestimated the effort to integrate the existing customer base onto the software and I underestimated how easy it would be to sell a new customer once the software was developed.  Therefore, two years into the start-up, after the significant pain of integrating the first acquistions and some experimentation of launching new branches in new markets from scratch, all the data was in: the cost to enter a new market organically was so low (basically hire one good branch leader) and the payback so fast (less than one year vs. three to four years plus for an acquistion) that the Return on Investment was far higher to simply grow a branch from the ground up rather than acquire, integrate and then grow. 

Now I recognize that it is much easier to switch to the organic growth after the acquisiton growth because the acquisitions did give us a base to launch from.  We can quickly point a prospect to our large customer base and claim experience and customers, whereas most start-ups cannot.  That lent us a lot of credibility in the early days when a rank start-up would have had a hard time creating the same kind of credibility.

So, overall, the lesson learned is that as an entrepreneur, you need to constantly be evaluating your growth strategy, your options, the competitive landscape and the industry landscape.  And you need to be courageous enough to change course if need be.  And of course, bathe everything in prayer.  God is good enough to sanctify us through our trials and to bless us even though we don't deserve it, for it is God that gives us the power to create wealth that He may confirm His covenant with us. (Deuteronomy 8:18).