Is it possible to increase the value of a business worth $3 million by 50% or $1.5 million by making a $500,000 acquisition?
Here’s a possible scenario:
A landscape services company with $750,000 in EBITDA might be worth, in some circumstances, $3,000,000 (if it was valued based on a multiple of four).
A smaller landscape services company with $250,000 in EBITDA might only be worth $500,000 (based on a multiple of two).
If the larger company is able to acquire the smaller company for $500,000, the starting point for the combined company’s EBITDA would be $1,000,000. If the larger combined company could still justify a four multiple, its indicated value would be $4,000,000.
If the combined company can realize $125,000 in synergies through increased revenues or reduced costs, the combined company’s EBITDA would then be $1,250,000. If the company still garnered a four multiple, the indicated value would be $4.5 million, a 1.5 million in increase in value for a $500,000 investment, a 3-to-1 return and what most people would call a homerun.
There are a lot of “ifs” in this scenario.
The larger company has to have the characteristics that lead to a relatively high multiple.
The larger company has to be able to acquire the smaller company at a reasonable valuation.
The larger company has to be able to integrate the smaller company into its operations, maintaining its business, and still have the characteristics that lead to a relatively high multiple.
The combined company has to actually be able to realize the $125,000 in synergies that have been identified.
All of that is a pretty tall order, but it does illustrate what is possible if everything goes right with acquisitions and that at least considering the possibilities of acquisitions is a very good idea for many businesses.