Growth By Acquisition (Part 1) - What is it and who is it for?

Growth by acquisition is a terrific topic to talk about for anyone that owns a business in the IT Channel regardless of the current or future company size. This could mean both being on the buy side and the sell side of a transaction in order to spur quick growth on top of organic growth. It’s a pretty broad topic so I have decided to distribute this educational information in pieces with this being Part 1.

Today we’ll focus on why growth by acquisition and M&A activity in general is so prevalent in this IT Channel and why a company would decide to grow by buying a smaller business or selling to a larger one and growing with them.




The first thing you need to understand is that M&A activity, whether you happen to notice it around you or not, is common in the IT consulting and services space. Why?

Well, for starters this industry has a very low barrier to entry, meaning it doesn’t take much capital to hang out a shingle and start a business. Because of this there are an overwhelming number of IT service providers in the US and Canada ranging from 1 to 100 person shop and a decent amount of 100+ shops as well. Especially in heavily populated areas, you can throw a rock and hit a couple of IT businesses focusing on servicing the SMB market. That leads to organic growth issues for big and small companies as markets get saturated with players.

There are also a slew of things these companies can provide like managed services, project work, high level consulting, design work, programming, hosting, etc. Put these factors together and you get an industry that is known as being highly fragmented.

So the above is why growth by acquisition is normally popular in the Channel, but the last 5 years or so it got a little boost due to the popularity of managed and hosted services using recurring revenue models. Leveraging economies of scale that come with adding on recurring revenue that someone else has built is a smart move versus the pains of organically growing these areas.

Since about 2009, M&A activity has been especially high and will continue on that path for the next few years. This is due do to the down economy and presents itself in two ways. First, organic growth for most established companies slowed a bit since the economy tanked. Good companies are holding steady or growing a little in revenue/profits, but the rate of that growth has been stymied compared to their norm. This economic trend makes growth by acquisition an even more appealing concept from the buy and the sell side.

In addition, very well run companies are sitting on money that is doing nothing for them in traditional investment avenues. M&A presents a way to use that money as an investment into the business that is risk controllable and has a much better shot of gaining big returns as well as doing it in a short period of time.

So who would growth by acquisition be good for? Here’s a quick list for both the buy side and sell side perspective to see if it would be right for your business:

- Outperform Organic Growth that has slowed, has stagnated or could still be doing well

• For sellers: Join forces with a rapidly growing organization

• For buyers: Do in less than a year what ok or even good organic growth may take 3+ years to achieve

- Get access to new Talent and Capabilities

- Make In-Roads into New Markets

- Achieve Economies of Scale

- Lifestyle Improvement

- Career Enhancement for buyers or sellers in terms of reducing the number of hats you need to wear by now being involved with other smart people that can do the jobs you don’t want to do or aren’t good at.

- Buyers can rapidly get to a company size where a lucrative exit is possible

- Sellers may be thinking

• Take some money off the table without completely selling the business in order to get a bigger payout when the new joined entity reaches growth goals

• A full exit of the company. Keep in mind most M&A deals involving buying companies with revenues of under $5MM are not usually intended to be full exits for the sellers but to build a better management team as well as grow revenues and profits. Unless you are already well into retirement age you probably won’t be seeing retirement like money on a smaller company and the buyer probably doesn’t want you leave anytime soon. Lastly, although another topic, in most cases it takes a good 3 years to see a full payout of a purchase.

So there you have it in a nutshell. Growth by acquisition should be on everyone’s mind as a business owner in the channel. It’s not for every owner or every business entity, but it certainly is a strategic vision to think about.

Any questions, you know where to find me. Until next time…


To Your Business Success-

George J Sierchio