Recently I met with a friend—I'll call him Paul—who owns a small publishing business in Toronto. Paul was trying to figure out who the natural buyer would be for a business like his, which generates around $110,000 in pre-tax profit on about $450,000 in revenue.
Paul had always assumed he would be acquired by one of the large newspaper chains, but given the degradation of the newspaper business, that was becoming less and less likely.
I turned to Todd Taskey, principal at Potomac Business Capital in Washington D.C., for his suggestion: "Paul should focus on companies that are between five and 20 times his size. As a general rule, most acquirers look to buy companies that will add between five and 20 per cent to their revenue."
Taskey, a mergers and acquisitions professional who helps his clients buy and sell businesses, elaborates: "Most established businesses hope to achieve at least 10 per cent growth each year. If they think they can get 5 per cent growth organically, they need to get the other 5 per cent revenue boost through acquisitions. Therefore, if I were your friend with a $450,000 business, I'd be positioning myself with a few publishing companies with revenue in the $2-million to $10-million range."
I asked Taskey for some real-life examples of the 5–20 rule, and he shared the following from recent deals he's been working on:
A $12-million IT services company based in Washington D.C. serving large companies and the U.S. government was sold to a $100-million, private equity–backed company from California with a small office in D.C. it was looking to expand.
A $1.5-million Arizona-based company that supplies a software program to a franchise system was acquired by a $15-million technology services and support business.
A private equity–backed billing company generating $45-million in revenue acquired a $5-million medical billing company.
The 5–20 rule is not written in stone. There are always going to be outliers like Google's May 2010 acquisition of Toronto-based BumpTop. But, according to Taskey, they are more the exception than the rule.
Are you using the 5–20 rule to draw up a list of potential acquirers of your business?
Special to The Globe and Mail
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine's "Who's Who" list as one of America's most influential business-to-business marketers.