A recent small business challenge in the Globe & Mail features a company called Momentum Technologies which is a information technology consulting firm based in Quebec.
Their numbers to date are impressive: With 120 employees, they achieved $12 million in sales last year and have an annual growth rate of 30%. However, all of this revenue is derived within the province of Quebec and the owner feels that this growth rate is not sustainable without expansion to Toronto, Ottawa and Calgary.
One option is to open offices with his own employees and grow the business organically. The other option under consideration is to buy a similar company with an existing customer base and revenue stream (Target company size: $1-million to $3-million in annual revenue, with 15 to 25 employees for purchase price of $1-million and $2-million).
One more point of info: He previously expanded to Montreal from Quebec City and while it has become successful for him, there were growing pains. The owner characterizes a new office opening as not unlike starting a new business from scratch.
See full story here called Growth path: Open new office or make acquisition?
What should he do?
- This company has no experience with company acquisitions and that should make them ultra cautious with this option.
- On the other hand, he does have direct experience with opening a new office.
- An acquisition comes with instant employees, market presence, customers and revenues. But even with due diligence, there is still a risk that the employees suck, the customers are uncommitted, etc., etc. In other words, he could be buying into a world of hurt and a tremendous time drain taking on a whole new company.
- I’m no M&A expert but buying a $3 million revenue company for $2 million seems really low and unrealistic. Let’s assume that the target company earns a 20% profit or $600,000. So a $2 million purchase price and valuation would be a P/E of only 3.3! I don’t think so.
What would I suggest he do:
Firstly, forget about the acquisition option. Go the new office and organic route. IMO there is simply too much risk with buying someone and he has no experience doing so. Also, I think he’s dreaming about how big a company he can expect to buy with $2 million.
Smell test: Let’s reverse roles and assume that Momentum Technologies earns 20% profit or $2.4 million. Would he consider SELLING his company for a P/E of 3.3 or $7,920,000? Highly doubtful.
Secondly, focus on one city at a time for expansion. In this case, focus on Ottawa because its only 2 hours by car from Montreal and also because it has strong mix of French and English people with whom he deals with already in Quebec.
Thirdly, identify a core group of 2-4 current employees who would be interested in re-locating to Ottawa to start up the office as a skeleton team. Clearly he’d want to go with “go getter” types who would thrive in a start up environment. Plus, he should provide an incremental financial incentive package that is tied to revenue and other targets for the first couple or 3 years.
Fourthly, leverage the team members in the Montreal office to support the skeleton team. It would not be very costly (relative to buying a company for millions) to send teams of people to Ottawa for 2-3 day working stints a few times per month. Thus, he achieves the physical presence of people that is so important to developing new business.
Once the Ottawa business starts to build up, the company can gradually start to hire locally instead of sending folks from Montreal (or offer to re-locate Montreal staffers if they are interested).
This approach is WAY less costly and much more controllable than acquiring a company. Assuming he has success with the Ottawa initiative, he can take those best practices and roll out to Toronto and Calgary.
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Authored by Geoff Vincent