The Smartest Businesses to Acquire Next

0:01How much more successful would you be if you had lunch with insanely successful entrepreneurs who shared their biggest secrets on how they think and achieve success. Well, now you can. Hear successful entrepreneurs reveal their step-by-step strategies and other fascinating stories. So grab your seat at the table, because this is Business Lunch with Roland Frazier and Ryan Dice. The next area that you want to think about maybe acquiring a company in would be in the event that you're thinking, how can I get a higher profit margin? How can I make more profit off of the customer relationship that I've got right now?

0:40Well, the easiest way to do that is to do something that in business school they call vertical integration. There are two types of acquisitions that you can make according to most business schools. That is a horizontal integration, meaning that you're buying for, you're a manufacturer of, let's say, microphones, and you are interested in acquiring more market share. If you're interested in acquiring more market share, probably the fastest way to do that would be to buy, like if you want to double your sales literally overnight, then just go out and identify a microphone manufacturing company that has the same level of sales and customers that your current business does.

1:19If you acquire that company, then you will literally be twice as big as you were the moment before you acquired it. So that's really easy. And that's typically called horizontal integration. I don't know. I mean, vertical makes sense. Horizontal, probably not as much, but it's because it's a competitor, right? Now, the other option would be to do what they call vertical integration, and that is going up your supply chain to acquire whoever is supplying you with the product or service that you're using. And so a lot of people instantly discount this as a strategy because they're like, well, I don't manufacture anything.

1:56I have a digital marketing agency. So how do I do vertical integration there? Well, let's talk about the easy one first. The easy one is you manufacture, in this case, we talked about microphones. Well, maybe you manufacture that by acquiring several components from other manufacturers that you assemble into a microphone. In that case, you would do an acquisition of those parts manufacturers that were providing you with those parts. Maybe you are a manufacturer of bath bombs and therefore you have several ingredients or supplements, you have several ingredients that you acquire in bulk and then you use that to blend to create your bath bombs or your supplements.

2:40In that case, you would acquire the ingredient supplier. Or maybe you buy from a wholesaler and you resell. So maybe you buy microphones from a microphone wholesaler that buys from manufacturers and then they represent several different manufacturers and then you get them to give you an order based on your demand. And then there's somebody in the middle. So you could cut them out by acquiring them or going directly to the manufacturer, either of those, right? You could acquire the manufacturer, you could acquire the wholesaler, you could acquire the components manufacturer, you could acquire the ingredient maker.

3:11All of those would be up the supply chain. It gets more complicated, as I mentioned, when you think about a service. So if you have a digital marketing agency, though, there's a decent chance that you are outsourcing some of the services that you provide. So most of the time there's either outsourced SEO, search engine optimization, there's outsourced media buying to other agencies. So maybe you're an agency that's a general digital marketing agency and you've got in-house people that are doing media buying and Facebook ads, but you need, you sub out your YouTube ads business. So rather than continuing to pay that supplier of YouTube ads to do the work for your customers that want YouTube ads, you just go and acquire that agency.

4:01And now you have vertically integrated that into your business. So hopefully that gives you a little bit more guidance on what that vertical integration looks like in non-manufacturing environments. Maybe you have somebody that is producing content for you, or maybe you outsource your customer service or anything that you outsource. Anything that you outsource, you just go and acquire the outsourcer, you've consolidated your supply chain. As we have experienced throughout the pandemic, a real challenge in getting our products in. The last article I read, I think this morning said there's 101 container ships that are backed up in the Los Angeles and Long Beach port area, 101 giant container ships with tens of thousands of goods and hundreds of millions of dollars of stuff that isn't able to get to the people who need it to be able to sell it.

4:55That's a challenge. So one of the things that you could think about too is maybe I can diversify the risk of my supply chain by acquiring some domestic manufacturers of the products that I want, or some domestic suppliers. If you're having challenges with, say, internet outages because you've got a team in Davao in the Philippines, you know, I've been there, I've had that, right? So there's a storm. Our whole customer support team there is out for a week while they get the streets cleaned up, right? It can be a real challenge. So that's the up the supply chain. Now, the other place that you can go is down the distribution chain.

5:31So if you are a middle person, it's pretty easy to say, well, how do I cut out the middle people? Like if I'm selling those microphones that I talked about before, and I'm not selling directly to the consumer, then any of the businesses that are between me and the consumer that I can acquire will increase my profit margin. Because right now my supplier's got to make a profit margin. But if I acquire that, I capture that margin. My distributor has to earn a profit margin. So if I acquire them, I get that too. So if I was making mics, there are music stores all over online and physically that are selling my microphones.

6:07Well, what if I started acquiring them? What if I acquired the online site? What if I acquired microphones.com? Don't want to know what it looks like, but I bet it's out there or Sweetwater Sound, which is a huge distributor of other people's products. Well, if I'm the person whose products they're distributing, if I'm the company who's got the products that are being distributed, I'm selling them at a wholesale price and then they're selling to the consumer at a higher price. I could get that margin myself if I could sell direct to the consumer. So I can effectively sell direct to the consumer if I acquire them.

6:36I might ultimately figure out how to take those relationships and just use them for my mic company, or I might continue to have them selling all of the diverse products that they sell. But I will now own my distribution chain and the margin, the profit margin that I have acquired by acquiring that company will increase my profits. The whole game here is how do we increase our profits? So what if you don't have a physical product? You've got an intellectual property product. Maybe you make courses. You sell information of some sort. Well, if that's the case, then you still have a distribution chain because you're typically selling through affiliates who you pay 20, 30, 50 % very often or more in commissions to sell your product or your service.

7:20So what if instead, or if you're paying referral fees to anybody or affiliate fees to anybody, then you can go and acquire those affiliates and then you acquire all of that profit margin. And, and that is vertical integration. So that's it. So the question is, how do I find those? Who's making the products, the components, the ingredients, or other things that you are buying? Who is providing services or being an outsourcer for the things that you are buying? You can acquire those and you will have vertically integrated your supply chain. How can you find the companies to buy, to acquire if you're looking to go down in vertical integration to the distribution chain?

8:03Well, that's easy. You say, who's selling my products or services? Who am I paying referral fees for referrals or to sell my products or services? Or who are the distributors who are selling my products or services to other people? And you go and acquire those. that's how you get supply chain distribution the other one that you might think about is maybe you've got a challenge and you're trying to figure out how can i level out my income my income is erratic i i go in some months i sell a whole bunch of stuff to people and some months i don't maybe it's seasonal i sell a whole bunch i'm an ice cream vendor and i sell a ton of ice cream in the summer months, but in the winter months, I really don't sell that much.

8:47Or I sell pool toys and I sell a lot in the summer, but not other times of the year. I sell diet stuff or weight loss products. And therefore it's big at the end of the year while people are doing all their New Year's resolutions and for the first quarter, but then it falls off when they all forget about it and fall off their New Year's resolutions as the year goes on. So if I wanted to smooth out those peaks and valleys in my revenue, I would think about how could I acquire something that people are paying on a regular recurring basis. So we call this recurring revenue, and it might be every month that there's payments, that's monthly recurring revenue.

9:24We abbreviate that MRR. Or it might be every year something renews, that's annual recurring revenue. Either of them is fine. But if we could acquire a product or service or company that provided a product or service that was recurring, that was a consumable. That would be like, maybe there's something, certainly I mentioned bottled water earlier. I consume the bottled water. If you're making this, maybe you could put me on auto ship. So is it a product that people consume more than one time? So if you sell something like a bed, like a mattress, then people don't buy mattresses typically every month or every year, but they might buy bedding products more frequently, or maybe they'll buy something that is like a scent or a atomizer that has a recurring component or a filter for the bedroom that will clean up the air and help you sleep better or a humidifier that has a filter and that thing gets replaced on the regular basis, right?

10:27Then you've got a recurring revenue product, or maybe you have a lawn care agency or a florist, you own a florist. And rather than just people buying flowers once in a while, when the special occasion hits and they remember it, you just say, Hey, wouldn't it be nice to have fresh flowers every single month in your home? We'll do that for a service of X dollars a month. Right? So, so you're trying to think of how do I recurify the things that I offer right now, or if the things that I offer tend to be only one-time purchases or very spread out periodic purchases like a car or a mattress, then what other products or services could I acquire that do have that monthly recurring basis?

11:06How do you find them? You just think about things we just talked about, right? They're easy to find when you think about that. You're just identifying what is something that has a monthly or annual recurring payment that has some consumption consumable component. That could be information like a subscription site, a periodical publication, some sort of service? Could it be auto ship? It could be intellectual property so that you have access to the intellectual property. It could be a royalty based so that you're getting a royalty every time that thing is sold. But what will help you smooth the peaks and valleys that you're experiencing right now in your revenue and profits because you don't have recurring revenue?

11:44So that's really what we're talking about there. And the easiest way to acquire it is just identify who's got it, and then you go make an offer. And again, that could be a whole company, or it could just be a specific asset like the atomizer, right? Or the service that's the digital marketing company that people have. Last but not least, when people are saying are the easiest types of businesses to buy, I think one of the easiest is intellectual property. And a really good example, and it's not necessarily like it might be a business because it's a business based on intellectual property, or it might be a asset that is intellectual property that has the ability to help you with innovation.

12:28right? So the real benefit of intellectual property is that maybe you've got products or services that are a little long in the tooth and you've had them for a long time. And there's some competitors that have come along and are doing things differently and people are starting to take notice and it's eating away at your business. Then one of the easiest things that you can do is go and acquire that intellectual property. Intellectual property can be copyrights. It can be trademarks. It could be patents. It could also be trade dress. It could be logos. It could be brand names. It could be URLs, right?

13:02It could be any of those things. It could be trade secrets, right? You know, like the recipe to Coke or Kentucky fried chicken. Those are pretty valuable assets. It could be an algorithm. It could be software. All of that is intellectual property that you can bring in to breathe new life into the products and services that you offer your customers right now, and it can get them excited to continue to do business with you. It can help you retain customers longer because you've got new things to talk about. And then it can also reduce competition because you are buying that intellectual property, hopefully exclusively, right?

13:35Because you could buy a license to it that might only have a certain vertical, or you could buy a right to it that might have a certain vertical, and it could be exclusive or non-exclusive. Ideally, it's exclusive. And then it becomes a moat that you build around your business and your customers that you've got this cool new thing that nobody else has. And it's actually protected legally because it's a copyright trademark patent. Some of the things that I mentioned now you've got amazing intellectual property. You've got amazing innovation. You are fresh. You are the hot thing on the block product or service wise that your customers want to have.

14:07And they know, like, and trust you already. And they're happy because you become somebody that has a company reputation of always looking forward, always evolving, always meeting new customer services or needs, always improving the products and services that you've got. One of the easiest ways to find intellectual property is to go to invention shows or to keep an eye on new startups in your industry. So that would mean looking at AngelList and becoming a part of the startup communities that are in your industry, going to the trade shows in your industries and seeing who's advertising, who's bought a booth, who's showing up, listening to the speakers and presenters, reading the publications, the blogs, the periodicals, the newsletters in that looking for articles about new things, looking for advertisements about new things, looking at who's the most innovative of the people that you see and staying plugged into that.

14:58And then as you see something start, see if you can acquire it or even if you can just acquire the right to it. Maybe you want to acquire the whole company, but maybe you just have to acquire that patent or that copyright or that trademark or that logo, right? Or that division of people that's constantly creating things. That's the easiest way to find intellectual property products. And that's the easiest way to buy innovation for your company. I hope that's been helpful. And I'm Roland Frazier. That is the easiest ways to acquire a business.

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