Sandy Hubbard04.04.24
When I meet with label company owners to discuss business strategy, one topic always piques their interest: buying growth. “Buying growth” means investing upfront to gain future revenue and profits. “Organic growth,” on the other hand, means building a sales or marketing framework so growth happens by attracting new customers.
They’re both solid approaches, but let’s talk about paying for growth. When working with clients on buying growth, I look for predictable, one-time, monthly, or annual costs that can be offset by regular cash flow and, hopefully, increased profit.
We want to factor in costs, benefits (rewards), risks, and time to return to see if the investment is worth it.
That last one, tying up cash, is especially important when the investment involves variable costs, employees, building maintenance, or inventory.
“Return” or return on investment can mean any number of things, depending on how we define and measure it. For example, it can mean having a positive cash flow earlier in the month, annual tax benefits, the ability to employ family members, contracts with marquee clients, or leveling out seasonal ups and downs.
Furthermore, not every business is suited to be an acquirer, but that’s an article for another day.
There are other ways to buy growth, however. Some of the options I’ve listed below are ideal for entrepreneurs and family-run companies with the flexibility and creativity to devise win-win solutions.
Here are five ways my clients have “purchased” growth.
1. Embed an employee at a client site.
I love this idea because it’s so flexible, and the upfront costs are minimal.
Cost: Shifting over or hiring a salaried full or part-time position, background check to put the customer’s mind at ease, office furniture and computers, reimbursing employees’ commuting costs or housing (maybe).
Benefits: Quick onboarding, immediate service and tech support for the customer, ability to upsell projects or improve existing ones, relationships with more people across the customer’s organization, setting a path to becoming a single-source provider.
Risk: The scenario may not achieve additional business compared to the current arrangement. There may be limitations around confidentiality and your ability to do business with the customer’s competitors.
Time to Return: You’ll have a good idea of growth possibilities within one business quarter.
2. Buy real estate with tenants.
A customer needed space to refurbish press equipment. When a nearby business complex came up for sale, he snatched it up. The business park has low turnover, is managed by his son, and there are three units with loading docks for the owner’s use.
Cost: Initial outlay can vary depending on the deal.
Benefits: Cash flow, asset acquisition, possible tax benefits, additional square footage for future needs such as warehousing or data operations.
Risk: Tax implications, ability to collect rent promptly from tenants, building management and security costs, real estate in the investment portfolio, uneven trends in commercial real estate values for your area.
Time to Return: 90 days to lease income with a longer ramp to profit after taxes and fees.
3. Make space for a rent-paying business inside your existing space.
A press repair company modified its warehouse space so an IT firm could move in. This compatible solution brought in enough lease income to cover construction costs and the mortgage payment.
Cost: Legal agreements, logistics, construction, security, potential ADA modifications.
Benefits: Empty space put to good use, shared utilities, quiet tenants.
Risk: Giving “outsiders” access to your operation, network security, confidentiality of jobs-in-process, potential tenant incompatibility or liability.
Time to Return: Immediate rental cash flow. Net profit after the build-out was paid for.
4. Add a shift to do lower-profit and automated work.
One of my former customers runs a midnight shift Sunday through Wednesday, staffed with part-time operators and one experienced prepress manager.
Cost: Staffing and utilities.
Benefits: Cash flow, contribution to overhead, ability to prep jobs overnight so the day shift can hit the ground running, ability to fit quick-turn or long-run jobs into the press schedule, reserving daylight press time for value-added jobs, ability to bid on volume work, ability to do enough “grunt” work in client categories to retain preferred vendor status.
Risks: Not enough work to keep people busy, not enough jobs suitable for the crew’s skill level.
Time to Return: You’ll know in three to six months if you can bring in enough consistent work to justify an extra shift. My customer hired operators through an employment agency for a three-month trial period and then paid to extend the trial. In the end, they hired the operators as permanent part-time employees.
5. Relocation
Okay, this is dramatic, I admit, and it takes longer than 90 days. But I see owners knock themselves out to acquire a business for its location. They take on headaches when they could simply move the business to achieve the same results.
Costs: Purchase price or lease arrangement with beneficial terms, retrofitting the space, floor reinforcement and electrical, moving costs, disruption.
Benefits: Room to grow, more flexible and modern space, the ability to leverage and maximize real estate opportunities, working with motivated sellers, co-location possibilities, being closer to services and public transportation.
Risks: Large open spaces must be evaluated for snow loads, earthquake and tornado safety, engineering concerns, environmental impacts, and potential transferable liability for past uses such as decommissioned fuel tanks.
Time to Return: Finding a suitable space and preparing it for your needs can be a challenging endeavor. Your commercial real estate expert can guide you and help you find unique spaces. I have visited well-modified press operations in a former grocery store, daycare center, and bowling alley.
If buying growth leads to a long-term uptrend in sales (profits from adding the third shift, let’s say) or significant cost savings (moving to a county with lower taxes, for example), the impact can be quantified and defended.
Acquiring entities and investors want to see three years of financials. If you are buying growth to improve value, start early so you have time to show clear profits.
Reviewing options for buying growth should be part of your annual planning regimen. Knowing what you’re comfortable with and where to access funds will help you make decisions confidently when opportunities arise.
Before you take any of the paths I’ve laid out, you’ll want to consult with experts – a licensed commercial real estate agent, CPA, tax attorney, architectural engineer, zoning expert, and so forth.
Once you’ve narrowed your ideas, meet with your management team for scenario planning. You may wish to present your final idea as a done deal, but I recommend including your executive team and advisors in the brainstorming process.
1. Hire a hotshot salesperson.
2. Buy the accounts of a print broker.
I will address the advantages and pitfalls of those options in future articles.
Sandy Hubbard is a chief marketing advisor who helps position businesses strategically and powerfully. She advises specialty print manufacturers, converters, and finishers – helping them improve, grow, and position powerfully in a world of rising competition.Her tenure in the industry has fostered business growth and success, allowing clients to make a difference in the world.
They’re both solid approaches, but let’s talk about paying for growth. When working with clients on buying growth, I look for predictable, one-time, monthly, or annual costs that can be offset by regular cash flow and, hopefully, increased profit.
We want to factor in costs, benefits (rewards), risks, and time to return to see if the investment is worth it.
Risks of growth
We run the risk-reward equation because owners have different comfort levels with business disruption, “gambling” on potential return, borrowing money, and tying up cash.That last one, tying up cash, is especially important when the investment involves variable costs, employees, building maintenance, or inventory.
Estimating the time needed
When buying growth, it’s important to factor in “Time to Return.” Where organic growth has a long runway before revenue takes off, purchasing growth can bring results in just a few months. That’s why, when we weigh factors, we need to define just what the return will look like.“Return” or return on investment can mean any number of things, depending on how we define and measure it. For example, it can mean having a positive cash flow earlier in the month, annual tax benefits, the ability to employ family members, contracts with marquee clients, or leveling out seasonal ups and downs.
Acquisitions as growth strategy
The most obvious way to buy growth is to acquire another company. Growth through acquisition should not be done casually or with the expectation you’ll see profits quickly. It’s actually one of the most expensive and risky ways to buy growth.Furthermore, not every business is suited to be an acquirer, but that’s an article for another day.
There are other ways to buy growth, however. Some of the options I’ve listed below are ideal for entrepreneurs and family-run companies with the flexibility and creativity to devise win-win solutions.
Here are five ways my clients have “purchased” growth.
1. Embed an employee at a client site.
I love this idea because it’s so flexible, and the upfront costs are minimal.
Cost: Shifting over or hiring a salaried full or part-time position, background check to put the customer’s mind at ease, office furniture and computers, reimbursing employees’ commuting costs or housing (maybe).
Benefits: Quick onboarding, immediate service and tech support for the customer, ability to upsell projects or improve existing ones, relationships with more people across the customer’s organization, setting a path to becoming a single-source provider.
Risk: The scenario may not achieve additional business compared to the current arrangement. There may be limitations around confidentiality and your ability to do business with the customer’s competitors.
Time to Return: You’ll have a good idea of growth possibilities within one business quarter.
2. Buy real estate with tenants.
A customer needed space to refurbish press equipment. When a nearby business complex came up for sale, he snatched it up. The business park has low turnover, is managed by his son, and there are three units with loading docks for the owner’s use.
Cost: Initial outlay can vary depending on the deal.
Benefits: Cash flow, asset acquisition, possible tax benefits, additional square footage for future needs such as warehousing or data operations.
Risk: Tax implications, ability to collect rent promptly from tenants, building management and security costs, real estate in the investment portfolio, uneven trends in commercial real estate values for your area.
Time to Return: 90 days to lease income with a longer ramp to profit after taxes and fees.
3. Make space for a rent-paying business inside your existing space.
A press repair company modified its warehouse space so an IT firm could move in. This compatible solution brought in enough lease income to cover construction costs and the mortgage payment.
Cost: Legal agreements, logistics, construction, security, potential ADA modifications.
Benefits: Empty space put to good use, shared utilities, quiet tenants.
Risk: Giving “outsiders” access to your operation, network security, confidentiality of jobs-in-process, potential tenant incompatibility or liability.
Time to Return: Immediate rental cash flow. Net profit after the build-out was paid for.
4. Add a shift to do lower-profit and automated work.
One of my former customers runs a midnight shift Sunday through Wednesday, staffed with part-time operators and one experienced prepress manager.
Cost: Staffing and utilities.
Benefits: Cash flow, contribution to overhead, ability to prep jobs overnight so the day shift can hit the ground running, ability to fit quick-turn or long-run jobs into the press schedule, reserving daylight press time for value-added jobs, ability to bid on volume work, ability to do enough “grunt” work in client categories to retain preferred vendor status.
Risks: Not enough work to keep people busy, not enough jobs suitable for the crew’s skill level.
Time to Return: You’ll know in three to six months if you can bring in enough consistent work to justify an extra shift. My customer hired operators through an employment agency for a three-month trial period and then paid to extend the trial. In the end, they hired the operators as permanent part-time employees.
5. Relocation
Okay, this is dramatic, I admit, and it takes longer than 90 days. But I see owners knock themselves out to acquire a business for its location. They take on headaches when they could simply move the business to achieve the same results.
Costs: Purchase price or lease arrangement with beneficial terms, retrofitting the space, floor reinforcement and electrical, moving costs, disruption.
Benefits: Room to grow, more flexible and modern space, the ability to leverage and maximize real estate opportunities, working with motivated sellers, co-location possibilities, being closer to services and public transportation.
Risks: Large open spaces must be evaluated for snow loads, earthquake and tornado safety, engineering concerns, environmental impacts, and potential transferable liability for past uses such as decommissioned fuel tanks.
Time to Return: Finding a suitable space and preparing it for your needs can be a challenging endeavor. Your commercial real estate expert can guide you and help you find unique spaces. I have visited well-modified press operations in a former grocery store, daycare center, and bowling alley.
Impact of buying growth
Clients ask: Will buying growth improve my valuation? There are pros and cons to investing upfront for expected growth. While it may not raise your valuation per se, buyers may see you as a more attractive acquisition target.If buying growth leads to a long-term uptrend in sales (profits from adding the third shift, let’s say) or significant cost savings (moving to a county with lower taxes, for example), the impact can be quantified and defended.
Acquiring entities and investors want to see three years of financials. If you are buying growth to improve value, start early so you have time to show clear profits.
Reviewing options for buying growth should be part of your annual planning regimen. Knowing what you’re comfortable with and where to access funds will help you make decisions confidently when opportunities arise.
Before you take any of the paths I’ve laid out, you’ll want to consult with experts – a licensed commercial real estate agent, CPA, tax attorney, architectural engineer, zoning expert, and so forth.
Once you’ve narrowed your ideas, meet with your management team for scenario planning. You may wish to present your final idea as a done deal, but I recommend including your executive team and advisors in the brainstorming process.
Final thoughts on buying growth
You’re probably thinking, “But Sandy, there are two more ways to buy growth.”1. Hire a hotshot salesperson.
2. Buy the accounts of a print broker.
I will address the advantages and pitfalls of those options in future articles.
Sandy Hubbard is a chief marketing advisor who helps position businesses strategically and powerfully. She advises specialty print manufacturers, converters, and finishers – helping them improve, grow, and position powerfully in a world of rising competition.Her tenure in the industry has fostered business growth and success, allowing clients to make a difference in the world.