Acquisition Is A Muscle

It’s generally accepted that acquisitions on average destroy more value than they create.

What’s less well known is that for those who make acquisitions a core strategy and take the time and discipline to build their skills, acquisitions can actually create more value than even organic growth.

I first came across this McKinsey article in a PDF written by David from Demesne Investments, and the basic premise is that “Programmatic” acquirers not only create value with their acquisitions, but do so at a rate better than even those companies who grow organically.

Ok, yeah, so it’s a McKinsey article, and you do need to get over that part, but the data is still credible.

And in my experience, it’s 100% correct.

When you make multiple acquisitions, you eventually reach a point where you have made enough mistakes that you (mostly) stop making them.

You learn from your failures, your stupidly optimistic pro forma, and your naive acceptances of a seller’s explanations.

You see, I lied in the subject of this email.

Acquisition is not simply a muscle.

It’s not something that you can train as casually as lifting some weights, doing a few reps while you listen to Sam Parr, then shower off the sweat and go about your day.

Becoming a good acquirer is in fact a skill forged in the deepest depths of anguish brought on by a 2am email from a panicked team member.

Your due diligence checklist becomes a PTSD-inducing list of things to avoid.

Your dealflow team becomes a support group.

Your PnLs start to make you wonder why you didn’t just buy bitcoin instead.

But through it all, you build a powerful skill.

Acquisitions are hard, I think I’ve made that part clear. However, getting it right can create a compounding machine.

When you see what companies like Constellation Software or Roper Industries have achieved over the years, you can see why we are attempting to do the same.

The reason I’m telling you all this is because I believe the juice is very much worth the squeeze, but it is not an easy road.

Some of you are subscribed to me to learn more about Onfolio and our philosophy.

Others are subscribed because you’re interested in improving or starting your own acquisition journey.

I think there’s something in this email for everyone, and I don’t intend it to be all doom and gloom.

I promised there would be a list of mistakes I’ve made over the years, and I’ll get to that part shortly.

First I want to give two pieces of advice that have come from those lessons:

1.) Before any acquisition, ask yourself the following question:

“If my assumptions about what I can do with this business are wrong, will I still be happy with the acquisition?”

Or said more bluntly:

“Will this screw me if it goes wrong?”

This piece of advice is aimed at the belief we all have, particularly first time acquirers, that we can significantly improve a business post-acquisition.

Chances are, you can’t, or it will take much longer than you thought.

In fact you are more likely to see the business performance dip in the near-term (hence the dreaded destruction of value).

My first few acquisitions contained the belief that I could improve the email funnel of the business, or by redesigning the homepage I would improve conversion rates, or I could add new products into the funnel with ease.

It is very important to make an acquisition with a list of things to improve and ways you might grow it. So the mistake isn’t in making that list.

The mistake people make is that they put too much value in their ability to do it, and will either overlook other signs that it’s a bad business, or they will pay too much for it hoping to realize those improvements. I wrote about this before here.

If you pay too much for a business because you can grow it, or because there are synergies with your own business, then the value of that growth goes to the seller anyway.

Knowing how much is too much to pay is a whole other email, but i think you get the point.

Don’t buy something you’ll regret later because you thought you could improve it.

Buy something where even if you simply maintain the business operations, you’d be happy either way.

2.) Don’t underestimate the cost of focus-loss.

Diversification is important, so finding a way to own multiple businesses is very useful.

However, if you diversify when you should focus, you’re going to have a bad time.

Most people start out making acquisitions from a centralized team.

Maybe they have their own businesses and use that same team to start running other assets.

Or maybe they just find a team of capable operators and figure they can use them to run multiple assets, creating diversification without increasing expenses.

This was our initial thinking too, but over time we learned it doesn’t make sense and pivoted to a much more decentralized model.

What you gain in cost savings, you lose in focus.

Most internet entrepreneurs think we can operate multiple businesses and perform exceptionally in the process, but the reality is different.

You need those shower thoughts and constant attention in order to build momentum online. Spreading yourself and your business managers too thin kills the business.

So with all that in mind, I want to circle back to the main topic of this newsletter:

The idea that acquisitions are something that you get better at over time, and that you can programmatically execute on.

Many of you reading this won’t be sitting down thinking you’re going to go out and buy dozens of businesses just for the sake of getting it right the 13th time.

But if you acknowledge that it’s going to take you some time to get good at it, you’ll be halfway there.

If you just want to buy one business, you probably shouldn’t.

You definitely shouldn’t PG something with a high-interest loan.

But if you understand it’s going to take time and you need to keep getting better, and can do make mistakes without getting wiped out, then acquisitions might just be for you.

Now, I promised people on Ex-Twitter (see what I did there) that I would include a bunch of mistakes in this newsletter, so let’s end with those:

1.) My first acquisition went well but I ultimately rested on my laurels once I had grown it 50%, and didn’t sell it. Eventually my lack of focus on it while I chased new acquisitions lead to a decline.

2.) My second acquisition I didn’t do proper due diligence and failed to notice the e-book that was driving most of the sales was stolen content.

3.) I don’t remember my third acquisition, so it probably went well.

4.) Another acquisition I didn’t fully vet the code of the custom-built website and only later found out it was over a decade old and would cost six figures to rebuild the site.

5.) I bought too many content sites between 2019 and 2020 thinking “Just scale content and links” and scaled an SEO team accordingly. The team was spread too thin and most sites didn’t improve their rankings. Also I didn’t give them anywhere near the necessary link building budget.

6.) I hired someone who thought he could run 4-5 businesses and was thrilled that I had found him. It turned out he couldn’t even effectively run one business.

7.) I made the same mistake as above, but again.

That’s it for this week. I hope this has been helpful.

The main TL:DR if you scrolled past everything else is this:

Build a skill. Take a disciplined approach. Stay in the game long enough to excel.