Adam Coffey, founding partner of The Chairman Group. Best-selling author of The Private Equity Playbook.
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I’ve talked to a lot of entrepreneurs in my time. From founders attending my seminars to business leaders I’m actively coaching, I regularly hear from people who are interested in using mergers and acquisitions (M&As) as a growth accelerator. The number one thing most of them tell me is that they’re looking to “buy small businesses cheap,” stack them together and create value through scale.
As soon as they say that, I know they may be underestimating the complexity of M&A. Because while this approach might sound good in theory, the reality is that value isn’t created by buying something that’s broken and trying to fix it. In fact, I believe that “buy low, improve operations and sell high” is nothing more than a dangerous myth.
The Fixer-Upper Fallacy
Look, I get it. There’s a certain seductive logic behind buying an underperforming business. You can pay a lower multiple than you would for a healthy business, then improve operations and expand margins after the sale is finalized. Or at least, that’s what people tell themselves.
In reality, underperforming companies are usually underperformers for structural reasons. They might have a weak culture, poor management, customer concentration risk, broken systems or other liabilities. Whatever it is that’s dragging them down, it’s unlikely that it can be fixed quickly—and when it comes to succeeding in M&A, a time suck is the one thing you can’t afford.
Any time you buy an underperforming business, you’re putting yourself in a position where you have to take your eye off the ball with your other companies. And when you do that, you may quickly find that your main business starts to suffer because you’re focused on trying to fix what you just bought instead of running the business you already have.
I’ve experienced this personally. I once bought a company I shouldn’t have. It was underperforming significantly, and for three years after I bought it, that single company caused 80% of my headaches, even though it represented less than 5% of my revenue.
Eventually, my team and I were able to fix it, but it took a lot of resources and caused a massive amount of frustration. Not only that: While we were dealing with the underperformer, we weren’t able to focus as intensely as I would have liked on acquiring new companies, expanding our geographic reach, recruiting and retaining top talent or optimizing capital structure. The whole portfolio suffered as a result.
Generate Outsized Returns
The moral of the story is simple: Unless you’re a turnaround specialist or a distressed asset investor, consider staying away from the fixer-uppers. Instead of trying to find a diamond in the rough, focus on buying good companies run by good people. Finding and acquiring those kinds of businesses, then putting them together with your own company, is hard enough, trust me.
When you do find a good company, pay fair market value for it, too, because simply by getting bigger, you can generate outsized returns for yourself (or, if you’re backed by private equity, for your shareholders). Let arbitrage and multiple expansion create value for you.
My slogan is simple: I’d rather regret not buying something I should have than buying something I shouldn’t have. My goal isn’t to buy problems cheaply—it’s to buy excellence at a fair price and then institutionalize it. Your goal can be to do the same.
A Textbook Case
I have a client who owns a service-based business that learned this firsthand. For the last few years, she’s been trying to utilize a buy-and-build strategy by buying a company she can add to her existing business. But every time we dug into a potential acquisition, we realized it had structural problems. Could she have bought any of those companies at a significant discount? Yes, but as I kept reminding her, it wouldn’t be worth it.
After two years of this, my client was getting pretty frustrated. She didn’t think we’d ever find a good fit. And then a seller reached out to her. It was a great company run by a great person, and they were willing to part with it for fair market value. The business ticked all the boxes, so much so that my client was able to get a Small Business Administration (SBA) loan to fund the purchase, and the bank didn’t even require any money down. That’s almost unheard of with those types of loans.
I recently met with my client, and she is on cloud nine. She told me that she understands now why I kept telling her to stay focused and disciplined. She knows she’s set herself up for a fantastic outcome. She’ll be able to enjoy multiple expansions, and with what she’s learned this time around, she’s poised to succeed in the next acquisition as well.
Price Isn’t Everything
Private equity firms understand the value of approaching M&A through this lens, too. They typically focus on profitable, well-run companies with healthy unit economics, leadership continuity and cultural alignment.
Arbitrage doesn’t come from fixing something that’s cheap and broken. It comes from aggregation, systems standardization, purchasing leverage, cross-selling opportunities, professionalization and institutional credibility.
That’s why I continually remind the entrepreneurs I talk to that sometimes the best move is the one you don’t make.
No matter how cheap something is, if it doesn’t have cultural durability, leadership integrity and earnings quality, you should probably pass on it. Rather than focusing solely on price, consider a prospective company’s customer retention history, recurring revenue stability, management bench strength, reputation in the market and whether it has clean financials. You’ll pay more for these things, yes, but they can produce the safest compounding engine.
Ultimately, the most successful rollups aren’t built on flashy turnarounds. They’re built on disciplined selection, repeatable integration processes and consistent earnings quality. Buying great companies at fair prices might not feel sexy or heroic. But those things rarely create durable enterprise value—and when it comes to acquisition strategy, that (not drama) should be your focus.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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