If you have built a business up over several years and achieved a natural increase in revenues year on year, you may be ready to take the next step in growth and are considering the best way to do it.
When it comes to growth, broadly speaking there are two key methods, organic growth, which is achieved via investment in expansion of the business internally and inorganic growth, which relates to growth by acquiring businesses through merger or acquisition.
Organic growth offers a steady and predictable path towards reaching your business goals but can stifle innovation and leave you vulnerable to competition, whereas inorganic growth through mergers enables rapid growth but comes at a cost and can be unpredictable, even with meticulous planning.
So, which is best? In reality, the answer will be unique to your business. To help you understand both methods, our blog post runs through the pros and cons of organic growth and buying a business to achieve growth.
Buying a Business
Growing via acquisition or merger is a proven method of business growth. When buying a business, there are several considerations to be made, most importantly is whether the business you are acquiring is right for you and will result in sustainable growth.
Whilst there are often preconceptions that mergers and acquisitions are exclusive to larger companies, many small and medium-sized businesses see excellent growth via acquisition.
For example, we recently helped an accountancy practice acquire a smaller business to enable faster growth, something that would have taken years if relying on organic growth alone.
Advantages of Growing a Business by Acquisition
- Growing via acquisition or merger can enable rapid growth. In sectors such as accountancy, growth can be up to 8 times faster vs. organic.
- When acquiring or merging with a business, you are taking over a proven model with paying customers and the relevant equipment, systems, and processes already in place.
- Increasing the size of your business puts you in a better position to access extra capital, allowing you to be more competitive and expand further.
- Larger businesses generally attract larger and higher-paying clients.
- Acquiring a business can give you access to talent within your industry.
- May allow your business to expand current service offering.
- The extra resources acquired can help the business pivot quickly into new markets when required.
Disadvantages of Growing a Business by Acquisition
- Even with the best planning, mergers and acquisitions can fail. Even at the highest tiers of business, ‘flops’ are not uncommon.
- Poses a large financial commitment. For small business owners where banking lending criteria is rigid, funding may not be acquirable without being secured against personal possessions such as property.
- Different management techniques and integration of new members of staff can cause friction between the new and existing workforces.
- It can take time and sacrifice for both sides to agree on the terms of the deal. If this process takes too long, deal fatigue can set in and negotiations may be abandoned.
Growing organically can be achieved through increased sales, optimising operating costs, expanding service offerings, franchising, or moving into new locations.
Whilst organic growth takes a long time, it allows business owners to retain more control over their business and offers a sense of accomplishment if successful.
Advantages of Organic Growth
- Retain more control of the business that could be diluted in the event of a merger, many entrepreneurs value this control greatly.
- Organic growth is lower risk and more sustainable than growing via acquisition and capital can be reinvested into the business.
- Allows business owners to stay true to their vision, building their own teams, service offerings and products based on their values and goals.
- Avoid the large upfront cost that comes with acquisition.
Disadvantages of Organic Growth
- Organic growth can stagnate and businesses may struggle to evolve to meet changing market demands.
- Relying on organic growth alone can stifle innovation and lead to top talent leaving the business to look for new opportunities.
- Organic growth takes significantly longer than growing via acquisition.
- Generally speaking, you are in a poorer position to access capital because you are in ownership of fewer assets.
- Businesses with high growth strategies could start to acquire businesses in the industry and eat into your market share.
- To sustain organic growth, businesses will need to continually invest in staff, assets and marketing.
Choosing the Right Path for Your Business
The optimal way to achieve growth will be unique to every business and individual.
Some business owners will struggle with the thought of giving up some control, whereas others will see it as an opportunity to amplify their business model and values.
In some cases, a mix of both inorganic and organic growth can be the optimal way to grow, enabling businesses to retain control whilst taking the company to the next level.
If you are looking to grow by acquisition, it is important to ensure that you have a business broker on side to find suitable prospects and help reach a deal.
Help and Support from Bristol Business Brokers
At Bristol Business Brokers, we recognise that every business is unique and therefore take a hands-on approach to buying and selling businesses which takes into account more than the monetary value alone.
To have a conversation about how we can help, give us a call today on 0117 379 0117 or fill out a contact form and one of our team will get back to you.