Organic Business Growth vs. Growth Through Acquisitions
Growth through acquisition is a very viable option for small and medium-size businesses. Should you buy a business?
We routinely hear on the news about huge companies merging with and acquiring other huge companies in deals measured in the tens of billions. But just a few minutes of research will show even novice entrepreneurs that growth through acquisition is a very viable option for small and medium-size businesses as well.
The question is, is it the right growth strategy for your company? Or are you better off expanding in more organic ways - by opening up satellite locations, franchising, or focusing exclusively on aggressive sales and marketing tactics?
There’s an interesting conversation to be had around this topic for every unique business situation, and there’s truly no “right” answer that fits every circumstance. Let’s look into some of the pros and cons of growth through acquisition versus more organic business growth so you’re in a better position to make that decision yourself.
The pros of organic business growth
Growing your business organically - in the most natural, progressive way possible - offers the most control over how that growth occurs. That doesn’t mean you’re going to completely avoid unexpected setbacks or even the stress of “too much success” at times. But, generally speaking, if you’re focused on continually improving your marketing efforts, improving your product or service, and identifying new or more profitable markets you can successfully enter, you’re going to find that growth is more predictable and controllable over the long term.
There’s also a real sense of pride and accomplishment that comes with growing a business from the ground up with your own (and your team’s) efforts to account for its success. Many entrepreneurs couldn’t imagine doing it any other way.
The cons of organic business growth
The biggest potential negative aspect of relying on strictly organic growth is that it’s usually very slow. It may take years for the market to evolve enough - and for your business to be able to afford - to justify a second location or expansion into a new geographic area. Getting to the point of opening a third location will probably take less time than the second one did, but it could still require years of planning and effort to get there.
This isn’t a hard-and-fast rule, of course. There are plenty of examples out there of restaurants, clothing stores, and specialty service businesses that seemed to appear out of the blue and suddenly explode across the map as they took over the market. But oftentimes, apparently explosive expansion - when it’s sustainable - is actually far more controlled and organic than it appears from the outside. And there are plenty of other stories of companies that went after aggressive organic growth and ended up biting off more than they could chew, collapsing before they could realize the rewards of the strategy.
The pros of growth through strategic acquisition
Unlike slow and steady organic growth, growth through acquisition or merger is generally much faster and - if done right - can yield a number of other almost instant benefits that can help make that rapid growth sustainable.
David Annis and Gary Schine, authors of the book, “Strategic Acquisition: A Smarter Way to Grow a Company,” explain the benefits of acquisition this way:
“Growth through acquisition is a quicker, cheaper, and far less risky proposition than the tried and true methods of expanded marketing and sales efforts. Further, acquisition offers a myriad of other advantages such as easier financing and instant economies of scale. The competitive advantages are also formidable, ranging from catching one's competition off guard, to instant market penetration even in areas where you may currently be weak, to the elimination of a competitor(s) through its acquisition.”
So this method of growth offers a two-fold growth process:
Grow your company’s market, brand reach, audience, sphere of influence, and supply chain while also eliminating or overtaking your biggest competitor, either by acquiring them directly or by acquiring one or more smaller competitors until your company is the largest in your competitive market.
The cons of growth through acquisition
Growth through acquisition is rapid and can yield quick results. But the internal atmosphere that develops in the time immediately preceding and following an acquisition or merger can present a number of management challenges that could hinder that rapid growth or plant the seeds of future failure.
If the merger or acquisition requires reorganizing of the workforce and/or management team in one or both companies, you may have a significant amount of stress and hard feelings to work through in the minds of those who stay. There can also be a latent sense of betrayal or disappointment on the part of employees, partners or owners of a company that has been acquired, especially if they agree to the arrangement because they’re facing a do-or-die situation.
Merging two distinct company cultures and methods will always present challenges, but a successful acquisition needs to get through these and other potential problems quickly and effectively if it’s going to successfully grow and evolve from the process.
How to choose what’s right for your business
The question of whether to buy your competitor or open up a satellite location - to grow organically or inorganically - must be answered individually by each business owner based on their own unique circumstances.
In both cases, thorough, strategic planning is required to ensure growth is both attainable and sustainable over a long enough period to achieve the company’s goals and justify the expense and effort required.
It’s usually best to explore both options thoroughly before heading too far down either path. Discuss your options with your lawyer, business broker and other trusted advisors to make sure you’re considering all the pertinent details.
Then research businesses for sale in and around the areas you’re considering for expansion and determine whether buying one or more of these businesses will help or hinder progress toward your growth goals. Keep a sharp eye on your competition - both large and small - and look for where synergies can be identified or created so that a merger or acquisition creates added value for everyone involved.
Once you’ve done your due diligence and you’ve settled on the best path, move ahead decisively. “Luck favors the bold,” as they say, and business growth certainly follows that axiom.