In my last blog I talked about the best organic business growth strategies. I guess the term ‘organic’ implies steady sustainable growth. Less risk but less return than growth through acquisition.
Growth through acquisition can be a very viable option for small to medium-sized businesses. Especially, since 2008 as there are many SME businesses that are under-performing and could be an attractive turnaround opportunity.
We often hear on the news about huge companies merging with and acquiring other huge companies in deals measured in the tens of billions but growth through acquisition is a very viable option for small to medium-sized businesses too.
If you own an SME business and haven’t considered acquisition, why?
- Happy working through the organic option I talked about?
- Too busy in the business to think about acquisition?
- Think that the legal challenge of an acquisition is too daunting?
- Think that financing an acquisition is beyond your resources?
Perhaps this article will help you reconsider. There are many good accountants and lawyers who can guide you through an acquisition without breaking the bank. More importantly they can find you financing that you probably never thought was available to you.
So, assuming growth through acquisition is a possibility for you. The question is, is it the right growth strategy for your company? Or are you better off expanding in more organic ways like I talked about in part 1 of this blog?
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.
The Pros And Cons Of Organic Business Growth
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 feels like you’re in for the long term but gives you the most control over how that growth occurs. There will be unexpected setbacks and very often dealing with ‘business as usual’ issues will feel like growth is being held back or going too slowly.
Through organic growth where you’re focused on continually improving your marketing, building a better workforce, 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.
You will develop a real sense of pride and achievement that comes with growing a business from the ground up with both your own and your team’s efforts. Many businesses growth this way.
The Cons Of Organic Business Growth
As I noted earlier organic growth is a long term sustainable approach. Moving into new markets doesn’t happen overnight. Also buying new premises in a new geographic area can take time to raise the funds and find the right location.
But, don’t assume organic growth moves a one slow pace. You will have seen many retail and service business grow dramatically – some make it and some don’t. Probably the last few years have seen many shop and restaurant chains cut back from rapid growth – reducing the rise of their portfolio
The Pros Of Growth Through Strategic Acquisition
Unlike slow and steady organic business growth, growth through acquisition or merger is generally much faster and if done right can give you several immediate benefits. Acquisition can:
- Be quicker, cheaper and far less risky than expanding through more effective sales and marketing activities;
- Offer economies of scale – merging the HR and Finance function are common benefits, never mind operational economies;
- Get you into a new market much quicker than organically adding one customer after another, or one branch at a time;
- Also impact your competition, especially if that is what you are acquiring!
The Cons Of Growth Through Acquisition
Okay, so growth through acquisition can give quick results. But like a large meal can give indigestion, so can an acquisition. Think through the following:
A merger or acquisition usually results in some reorganisation of the workforce and/or management team in one or both companies. Not everybody will get the job or boss they want. Stress levels may be high across the businesses and there will be winners and losers. Don’t be surprised if 1) good and bad people leave voluntarily and 2) you will have to face getting some people out of the business
Whilst people issues may be the first area to face up to there will be others to think about. Firstly, there is often a need to sort out processes and systems – never underestimate the time and effort required. Secondly there is the subtler issue of company culture. The numbers may stack up well for the two businesses to become one. But people, their values, behaviours and norms may clash. At the worst extreme, clashing cultures can destroy any other benefits from acquisition.
A third issue you could face is paying for the acquisition. I don’t mean having the funds to make the purchase. It’s the subsequent repayment of loan interest and capital. Your business plan for the acquisition probably assumed those economies of scale and greater sales growth. Hence the improved combined profit would easily afford any additional financing costs. If there are problems squeezing out efficiencies or the sales growth doesn’t appear then you may have to attend to refinancing or cost cutting.
How To Choose What’s Right For Your Business
The question of whether to buy another business or to organically grow depends on each individual business owner’s unique circumstances.
Answering these questions below will provide you with a direction on what you’re looking to achieve:
- How will the targets be identified and approached?
- What does the company want to achieve as a result of acquisitions?
- How will the targets be valued?
- Who will be the team of professionals to process and complete the transactions and what are the costs?
- How will the acquisitions be structured in terms of ownership and funding
- How will the culture of the acquired business be aligned to the main business?
If you can answer all of these questions you have a basic acquisition strategy to share with funders and potential investors.
Which Route Is The Best For My Business?
Whichever organic or acquisition route or combination to the two routes you chose, you will need to plan strategically and tactically. I would recommend exploring both options thoroughly before heading too far down either path. Discuss your options with your accountant, lawyer or business broker.
Then research businesses for sale in and around the areas you’re considering for expansion and work out if buying one of those businesses will get you closer to your growth goals. Look for where synergies can be 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 favours the bold,” as they say, and business growth certainly follows that saying.
Having the valuable experience of the right people at outset of the acquisition will ensure funding approval is given, the business pays the right price and the negotiation process is managed effectively for all parties. Good advisers can fill some of the gaps but a senior finance person in the team is often the glue holding it all together.
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