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December 28th 2017

Business growth: to buy, or not to buy?

There are basically two approaches to business growth: organic and inorganic. What are the pros and cons of each?

Organic growth is achieved through the effective management of existing business resources. Growth may come from increasing sales volumes and/ or improving profitability.

Inorganic growth is achieved by acquiring, or merging with, another business. The general idea is that the enlarged business should enjoy higher turnover and/ or increased profitability, maybe enhanced by economies of scale, the ability to access new or better quality markets, or perhaps the removal of a competitor. This strategy can be as valid for smaller businesses, as it is for big ones.

Organic and inorganic methods are not mutually exclusive; sometimes a combination of both may be suitable. What are the main advantages and downsides of each approach?

Organic growth tends to happen at a slower rate than growth by acquisition, but may be easier to manage. There may be a lower level of financing required, compared to that for an acquisition or merger. There may be less operational disruption and fewer reputational risks compared to more acquisitive growth strategies.

By contrast, inorganic growth may offer the opportunity to grow more quickly, perhaps by enabling the business to rapidly reach new markets or remove competitors. The acquired company might significantly enhance the customer value proposition, especially if high quality people, processes, technology or IP are part of the deal.

The major challenges of inorganic growth generally revolve around raising finance, and ensuring the enlarged business can meet debtholder and shareholder obligations/ expectations.

Managing the transition might also include critical considerations about the leadership and culture, brand, customer relationships, and integrating staff, systems and processes.

Whichever strategy (or strategies) you want to employ, a well thought-through business plan - including a robust financial plan - can help you keep your business on track. If you want to go down the acquisition route, there is a variety of investment appraisal and risk assessment techniques you may need to deploy before jumping in.

You can read more about how we help small businesses to achieve high growth in our free Guide to Growth for Business Owners and Entrepreneurs. Or, just contact us if you'd like to have a discussion about your goals.

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