Organic Growth vs. Growth by Acquisition?
Opting for growing your business by acquisition as opposed to or, in the majority of cases, in parallel with organic growth offers a number of advantages for businesses. While the advantages of a ‘big leap’ are obvious and in some ways superficial, as we will go on to discuss, the promise of acquisition as a tool for sustainable growth and value enhancement by no means are limited to a one-off hit of larger revenues and profit.
But it is precisely the size and effect of acquisition that also makes some businesses cautious in adopting M&A as a significant part of their growth strategy. Large and sudden changes can easily destabilise a business and the transaction almost inevitably involve significant financial risk. It is for this reason that, for SMEs in particular, incorporating acquisition as a part of a business’s growth strategy just seems like too big and too risky.
This is a shame as, properly understood and crafted, an acquisition strategy is a way not only to gain size and reinforce cash flow, but also to add significantly to a business’s value offering in a number of ways that complement and enhance the core growth strategy.
Alignment with the Growth Strategy of the Core Business
Dovetailing with Business Model
Firstly, positive M&A works best when it is seen as complementary to a strategy for organic growth. A strong and successful business model works to the advantage of a secure acquisition strategy in two ways. Firstly, it ensures that the core business is in robust health, supported by a business model that works. This means that any acquisition is being added to an entity that is already stable financially and successful commercially. Doing the opposite by acquiring a sound and successful business to a static or failing parent entity with a dysfunctional business model will not fix the core business. In fact, it is a recipe for ensuring both businesses get into difficulties.
A Secure Home
Secondly, the chances of success during the course of introductions and negotiations are vastly increased when the would-be acquiror can clearly demonstrate a successful track-record that is sustainable that is attractive to sellers and shows a potential partner who can look after and even enhance their business when they relinquish ownership. Due diligence, in some form or other, very often works in both directions.
A Strategy for Accelerated Value Enhancement
As such, a well thought through organic growth strategy is important as a signal to business owners that, should they sell, the business will be valued and enhanced. Furthermore, if that overall growth strategy can demonstrate how and where the new business to be acquired actually can be an important part of the acquiring entity reaching its growth targets, then it is a strong signal that M&A and organic growth strategies are aligned.
How can Acquisition Strategy Enhance Organic Growth?
There are a number of ways that acquisitions can complement and accelerate the overall growth strategy of an acquiring business. Different sectors sometimes have specific requirements (e.g. the need to acquire a business with a certain accreditation etc.), but generally the ways acquisition can help overall organic growth strategy are as follows:
Acquisition to increase market share
Acquisition of a business to increase market share within either a strategic sector or geography is one of the most obvious ways that acquisition can boost organic growth. In some markets, especially those with low growth rates but also low levels of competition, acquiring market share can significantly improve the competitive position of a business as well as opening up the possibilities of economies of scale to enhance profitability.
Acquisition to add products and/or services that are complementary to the current portfolio
The addition of new products or services can mean that more can be sold to existing clients (ie ‘capturing increased share of wallet’ etc.) as well as opening the door to reaching other, perhaps larger types of clients. Benefits here are not just revenues and profits, but also deeper customer penetration, enhanced relationships with large or strategic customers and opening up other, untapped areas of the market that were otherwise closed off.
Acquisition to develop new geographical markets
In an increasingly integrated economic environment, macro market fundamentals and growth drivers are very often the same within similar types of economies. This means that a successful market in one country is likely to have good prospects in another. What often is the barrier are legal, cultural and fiscal issues that diverge more significantly between countries. Hence, a market may well be as if not more attractive in a neighbouring country but addressing it without an initial foothold is difficult and requires patience and investment. Acquisition can act as a funnel for an organisation, giving the business a presence in a new geography and allowing it potentially to sell its core services using the acquired business as a conduit.
Acquisition for Diversification
However, successful and business is and however sound its business model has proved, every business is exposed to potential hits to its core markets, whether cyclical or in the form of structural changes. As such, very often a compelling case can be made for some level of diversification in order to strengthen the business by offering alternative (albeit potentially complementary) exposure to different markets and/or customers. Furthermore, niche acquisitions of even very small companies can sometimes represent the ‘missing piece’ within product or service development that can allow a company to diversify itself, by developing new products or services that can address different markets.
Acquisition can be a daunting prospect but it becomes less daunting when integrated with an organic growth strategy. Even for SMEs, acquisition can significantly enhance their business, provided they are wise about the professional help they may well need to fill in resource gaps. Such external help can be provided by Victanis, helping your business to understand how acquisition will fit with the rest of your business and its growth strategy. Furthermore, additional financial resources may be required which means the involvement of debt providers to facilitate the bold move of acquisition.
Ultimately, acquisitions must enhance and complement the growth trajectory of the acquiring business. They should never be a compensation for a failed growth strategy or a panacea to transform a business model in need of renewal. Done right, acquisitions have the potential to accelerate growth and deliver value enhancement in a way that would take considerable time and investment if delivered purely through internal resources.