Have you ever heard the saying, "If you aren't growing you're dying?" It makes it sounds like the only reasonable thing to do is grow!
When looking to grow, is it better to do so through your own internally generated capacity (organic growth) or should you be looking to make acquisitions (inorganic growth)?
While there is no absolute right answer, many business owners face the question at some point. Deciding what to do requires a clear understanding of your goals, internal resources and existing capabilities as well as a realistic consideration of the benefits and challenges associated with each path.
If you are going to grow organically, which occurs when a company internally develops new customers, products, or markets, you need to evaluate your ability to do so. Start with your management team. It is essential to have capable people to provide the vision and strong leadership necessary to develop new products or markets to achieve the growth you want in the time you want it.
Other key areas to address are your sales team and facilities. Growing internally requires an aggressive sales team to enter new territories, and someone with knowledge of new products you plan to take to market. Look closely at the ability of your existing facilities to handle the projected new growth to determine if expansion will be necessary. Also, consider if your growth will require significant research and development — do you have the time and resources to invest in this new R&D?
Many companies choose the organic route for the following reasons:
- Typically, less up front cost
- Fewer surprises or unexpected consequences
- A more unified culture within the organization
- A stronger brand through continuous reinvestment into the entity's products, processes and customers; resulting in a high degree of customer loyalty.
Inorganic growth requires buying or merging with another company, and more upfront costs and financing. When you buy a business you almost always end up paying more than book value, and your financial risk can go up as you become more leveraged.
Since you are buying into something you did not create, there is a risk that even with the best due diligence, you might be surprised by unexpected issues with products, processes, cultures or customers that you don't learn about until after the transaction is complete.
Other issues to consider include the time and money it will take to integrate a new business, and the level of management expertise to manage the transaction, post-merger activity, and overall cultural assimilation.
Still, if the issue is to grow quickly, buying another company is generally thought to get you there faster. Consider what you get when you buy the right company:
- You can rapidly introduce new products, enter a new market or remove a competitor.
- You can quickly gain the critical mass necessary to make you a larger player in a market or industry.
- You instantly add new human capital and employee experiences to your team.
Besides bypassing a slower process, you avoid some of the risks associated with growing organically. For example, a company that decides to grow internally can be subject to a faster growing competitor that might quickly take over market share and become dominant. Also, in the end, it takes sustained discipline over a long period of time to maintain steady growth.
A multitude of factors can play into a decision on how best to grow. A meticulous review of all the options, your capabilities and the specific risks can help you make the right choice for you.
Dennis Blanton is managing partner of the Chattanooga office of LBMC, the largest regional accounting and financial services family of companies based in Tennessee. He has diversified experience with a variety of industries and can be reached at (423) 755-0706 or firstname.lastname@example.org.