ORGANIC VS ACQUISITIONS GROWTH
Rarely a day goes by without hearing of the merger of one firm with another. What better way to grow your business you might say, and it can definitely make sense for certain businesses under particular conditions.
But before you head off on a spending spree, there are a few things to consider, not least to question whether the idea of growing the business organically might be preferable?
What Stage is your Business at?
Different growth strategies will suit different businesses at different times. Whether you decide to buy or build, care has to be taken in planning and execution to be certain the end result creates real value and sets the company in the right place for future opportunities.
Just starting out…?
If you are just launching your company, and your budget permits it, acquiring firms with similar products or services will mean that you start off with many things already set up:
- Existing product or service
- Existing customers
- Existing staff
- Existing market recognition
- Existing processes
- Existing culture
Be wary though – it won’t take a genius to see that each of those advantages could also put you at a disadvantage in some way!…
- The product or service may have glitches that you weren’t aware of
- The customer base may be unprofitable and the data not captured
- The staff may well feel uncertain at the change in ownership
- The market reputation may be a negative rather than a positive one
- The existing operations may not run smoothly
- The culture may not reflect your ethos.
Taking all these things into consideration you may end up having to retrain staff, revisit procedures and, in short, take a huge amount of time and effort to turn the company around. During that time, the negative impact could spill over into the fledgling business you had imagined, something to be avoided at all costs.
When you acquire a business there is also that nail-biting time when you wait to see if the amount you’ve paid for the business is justified!
The alternative is to build up your business at a pace you are comfortable with, recruiting staff with the relevant experience as you go along, ensuring processes are in place at every turn. Starting from scratch means that you determine every aspect of the company’s growth from recruitment of staff, the marketing undertaken and all the processes to get your product from design to customer. Your ethos, your culture, your branding.
The Established Business
Further along in your business development, you might see acquiring a company with a similar or complementary product or service as a means to quickly gain traction in your market place. For example, a pizza business may see the sense of buying a company that can make their pizza dough and sauces, thus ensuring they have control over the quality and supply of their essential raw materials. By this stage you will have a clear grasp of the costs and complexities of your own business and be better able to dovetail an acquired company into your own.
If you’re looking to grow organically, you will need to innovate – take your product or service in a new direction or to a new market. Look at examples all around us – the way confectioners seem to take their products on a new journey (I discovered, to my great joy, Bounty ice cream this year – a great example of a product growing beyond its original concept).
Problems can arise if you try to grow too fast or beyond the capabilities of your infrastructure. It’s a good problem to have but nevertheless its best not to build too fast without considering your infrastructure. Outsourcing those services that are not critical to your core business in the same way your product is such as your accounts, HR or marketing is a great way to manage expansion without additional staffing issues.
Take especial care if you decide to sell your product overseas. In the current economic and exchange rate climate exporting could be great but detailed research should be carried out not only to be sure there is a niche for your product but also to take into account export tariffs, delivery costs and future exchange rate uncertainty.
As with everything in business, keep an eye on your cashflow – use strong budget controls and be cautious rather than wildly optimistic with your sales projections. Things usually take longer to progress than we would like so factor that in too.
Are you Cautious or Gung Ho?
It may seem a strange thing to say but your own character will play a part in which route you choose to take – you may be someone eager to progress your company in a fast and furious pace or may be more risk averse. If possible, try not to let your heart rule your head in the way you grown your business. Seek advice – your accountant would be a good first port of call and will be glad to give you objective advice.