Growth Strategy: Comparing Acquisitions to Organic Growth
Most business owners and CEOs want the right growth strategy to increase the value of their businesses. After all, if a business isn’t growing, it’s either stagnant or declining — neither of which is desirable for shareholders or employees.
But growth doesn’t just happen by accident. It usually requires a growth strategy. And when it comes to growth strategies, you have two main choices: you can implement an internal or organic growth strategy, or an external or acquisition growth strategy. These are two very different ways of growing a business, so it’s important to understand these strategies and their pros and cons in order to choose the right one for your business
Organic Growth vs. Acquisition Growth Strategy
Organic growth means growing your business by doing more of what it is that you currently do and doing it better. Ultimately, a growth strategy focused on organic growth comes down to increasing revenue by selling more products and services. This can be accomplished by ramping up sales and marketing efforts, investing in new machinery and equipment to boost manufacturing capabilities, rolling out new products and services to sell, and expanding your geographic footprint.
An acquisition growth strategy is focused on growing by merging with or acquiring other businesses — this is also known as M&A. Business acquisitions are usually either vertical or horizontal. In a vertical acquisition, you would acquire other businesses along your supply chain. For example, if you’re a manufacturer, you would acquire one of your suppliers with the goal of reducing costs and increasing efficiency in order to boost profits.
In a horizontal acquisition, meanwhile, you would acquire a competitor that’s in the same line of business that you are. The goal is to take advantage of synergies between the two companies while also boosting efficiency, lowering costs and reducing competition.
Long-term vs. Short-term Growth
Growing a business organically is usually a long-term growth strategy while growing a business via M&A is usually a short-term growth strategy designed to achieve rapid business growth. By acquiring another business either vertically or horizontally, you could literally double the size of your business overnight. But growth by acquisition can be an expensive proposition in terms of both money and management time.
Challenges exist with both the organic growth strategy and the acquisition growth strategy. For example:
Acquisition Growth Challenges
If you don’t have enough liquidity to pay for an acquisition in cash, you may have to finance the purchase or pay for it in stock, which could lead to a loss of business control and ownership dilution.
In your quest for growth, you might end up acquiring a business that isn’t the right strategic or operational fit with yours.
After the acquisition is complete, the synergies you identified between the two merging businesses could fail to materialize, which would diminish the value of the acquisition.
Organic Growth Challenges
If you operate in an industry that’s highly cyclical and subject to wild market fluctuations, it could be difficult to forecast organic growth.
You might not be able to afford to wait for long-term organic growth to materialize if you have aggressive growth targets.
Failure to meet these growth strategy challenges can lead to a number of negative impacts, including the following:
Potential Risks for Acquisition Growth Challenges
If you assume debt to finance an acquisition, this can lead to a weakening of your balance sheet.
If you use equity to finance an acquisition, dilution and partial loss of control can occur.
Management can become unfocused and staff can become strained due to the time and effort required to execute an acquisition.
Potential Risk for Organic Growth Challenges
An over-emphasis on organic growth can lead to the erosion of margin if revenue becomes the sole driving force.
Working with a CFO Services Professional
An effective way to overcome these challenges by implementing the right growth strategy is to work with an on-demand CFO services partner. This high-level financial professional will be able to perform much of the due diligence required in an acquisition and have at his or her disposal various analytical tools that can aid in determining the proper enterprise value.
A project CFO or part-time CFO will also understand the use of debt instruments and the right mixture of debt and equity to use in the M&A transaction, as well as other tools at your disposal such as earn-outs, stock options and employment contracts. In addition, a CFO partner will understand the operational impact that any aggressive growth strategy, whether organic or acquisition, will have on your organization.
You could realize a number of positive outcomes by working with an outsourced CFO on your growth strategy, including the following:
Your company will achieve its growth targets without sacrificing margin to do so.
Due diligence will be performed seamlessly and your day-to-day business operations will not be disrupted.
You’ll realize the lowest cost of capital if debt financing is used for an acquisition.
When it comes to growth strategies, your business has two main choices: organic growth or acquisition growth. These are two very different ways of growing a business and challenges exist with each. A CFO partner from a CFO services firm can help you choose the right growth strategy for your business. He or she will understand the operational impact that any aggressive growth strategy, whether organic or acquisition, will have on your organization and recommend the best course of action for your firm.
Mark S. Becker, Partner, CFO Edge, LLC