To Grow Fast Should You Build or Buy?
Whenever the topic of small business growth strategies comes up, there’s one that’s almost never remembered. I refer to growth via acquisitions, or as it’s sometimes called “inorganic growth.” Practically everyone’s thinking is limited to so-called “organic growth.” So let’s take a look at these two basic growth strategies and consider their pluses and minuses.
Organic growth is basically about adding new customers one at a time. The focus here is to continuously make incremental improvements in the operations of the business in order to grow it. These improvements can be made in both outward and inward facing functions.
1. Outward facing functions
These consist of the business’s marketing, advertising, and sales functions.
2. Inward facing functions
The lesser known half of organic growth consists of operations functions that make the business more efficient by driving down costs. For example, they typically include improving the product and/or service as well as upgrading the equipment and assets utilized in producing and delivering the business’s products and/or services. Both are done with the objective of making the product more attractive to customers.
Inorganic growth is about adding new customers in blocks rather than one at a time. This is accomplished by acquiring or merging with other businesses in order to enter their markets and acquire their customers. This type of accelerated growth is commonly referred to as “M&A.”
There are two basic types of M&A: Horizontal and Vertical. Recall the standard industry value chain of manufacturer > wholesaler > retailer to get a grasp of what we mean here.
With horizontal M&A the business basically buys up direct competitors or similar businesses. For example a retailer will buy up other retailers selling the same types of products or related ones. It may even buy retailers specializing in different merchandise in order to diversify. Typically the main driver behind horizontal expansion is the desire for dominating a market whether it be local, regional, or national.
Vertical M&A comes in both upstream and downstream varieties. For example, a wholesaler acquiring a manufacturer is said to be going upstream. A manufacturer acquiring a wholesaler or a retailer is said to be investing downstream. A company will go upstream to gain more control over its source of supply. It will go downstream to gain more control over its markets.
The Advantages and Disadvantages of Each Type of Growth
The main advantage here is the relative simplicity of managing a single location over multiple ones. The owner can also employ a minimal number of managerial level staff.
On the negative side many such businesses see their initial sales growth level off over time into the mid or even low single digit rates. Without a deep bench of talent a business usually becomes stagnant after which the goal becomes no longer growth but simply preservation of the status quo.
The buy it growth strategy offers a number of significant advantages. A fast growth curve can be maintained indefinitely by gobbling up other entities. Moreover, the benefits multiply as the company gets bigger with each acquisition. For example, debt and equity capital become easier to raise as the business expands. This extra capital then allows the company to attract higher quality executives and staff. It also allows the company to invest in assets and technologies which will further improve its performance and profitability.
On the down side, the owner has to invest in himself initially in order to upgrade his skills. In addition, he has to have the confidence that he can master the lessons necessary to implement the M&A strategy. Finally, the owner has to be willing to let go of daily responsibility for the operations of business and delegate those to his new executives so that the organization can begin to really grow.
Both strategies can serve your needs. However, the Buy It strategy will work far better for you if you wish to build something substantial. Are you genuinely set to shoot for the first 100 million? If so, go with acquisitions. It can even play second fiddle to your Build It strategy. Just understand that very few businesses get 20% of the way to the 100 million landmark without some M&A activity.
An entrepreneur who doesn’t know how to use acquisitions for growth is like a boxer in the ring with one arm tied behind his back.
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