2015-10-15 12:24:00Growing Your BusinessEnglishLearn if organic or inorganic growth is the best thing for your business, and what you need to consider when choosing the best options for...https://quickbooks.intuit.com/r/us_qrc/uploads/2015/10/2015_9_23-small-am-organic_vs_inorganic_growth_for_your_business.pngOrganic vs. Inorganic Growth: The Best Way to Grow Your Business

Organic vs. Inorganic Growth For Your Business

5 min read

If you own a small business and have been considering growing your business through a merger or acquisition, also known as “inorganic growth,” then the next 10 years should provide you with opportunities like never before.

According to a Pepperdine University study, nearly two-thirds of business owners surveyed intend to transfer primary ownership of their business in the next 10 years, as Baby Boomer business owners retire in droves. But is inorganic growth right for your business? Or would it be better to focus on growing your business organically through your day-to-day marketing and sales efforts?

In this article, we will look at both organic and inorganic growth, explore the pros and cons of each and end with an examination of what situations and factors determine which option is the best for your business. Let’s get started.

Inorganic Growth: Mergers and Acquisitions

Inorganic growth is typically the result of a deal between two businesses. Sometimes the two businesses merge, sometimes one buys another outright, and sometimes one business buys the clients from another business. Whatever the case, this is growth that would not happen as the result of everyday, organic business operations.

Pros

  • Potential for substantial and quantifiable growth: Many businesses will nearly double or triple their list of clients with a business merger.
  • Immediate rewards: You get a bunch of new clients. Start servicing them as quickly as you can to get things up and running.

Cons

  • High upfront cost: Buying or merging with another business is not cheap, and you will usually have to shell out some big bucks upfront to make it happen. If you don’t have the cash on hand, you’ll have to rely on a business loan to purchase the business.
  • Transfer risk: Inorganic growth only works if the buyout or merger is a success. If the client transfer bombs, then your cash and growth chances are gone.

Consider inorganic growth if your target business meets any of the following criteria:

  • The business is in your industry. You already have a good read on the industry and customer expectations, making the chance of a smooth transition much more likely.
  • The business has solid management in place that comes with the deal. If you lose key employees in a deal, the transfer risk is much higher. But if you have an innovative, excited and responsible team that comes with the deal, then the transfer is much more likely to succeed.
  • The business is a franchise or is remotely run. If a business is franchised or run remotely, the odds of transferability are much higher, because the success of the business is much less dependent on the personality or personal relationships of the owner.

You should not consider inorganic growth if any of the following circumstances apply:

  • Your own business is already struggling. Fix your own problems and get your business healthy before you try to take on another set of problems and customers.
  • If the majority of the target business’ revenue comes from a select few clients. The less diversified a client base, the more of a chance that a big client or two will leave during the transition, resulting in the acquisition or merger falling flat.
  • If the target business’ customers are likely to transition to your business organically. Let’s say a competitor in your industry is going out of business, and you have the chance to buy it. If there are several other big competitors in your area, an acquisition or merger makes a lot of sense. But if you are the two main businesses in the industry in your local area, the customers will probably come to you anyway once the other business goes under.

Organic Growth: Marketing and Sales

Organic growth is the building of your business via strong management, planning, marketing and sales. This means pushing your product, getting new clients, closing more deals, etc. This growth happens internally as the result of day-to-day operations, and does not involve acquiring or merging with another business.

Pros

  • Smaller upfront cost than inorganic growth. You don’t have to shell out a large amount of money at one time.
  • More flexibility. When you have more staff and money, you can increase your push to grow organically. When you are low on money and staff, you can scale back.

Cons

  • Slow growth rate. You are not going to get 1,000 clients in a couple days. It’s a much slower process than inorganic growth.
  • Less certain. Any number of factors could slow—or even halt—your growth organically. The economy could tank, a new competitor could emerge or something else might happen that disrupts your business.
  • Can be as costly in the long run as inorganic growth. You are spending less money at one time, but possibly as much or more long-term.

Your business is ripe for organic growth if the following circumstances apply:

  • You don’t have the collateral or funds to grow inorganically. Many businesses simply don’t have the financial ability to acquire or merge with another business.
  • You are already growing by leaps and bounds. If you have a killer marketing and sales team and are already growing significantly organically, it makes sense to keep putting your money into what’s working.

Organic growth may not be the best choice if either of these circumstances apply:

  • You have the experience, finances and opportunity to make inorganic growth work. If you have acquired businesses successfully before, have collateral and come across a killer buyout or merger, it may make sense to go for it.
  • There is a significant amount of competition in your industry. If your industry is already crowded, growing organically is much more difficult. A buyout or merger might be a better option.

Summary: Organic vs Inorganic Growth

Whether you should focus on organic or inorganic growth depends heavily on your industry, individual business circumstances and the opportunities that come your way. These opportunities come up, and it’s likely you’ll have plenty of chances to grow inorganically in the next 10 years. The question is whether or not that is right for your business.

By doing your research ahead of time, keeping track of what’s going on in your industry and using this guide as reference, you should have the tools you need to make the right growth decision for your business.

If you’re looking to grow your small business, then continue on to our article on how to create a plan to reach your growth goals.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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