Organic vs. inorganic growth for your business

By Jo Poucher

5 min read

If you own a small business and have been considering growing it through a merger or acquisition (M&A), also known as inorganic growth, then the deal landscape remains fairly optimistic, even as the economic uncertainty over the UK’s exit from Europe continues for the next couple of years. But is organic growth an option?

According to KBS Corporate, 94% of private equity and venture capital houses are confident about the long term future of the M&A market and the wider economy in the UK. But is M&A 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 plans?

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 which situations and factors determine the best option for your business.

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: Businesses can double or triple their list of clients with a business merger.
  • Immediate rewards: You get an existing book of new clients. Start servicing them as quickly as you can to minimise disruption.

Cons

  • High upfront cost: Buying or merging with another business is not cheap, and you will usually have to invest a large amount of money upfront to make it happen. If you don’t have the cash to hand then 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 clients don’t stay with you, 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 understanding of the industry and customer expectations, making the chance of a smooth transition much more likely.
  • The business has a solid management team in place that comes with the deal. If you lose key employees in a deal, the transfer risk is much higher. But if you are lucky enough to gain an innovative, motivated and responsible team, then the deal is much more likely to succeed.
  • The business is a franchise or is remotely run. If a business is franchised or run remotely, the chances of a successful deal is 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 financially secure before you try to take on another set of problems and customers.
  • The majority of the target business’ revenue comes from a select few clients. The less diversified the client base, the more the chance that a major client will leave during the transition, resulting in the acquisition or merger failing to deliver.
  • 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 local area, an acquisition or merger makes a lot of sense. But if you are the two main local businesses in that industry, the customers will probably come to you anyway once the other business closes down.

Organic Growth: Marketing and sales

Organic growth is building your business with strong management, planning, marketing and sales. This means promoting your product, winning 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 in one go.
  • More flexibility. When you have more staff and resources, you can increase your efforts to grow organically. When you are low on funds and staff, you can scale back.

Cons

  • Slow growth rate. You are not going to get a large chunk of clients in one go. It’s a much slower process than inorganic growth.
  • Uncertainty. Any number of factors could slow—or even halt—your growth organically. The economy could slow down, 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, in the 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 company.
  • You are already growing from strength to strength. If you have a successful marketing and sales team and are already growing significantly organically, it makes sense to keep investing in 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 the collateral and come across a tempting buyout or merger opportunity, 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. M&A opportunities will present themselves and you’ll have plenty of chances to grow inorganically as well. The question is which 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.

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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