How has your business grown in recent years? What are your plans for future growth? These are questions any business owner is likely to hear from prospective investors and lenders.
In general, companies have two options when looking to grow. A business can take the organic approach, utilizing internal resources (capital, personnel, processes) to execute a growth plan. Alternatively, the inorganic approach calls for one company acquiring another. The key is determining which one is right for your business.
Acquiring another business
One business acquiring another can result in a powerful combination when the two companies have overlapping strategic initiatives, complementary services or product lines, and the ability to achieve greater economies of scale. In addition to synergies, acquiring another business can provide immediate access to a new segment or market, positioning your business to realize growth and profits from day one. While many companies rely on mergers and acquisitions (M&A) to fuel their growth strategies, the territory comes with a host of considerations:
Does your team have prior M&A experience, or would you need external advisers to help navigate the process?
How will you source potential targets? What criteria will you use to narrow the search?
What is the current state of M&A markets within your industry? Are potential targets available at reasonable valuation multiples?
Is the target a cultural fit with your organization? Will you be able to retain key individuals?
Building it yourself
Like building a new home versus buying an existing one, using in-house resources to develop a new service or product line often gives business owners more control of scope, timeline, and costs. While building out a new line of business is typically less costly than acquiring one, speed to market is a drawback. Factors to evaluate before pursuing a significant organic investment include:
Do you currently have unfulfilled demand within your customer base?
Will the expansion require additional labor resources? Or will you be able to manage with your existing infrastructure?
Is your supplier base equipped to support your growth?
How will this investment strengthen your company’s overall value proposition?
Analytical considerations
Once you’ve evaluated potential growth options, it’s prudent to evaluate the return delivered by the intended strategy and to consider the returns of any competing options. Required inputs for this analysis may include:
The purchase price for an acquisition, or the production costs associated with organic growth.
Capital structure. Performing a dry powder analysis can help show a company’s potential funding sources, including the ability to obtain bank financing.
Financial projections. Based on your best assumptions, determine whether the strategy exceeds your firm’s weighted average cost of capital to ensure it is an accretive use of capital.
With a strong business case, analytical approach and proper resource allocation that allows management to continue to run the day-to-day operations, your business can be on a path to achieving sustainable growth.