Business Growth: Buy or Build?
August 05, 2015
Businesses can grow in one of two ways – from within or through acquisitions. While each one will ultimately increase the size of your company, they are not at all similar. When creating a plan of growth for your business, you will need to compare the distinct benefits and drawbacks of internal, organic growth and external growth through acquisitions. How will each one affect your growth? What are the costs related to acquisition and integration and can you afford them (or the debt incur)? What are the advantages and risks? Which one will give you the largest, most consistent growth opportunity?
In an acquisition, a business is able to buy into another company with an established product or service line, existing customers and a reputation in the industry. An acquisition will eliminate the time and cost necessary to set up a new operation and the need to build from the ground up. It also avoids developing, creating and marketing a new product or service. Immediate market penetration where the purchaser is weak, elimination of competition, desirable locations and faster, less expensive growth are also potential benefits.
Although those all appear to be positives, there are some serious considerations before proceeding with acquisitions. First and foremost, there is the matter of money. While a business can avoid the time and costs necessary to growing from within, a business must have the initial acquisition costs or a loan lined up, which can be too great of a risk for some businesses.
This problem is not always offset by the benefits. An existing business is being purchased, which means the acquiring business will inherit all of the business’ problems of the purchased company. No matter the depth of due diligence potentially done by the purchaser, it is purchasing an ongoing business and may later discover operational or financial issues, whether known or unknown. Those problems can range from system and/or equipment breakdowns, to product or service failures, and even staffing issues.
Growth From Within: Pros and Cons
The pros of building a business from within are very different from those associated with acquisition. For instance, while growth can certainly be slower than what one will see in purchasing a business, you will be able to tailor the operation to your needs. The control over the direction of the business dispenses with the potential for inherited problems and issues. Growth from within makes it possible for a business to move at its own pace and make strategic decisions based on its needs and preferences. And unlike an acquisition, changing direction can be relatively easy.
Growth from within also comes with limits, plateaus and drawbacks. It can be a slow and difficult process. A product or service must be developed and marketed until it gains awareness, acceptance and recognition from consumers and the industry, which is challenging and potentially costly in and of itself.
Which Is the Correct Course?
Before pursuing either growth strategy, consider what the outcome of each will be for your company. Both come with their own strengths and weaknesses. Is your business financially strong? Is your market undergoing shifts that might pose future problems? If the core business is eroding, then acquisition can make the best sense, since time may be a factor in keeping the existing business on-going.
The question of growth is a serious question for businesses of any size. Working with your counsel to plan appropriately can help make this decision clearer both in the present and the future. An attorney with strong business acumen can help you understand the legal challenges that may arise throughout all stages of your business’s growth whether through acquisition or organic.