There are two main avenues for business expansion. One approach is organic or internal growth, which is the process of gradually expanding a company’s operations and sales. The other way to pursue expansion is by acquiring another company or several companies (a corporation may also pursue growth through a coalition or partnership, such as a joint venture, licensing agreement, or strategic alliance).
Organic growth is sometimes characterised as slow and steady development attained over many years (or decades) through a persistent commitment to sales, marketing, and customer service. Contrarily, growth through M&A can offer a business the opportunity to grow dramatically overnight, cover a portfolio gap, or enhance long-term competitive advantage through the realisation of synergies and economies of scale. Growth through M&A can also put a business in a better position for potential exits in the future (typically, a large company with diversified revenue and customer channels will be more attractive to a prospective acquirer).
Acquisition growth benefits include:
- improving the performance of targets
- removing excess capacity via consolidation
- fast-tracking market access
- acquiring skills or technologies faster & at a lower cost
- improving competitive behaviour via consolidation
But it is difficult to make this kind of transaction successful. Seven essential operational principles are followed by profitable corporate and financial buyers. Almost all phases of the acquisition process, from the selection of candidates to post-merger management, are impacted by these principles:
- Demand innovative operating strategies
- Don’t do the deal if you can’t find the leader
- Offer large incentives to top-level executives
- Relate compensation to changes in cash flow
- Drive the pace of change
- Foster dynamic relationships among owners, managers, and the board
- Hire the best acquiring team
Across all industries, the discussion of mergers and acquisitions is still a heated one. It is seen as a key factor in business expansion and even an opportunity for small business success. A total of 4,789 merger and acquisition transactions were completed in the second half of 2021, according to Deloitte’s 2022 M&A Trends Survey.
It’s essential to include an M&A line item in your strategic development plan from the start, even if you haven’t formally chosen whether your objective is to sell your firm, purchase another business, or divest underperforming segments. You will then have a clear understanding of all alternatives as your business develops and evolves.
A contrast to acquisitions, organic growth is the company’s internal formula for accelerating expansion and often doesn’t require much in the way of upfront expenses or investments. Organic growth is produced by continuous, increasing sales and cash flow from the company’s internal activities, and it symbolises the underlying health and vitality of the core business. While acquisitions are an important part of certain companies’ business strategies, they function best in tandem with organic growth.
Dees Maharaj – Group CSO