Ask an entrepreneur with a business in growth mode if he prefers to build vs. buy and nine out of ten times he will undoubtedly respond “build.”
As a founder, you attribute the early success of your businesses to a do-it-yourself mentality. It’s no surprise that the method of growth you may initially prefer is one that relies on internal, or organic, resources and yields a steady and controlled pace of expansion.
There may come a time in the life cycle of your business, however, where you feel a need to step on the gas, accelerating your rate of growth or tapping into new resources to meet more ambitious goals.
There are two ways you can do this:
Inorganic vs. organic growth
An inorganic strategy, also referred to as a “buy” strategy (as opposed an organic “build” strategy) means acquiring or merging with another company to achieve expansion. Since such a transaction represents spending a significant sum up front, it is often misconceived as a more expensive way to grow.
Inorganic growth also gets a bad rap for its risks of failure. The complexity of integrating a new business and a fear of loss of control is often the reason entrepreneurs shy away from this type of strategy.
On the other hand, an inorganic growth strategy allows an entrepreneur to make substantial changes to a business in a very short amount of time. This strategy is often pursued by businesses looking to tap into highly coveted talent pools, add new or complementary products to its existing offering, or enter new markets or customer segments.
A well-executed merger or acquisition can help achieve each of these goals — or all three simultaneously.
Here’s an example
Perhaps the best way to consider the two strategies is through an example.
Let’s say an East Coast-based business is looking to develop a stronger presence on the West Coast, where there are a handful of smaller competitors in the market, each with a loyal customer base.
Following an organic strategy, the company might first send some key members of its sales team to the new market to build up a prospect base there.
While this approach might seem like the lowest cost and least risky option, the time it will take for employees unfamiliar with the market to chip away at a customer base is currently served by several other local companies should not be ignored. Additionally, an entrepreneur will be faced with replacing sales staff back at home in so as to not to lose any traction in the home market.
Another organic option is for the business to invest in additional office space in the new market.
This is obviously a higher cost option, and still assumes that a business who has only operated in the East Coast can successfully break into a new market without a management team with local experience.
There is also significant ramp time associated with building out the new location, moving key employees, hiring additional staff, and engaging in marketing efforts to introduce the business to the new market.
The same business, if following an inorganic strategy, might instead decide to acquire one of its smaller West Coast competitors, allowing it to open up shop almost immediately in the new market.
In doing so, an entrepreneur has the advantage of gaining experienced managers and sales staff in the local market as well as a built up customer base.
One choice an entrepreneur might make in this scenario is to retain the brand of the smaller company for the time being. In this way, he can slowly introduce the parent company through the smaller local brand, adding resources from the core business to build out a bigger presence over time.
The importance of culture
The key piece of any acquisition is a successful and seamless integration. To ensure this goes smoothly an entrepreneur should conduct careful due diligence on the acquisition target to make sure the cultures of the two companies are compatible.
While no two companies will approach culture and values exactly the same, a seller should be excited about the culture of the acquiring company and open to morphing their existing culture to meet it. Engaging leaders from both selling and acquiring companies to focus on this part of the integration is essential.
Information sharing and communication with employees and customers is also important to make sure he is establishing trust and legitimacy with the two most important assets of the newly-acquired business.
Yes, acquiring a new company does require capital as well as proper preparation and a carefully planned execution to make sure the transition into the new market and adoption of the new company doesn’t result in the loss of customers or a distraction from the core business.
For companies who are in a financial position to do so, however, and need to make growth happen fast, it may very well be the preferred strategy after all.