Business growth planning: Organic vs acquisitional growth
Dean Lomas, Business Development Manager at Begbies Traynor Group Birmingham, explains the difference between both approaches and why they matter.
The success of a business can be measured by its cash flow position, turnover and debt-to-asset ratio, all of which fuel company growth. Growing a company can be an advantageous, yet enduring process, with many trials and tribulations experienced along the way.
The speed at which company growth can be achieved is determined by a combination of internal and external factors, along with the path taken to grow.
There are different approaches to business growth including organic growth and acquisitional growth.
What is organic growth?
Organic growth is when a business grows naturally using internal resources and funds to invest and expand. This shows that the company is structurally strong, financially stable, and cash-rich, and therefore, able to retain sufficient cash flow in the business while parting with a substantial proportion of company funds to grow.
The definition of growth is individual to each business, so while one may use profitability as a measure of success, another may turn to market share or the number of employees that have.
Here are some of the factors used as a measure of success by businesses:
- Sales value
- Business value
- Number of clients
- Value of service lines
- Employee numbers
- Size of professional partner network
- Office network
- Rate of growth
How a business defines growth is also motivated by numerous factors, such as financial targets, business planning, and shareholder interests. The approach must align with their values and support the long-term vision of the business.
What is acquisitional growth?
Acquisitional growth is when a business grows through acquisitions or mergers using external support to grow, such as funding. This approach is popular with cash-rich businesses with a high-risk appetite as growth can be quickly achieved.
Growing a business through acquisitions means forming a synergy between two or more businesses to multiply market share, digest multiple profit lines, and access a larger playing field. An acquisition may seem appropriate if company growth is time sensitive.
This route is often used to gain a competitive advantage by permanently removing competitors from the market. By joining forces, businesses can diversify products and client bases, consolidate overheads, and work in partnership, rather than in opposition.
Why is the business growth journey important?
How a business achieves growth holds weight when borrowing, investing, selling and marketing. It shows whether there are enough natural resources to facilitate growth or whether the business must rely on external support and increase its debt liabilities to grow.
While shouldering more company debt increases business risk and dilutes ownership, it shows that a business is highly resilient.
It’s common for businesses to journey one path at a time, although a combined approach is also practical. This enables businesses to invest in the highest performing areas of their business, while turning to acquisitions for areas they lack expertise in.
By cherry picking each component, owners can build an entity that’s highly performing and completely tailored.