Organic Growth vs. Growth by Acquisition: Understanding Your Limitations

For the motivated business exec, stagnating is not an option. Companies owners motivated toward growth will find a number of hurdles and difficulties in growing the business beyond 10 to 15 employees. Unlike some companies focused on growth at all costs, most small businesses lack the luxury of burning through capital just to attract market share and great talent. The “grow at all costs” mentality ignores sustainability, business longevity and true staying power. Those working to build a true legacy would avoid the shortsightedness of flash-in-the-pan growth.

Balancing between growth desires and constraints is one of the most practical ways to look at the decision process. In many ways, deciding on a growth strategy is the trifecta of the mutually inclusive issues of cost, quality and speed. You’ll always be limited by one of the three and if you would like to increase one leg of the stool, the other must decrease.

Overcoming Growth Limitations 

There are always limitations to business growth. Whether such limitations are based on physical or human capital, time constraints or knowledge constraints, the results are the same you are limited in the amount that can be done and the speed with which it can be accomplished. Regardless of the business type, companies will always be restrained for massive growth. Those whose businesses throw off enough cash for reinvestment, for instance, may not be limited by capital, but they will most certainly be limited by time constraints for go-to market strategies, thus requiring a rapid acquisition of talent, know-how and resources able to integrate down a market line or into some heretofore untapped business vertical. The following is helpful in viewing growth strategies in light of the organic/acquisition growth framework.

Organic Growth Limitations 

  • Speed. If you are in a quickly moving industry like many web-based or technology companies, timing is everything. In most cases organic growth takes more time than a quickly and efficiently executed acquisition. When moving quickly is highest priority, organic growth to outpace the competition requires either hiring top-notch experts in the field or trusting your people have top-notch brains and quick feet to pull it off. The latter is more risky and generally less successful.
  • Cost. Some would argue that acquisition is the most expensive, but like all things in business “it really just depends.” First, cost is dependent on how you measure it. Cost is measured in terms of cash as well as strategic time, potentially lost personnel, etc. In other words, total cost should be included in any cost analysis. Secondly, the total cost of organic growth is dependent on the industry and what it takes to expand into new markets. If low-hanging fruit is easy to acquire in a new market, then organic growth may be the least expensive way to go. If, on the other hand, you want to grow in a highly-competitive and entrenched market, organic growth–without some type of creatively destructive value-ad–would be ill-advised. Red Oceans are never fun to swim in.
  • Knowledge. Most often limitations within a firm are the knowledge needed to take a particular product to market or the tacit understanding of a particular industry. Without such knowledge/understanding limits your firm and brings you back to bullets 1 and 2 above.
Acquisition Growth Limitations
  • Speed. Speaking generally, growth by acquisition is generally faster, especially with large entities accustomed to macro-phaging a host: they integration systems are great at extracting synergies rather quickly. Firms without the ability to quickly adapt in a strategic merger transaction scenario may not have the legs to quick integration. The most nimble entrepreneurs can often move more rapidly into new and growing markets than the Titanic behemoths of  yesteryear.
  • Cost. Acquisitions, unless you are just acquiring talent through standard hiring can be extremely expensive and capital-intensive. However, if you do your valuation models correctly, they can also prove a huge boon. For instance, most acquisitions are buying into a steady and reliable cash-flow. In such cases, the phrase from Warren Buffett comes to mind, “price is what you pay, value is what you get.” That is, of course unless you are able to buy a business in a distressed situation.
  • Knowledge. Knowledge limitation in strategic acquisitions is greatly dependent on the retaining of top-notch talent. Keeping talent can be difficult, especially if you just acquired a company from a founding entrepreneur  If you’ve contracted to keep them on, it can be a struggle to keep them interested and in their chair very long past the contract deadline. Extract all tacit knowledge of the business before their exit and the knowledge hurdle will most likely be cleared successfully.
The overall quality of processes and strategic business objectives in the internal vs. acquisition growth analysis is entirely dependent on the ability to integrate. And frankly, integration is usually messy and is can be easily botched.
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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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