There are two ways to grow your business. Either you can grow the business organically--adding Customers and sales one at a time--or you can acquire another business, which gives you a one-time slug of assets, customer lists and sales.
I find that organic growth is often much more profitable. When you grow a business organically, you can choose the Customers you add more carefully than when you add through acquisition. Also, growing organically is almost always a slower way to grow, which allows you to integrate new employees into your company gradually so that they can absorb your company culture. When you add through acquisition, integration can be more difficult.
On the other hand, if a large chunk of extra business would immediately make your business more profitable, then growth through acquisition makes a lot of sense. Or if you want to learn a technology that is related to what your company does, but different in some fundamental ways, acquisition can make sense in that situation, too.
In any case, you have to be prepared that you may lose a very significant amount of business as you integrate the acquired business with your own operation. I've seen sales losses as high as 70% after an acquisition is made.
Organic or by acquisition, the key with growing your business is the measurement system you have in place for figuring out whether growth is going to be good for your company. This measurement system has to be integrated with the key metrics in your business. For example, in an internal growth program you need to know what a profitable account looks like—what the metrics are for a profitable account. You then have to have systems that limit your sales staff to making sales calls only on this type of account.
If you are contemplating an acquisition, you not only have to understand the financing and cash flows for the new business, but you also have to factor in the loss of business that will likely happen after you take over the new company. When you do your financial analysis of whether the acquisition makes sense, you must use your worst case scenario numbers to see if the cash flow and return on investment are within your expectations. If you haven’t established goals for cash flow and return on investment, this is a good time to start.
At the end of the day, the choice of organic growth or growth through acquisition should fit in with your overall strategy for your company. Each path requires a different skill set and a different way of looking at growing your business. Each requires you to concentrate on profits, particularly what extra profits growth brings. In most instances, growth for growth makes no sense. If your growth strategy doesn’t make you more profitable, then it’s time to go back to the drawing board.
With warm regards,
Stage 2 Planning Partners
Josh Patrick © 2007
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