When discussing business, we talk a lot about growth. Growth is essential for any business that wants to take the next step and improve its revenue and profit levels. However, a company can take many courses of development, depending on its goals and preferences.
Most types of growth will fall into one of two categories: organic and inorganic. These describe two ways of expanding as a business, each with unique strengths and weaknesses.
In this guide, we explain what inorganic growth is and why a business might utilise this approach for their expansion goals, including the considerations to make beforehand.
What is inorganic growth?
Inorganic growth refers to growth that happens as a result of launching new locations or the merger or acquisition of other businesses. It’s called ‘inorganic’ as your business hasn’t grown of your own accord, through your own sales and marketing activities and leveraging your own business model.
In the case of a merger or acquisition, you are essentially creating additional growth by adding new assets, staff and customers to your company through the purchase, rather than growing your business over time.
Although the growth isn’t necessarily ‘organic’, the assumption is that you will only make a move to acquire a new company or open a location when the time is right, such as being at a point of financial strength and having reasonable demand to warrant expansion. You will also need to ensure the conditions are right for an acquisition, with the funding you need to support the purchase.
One of the most significant advantages to inorganic growth is that it allows you to accelerate your growth goals in one fell swoop rather than building towards them over time. Once you acquire your new location or business, you will automatically increase your market share and presence through new assets and customer bases.
If you are opening in a new location, you can also gain access to a new market, helping you to extend your reach across a more expansive geography. This will enable you to diversify your audience and generate increased demand.
Another benefit is that, when you acquire another business, you will usually obtain it in an established form, complete with its equipment, staff, management team, customer data, reputation and infrastructure. This means you don’t need to start from scratch, making it simpler to operate, integrate and begin increasing sales.
Finally, by gaining additional assets through premises, plant and equipment, you will be able to leverage this to assist with funding now or in the future. This can further your growth goals, enabling you to achieve the finance you need to achieve your goals.
Considerations to make
Although there is a worth to inorganic growth, it may not be for everyone, and there are considerations you need to make before committing to it.
Firstly, it can be costly. You need the capital or finance to cover the expense of buying new premises or funding mergers and acquisitions. These do not come cheap, so you need to be sure that you are ready to foot the cost, with the proper support to assist you. You’ll also want to be sure that the move will improve your profit and sales by conducting due diligence during the acquisition phase.
The change will be sudden for those within the business, especially in the case of a merger or acquisition. Even after the purchase is complete, it takes time to get used to new processes and strategies. You may need to consider adopting a consistent culture and working environment if you are merging across two entirely different workplaces, which will require time and effort. This means that the delivery of additional value from your acquisition may be slow initially, unless you invest the time in getting this right.
Most crucially, you need to make sure you have an effective strategy that enables any merger or acquisition to be a successful step in your growth. This means choosing the right business to acquire (companies that fit your values and culture or premises in optimum locations for your brand). This will allow your business to transition smoothly and ensure you gain the results you expect. This is particularly essential given the considerable cost behind inorganic growth. Without this considered strategy, you risk acquiring new assets without actually growing your business.
Inorganic growth is a route that many businesses take when scaling up. It’s practical for those who want to quickly expand their market share and reach, often through the acquisition of an established company. It also enables you to potentially increase your asset base, which may make it easier to access finance.
However, there are a number of considerations you must make to ensure the merger, acquisition or new location facilitate your long-term growth. This includes making sure you have the finances to fund the growth and the resilience and tenacity to drive through the changes. By doing so, you can ensure success.
If you are considering mergers or acquisitions as part of your growth strategy, we can discuss the options with you, including how to finance it and decide if it is the right move for your business.
Get in touch today.