Almost every business wants to grow. The question is how they do it.
There are many ways to scale up, depending on the goals you are looking to fulfil, when you want to meet your targets and your company’s existing situation.
One option is external growth, sometimes known as inorganic growth. As the name suggests, this growth occurs through acquisitions, diversification, and the like.
If you are considering your expansion journey, you may wonder if an external strategy is right for you. This blog delves into the implications of external growth and what you need to do it effectively for your business.
- What are the forms of external growth?
- The benefits of external growth
- How to create an external growth strategy
What are the forms of external growth?
External growth encompasses several forms of expansion, all of which rely on resources and capabilities that sit outside your business.
Examples of types of external growth include:
- Mergers
- Acquisitions
- Strategic alliances (in which you combine assets with another company to achieve your goals, though technically remaining independent)
The form you choose will vary depending on your preferences and available opportunities. However, each allows you to maximise your assets and grow your market presence rather than be limited to your company’s internal capabilities.
The benefits of external growth
There are many benefits associated with external growth.
The most prominent is that it enables you to accelerate business expansion by making one significant growth move. This varies from internal growth, where you might spend a long time generating increased demand and scaling your operations to drive revenue and profit.
By instead acquiring or merging with another established company, you automatically gain access to new markets and pick up their existing customer books to increase sales and improve market share.
You will take control of the assets of any business you acquire, which enables you to increase the overall value of your company. This makes it easier to access external finance, either through a higher valuation (making you more attractive for equity) or increased collateral to use as security against debt funding.
A large part of your work will be around the change management efforts required for a smooth transition as the business adapts.
Once you have made your external growth move, the aim is to boost your profitability and maximise results. This is achieved through the ability to meet and generate greater demand, improve brand awareness and an efficient operational structure that facilitates higher sales.
Another objective will be to reduce the cost of production through economies of scale of the combined operations. With reducing costs, the opportunity to grow profits accordingly increases.
How to create an external growth strategy
If you are pursuing external growth, it is essential to have an effective and considered strategy to ensure success. We’ve listed the steps to follow.
Start by understanding the implications
While we’ve already mentioned the benefits of external growth, there are also important considerations to make. When acquiring or merging with another business, planning is required to ensure a smooth transition period, allowing you to optimise operations and motivate staff.
On top of this, external growth requires substantial funding and a suitable opportunity. You need to be patient during the process to end up with the right opportunity that works for you logistically and financially.
Prepare your business
Before engaging in external growth, you need to reach a point where your business is ready. This may involve some internal work to build up your management team, optimise your processes and address any outstanding issues, so you are in a position where growth is required.
You will also need to consider how external expansion may affect your business and what vision you see moving forward – including a possible redefinition of your value proposition. This will enable a smoother evolution, with reduced barriers, when you acquire or merge with another company.
Find the perfect opportunity
To find the best opportunity for your expansion, you need to look for companies that are the right fit for you. This could mean sharing similar values, culture, and expertise to make bringing together workforces, leadership, and processes more manageable.
It will take time to find a suitable option, so remember to be patient and keep an eye out for companies possibly looking for a merger or sale as they come onto the market, or ideally off market. Networking may help to uncover opportunities.
Pick your method
One of the early steps in your strategy is deciding if you want a merger or acquisition. If you choose an acquisition, there are number of routes this could take, including:
- Strategic purchase (to gain market share, enter a certain market or acquire key products or services)
- Buy and build (used to buy and develop a group of companies with a planned exit phase)
- Management buy-ins (MBIs)
Different methods will have unique pros, cons and funding requirements, so you may prefer one in particular. It will also be dictated by the available opportunities from any companies you want to acquire.
Source funding
Once you have identified an appropriate opportunity for your business, you’ll need to raise funding for it. Mergers and acquisitions typically are sizeable investments, so this may be a big ask. There are a number of different financial solutions that might assist, including:
- Bank loans and alternative loans
- Equity – including angel investment and private equity
- Asset-backed lending including invoice discounting, asset finance and cash flow loans
- Seller financing
You may need to combine funding sources to secure enough to cover the transaction. If you aren’t sure of the best option for you or your eligibility, it’s worth discussing with a commercial financial advisor who will identify a solution for your needs.
You will need to take into account any funding support you will need post-completion.
Negotiate
Even after you’ve identified the right opportunity for your business and raised funding, the process is by no means over. The negotiation stage may take a number of months, with both sides seeking the best possible price and terms.
There will also be a level of due diligence required to ensure you are buying a valuable business correctly and legally. You, therefore, need to be calm through the negotiation and bureaucratic period to ensure you get a good deal and all sides leave the process satisfied.
Consider further acquisitions
Depending on the ultimate growth goals you have, you may choose to pursue further acquisitions to continue to expand the company.
If you decide to do this, you need to consider the existing situation of your business and ensure that the acquisition makes financial sense. It’s also vital that the company you acquire offers something for you strategically – such as increased market share, new IP, products or services or financial benefits.
If you find an appropriate opportunity, the cycle repeats all over again until you fulfil your ambitions.
Conclusion
In your mission to scale your business, external growth plays a valuable role. However, you must ensure an effective strategy that addresses the adjustments and preparations you will need to guarantee that any external moves are successful.
Through this strategy, you should identify the best opportunities for your business and raise funding that allows them to reach fruition.
If you are looking to fund a merger or acquisition for your company, you’ll need finance. We will help you find appropriate solutions to expand your business without unnecessary strain.