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BFS Capital Blog

Should You Build or Buy Your Way to Growing Your Business?

June 4, 2013

Many owners dream of growing their small businesses into larger ones. Getting there involves loads of decisions to make along the way. But one of the most fundamental is how you’re going to grow your small business. One way is to generate growth organically, which includes building your revenue and bottom line by increasing your customer base, reinvesting profits and improving efficiency. The other way to grow is through merging with or acquiring another company. This can quickly increase your customer base and give you entirely new channels that can accelerate the growth of your business.

Business consultants Karl Stark and Bill Stewart say that, based on their work with client companies, they’ve noticed that a distinct pattern emerges in how different size businesses approach growth. Small companies, they say, typically view business building as a “do-it-yourself” organic approach, while large companies tend to turn to acquisition. But the reality, they say, is that companies of any size should be able to successfully do either one. The key is building and basing the growth strategy on the right business case.

As a thought starter, takes a look at some of the advantages and disadvantages of organic and inorganic growth, respectively.

Advantages of Organic Growth vs. Inorganic Growth

When you grow your business yourself, you know the company inside and out and have the satisfaction of seeing your vision come to life. You can control your rate of growth and may even decide to sell the business when it’s reached a certain size.

On the other hand, if you merge with or buy another business, your market share and assets are immediately larger. Your new, expanded business is more valuable, which may make it easier for you to get capital when you need it. You may also benefit from the skills and expertise of added staff members.

Disadvantages of Organic Growth vs. Inorganic Growth

Growing your business on your own can limit your resources, or you might find that you can only grow to a certain point. Competition and other market factors are constant threats to your strategy, and keeping your cash flow going year after year tends to be a never-ending challenge. You also have to keep marketing and selling in order to keep growing.

If you’ve merged or acquired, you’re suddenly big and need to ramp up your capabilities and systems immediately—there’s just a lot more to manage. You could be headed in new directions, which means a steep learning curve, and you may not be able to control the rate at which you’re growing. You’ll definitely have financing debt, and correctly calculating how you’ll service that debt from your new growth is critical to staying solvent.

So, how do you know which growth strategy is best for you?  Stark and Stewart outline the steps involved in one possible approach on

      • Define your “burning platform.”  The authors say that a change in your customer preferences or competition—causing changes in your actual business model—can provide a “burning platform” on which to build a new business.
      • Outline the case for an organic build. This may be the cheapest or most flexible route but may not be the best. You’ll need to ask yourself a number of specific questions having to do with opportunities for the new business model and how you’ll leverage them.
      • Outline the case for an inorganic build. Likewise, while merging or acquiring may be a faster and more valuable way to build your business, you need to explore specific questions here, too, including doing financial and organizational cost-benefit analyses for this approach.
      • Align on an action plan. This means detailing a clear path that addresses things like accountability and decision making.

Again, the authors stress that defining and pursuing the best growth strategy for your business—organic, inorganic or even a hybrid approach—all depends on asking the right questions.

Is your growth strategy organic, inorganic or some combination of both?

Image courtesy of ddpavumba /