Organic Growth or Acquisition – How should I grow?

I heard an interview on Radio 4’s Bottomline programme recently when Evan Davis was joined by Luke Johnson, chairman of Risk Capital Partners; Vincent de Rivaz, chief executive of EDF Energy; and Jacqueline de Rojas, UK and Ireland vice president of McAfee.

Business growthOne of the subjects being debated was how best to grow a business. It seemed to me that this question must be a challenge for many businesses wanting to grow and keen to show growth but not understanding how best to go about it.

There are no clear cut rules that help you decide which approach to take, no easy tick box solution – organic growth or acquisition which is best? Here are some pointers….

1. ‘Steady does it’ – Whilst achieving growth organically may take time, it is potentially the most stable way to grow. Building up your own market and client base allows you to keep in control of the pace of growth to ensure your organisation can manage and deliver to your standards.

2. ‘Why reinvent the wheel’ – Jacqueline de Rojas explained that McAfee have made a number of acquisitions purely for the technology. Rather than McAfee developing product they have identified companies who have developed the product they want to integrate into their portfolio and purchased the company. Once purchased McAfee ensure the new company is fully integrated into their business.

This is not uncommon in the IT industry, why invest time money and energy developing product if someone else has already done it?

There is also a strong case for making acquisitions to buy into a market. For example a UK company wanting to expand into Europe. Rather than spending time developing contacts and competing against local companies why not buy a local company. This not only provides an immediate market, it can also overcome some of the political and social constraints you can be encounter when setting up in other countries.

3. ‘It’s not an ego trip’ – It can be seen as very sexy to acquire a company, but don’t be fooled the process is a lot of hard work.

Once you have found the right company to acquire it is vital that you undertake thorough due diligence, which can be time consuming and expensive.

During the negotiation process emotions can run high, particularly if you are looking to buy a small private or a family run business. Lawyers and accountants need to get involved, more time and more money.

After the deal is done and the papers signed, the real hard work starts. Integrating the new business into the existing is essential, there is no point making an acquisition to leave the company operate as before and not properly integrate it.

Luke Johnson’s company, Risk Capital Partners purchased the Borders chain of shops. He explained that when he made this purchase he fully believed that the business model was not flawed it was purely the execution that was not effective. Unfortunately he was wrong and the result was Borders went into Administration. He openly accepted that he let his ego influence his decision to buy the chain, rather than realising the enormous shift in the market for books.

4. ‘Why oh Why’ – Most important of all know why you are buying the company and make sure this is right for your business. Allow others to question what you are doing, listen to them and check you can answer their questions fully.

Luke Johnson, in admitting he let his ego take control, also admitted he did not listen to those around him. Those who he latterly realised were talking commercially rather than emotionally.

5. Investment needed – Acquisitions are costly, not only in the purchase fee and consultants/advisers fees but also in the integration process. Time needs to be given to fully integrate an acquisition and for it to deliver a reasonable return. 

When considering an acquisition it is vital to ensure all these factors are taken into consideration and the investment required is properly calculated and understood.

So do you want to grow? What do you need in order to grow? Is it new products which will take time to develop or expansion abroad, or is it more of the same market and customers. The answers to these questions and more can help you decide ‘How should I grow?’