It seems pretty simple to many people. Organic growth must be a better strategy than risky, expensive acquisitions. Of course, organic growth is often the best strategy.
Organic growth makes sense when your business is growing or you can stimulate growth at a rate that meets your objectives, when it can be achieved at a reasonable cost with manageable risk and if your timetable permits it. In other situations, it may be wise to consider acquisitions as a vehicle to drive growth.
Sometimes very successful companies become overconfident of their ability to grow organically and, as a result, take on too much risk and miss out on opportunities. For example, some otherwise very successful companies have added branches without acquisitions expecting to grow their business and have run into unexpected roadblocks. The newly opened branches may not be successful and losses incurred in an expansion drive can threaten the prospects of the base business.
Here are some examples of situations in which considering acquisitions makes sense.
Geographical expansion – Geographical expansion can be very risky. In its simplest form, you might identify an area to expand into, rent a facility, acquire equipment and hire a staff in the expectation of being able to attract customers. That process is risky indeed and usually is going to produce start-up losses, even if the new business location is launched successfully. Some businesses may be in a position to absorb start-up losses. Many will not be. In addition, there are many factors, of course, that may affect the success of the new location, but success is rarely assured. A strategic acquisition may allow a company launching a geographic expansion to absorb the acquisition’s customer base and reach a critical mass in the market much more quickly and with less risk of failure.
Reaching critical mass – A business may need to grow to reach a level of critical mass, a level at which overhead is covered and the business can reach or significantly enhance profitability. An acquisition may significantly shorten the time required to reach critical mass, allowing the company to attain profitability and pursue its other objectives.
Enhancing Profitability – Beyond just reaching critical mass, an acquisition may enable a company to enhance profitability. For example integrating overlapping customer routes may produce a higher level of customer density and greatly enhance productivity by reducing drive time. It may also improve purchasing power.
Adding a Service line – An acquisition may be an attractive way to expand the service offerings of the business. For example, a landscape maintenance company might acquire an irrigation business to jump start its entry into irrigation services. Not only might they gain a profitable customer base, but they might be able to add experienced personnel at the same time.
When Organic Growth has Stalled – An acquisition may be an attractive option when organic growth has stalled.
Solving a Problem – Sometimes a strategic acquisition can solve a problem that has developed within a business. One example that comes to mind is a business owner who has no clear successor in place. An acquisition may be able to bring a new leader into the organization that may evolve into a logical successor. There are many other possibilities.
Extraordinary Opportunities – Some acquisition opportunities don’t fit into any of these categories. An opportunity may come along that just can’t pass by. One reason is that it is pretty difficult to find high-quality acquisitions. Most business owners in the green industry are not in a hurry to sell their businesses. When a high quality business becomes available, even when you are not really looking for an acquisition, it may be a good idea to take a look and consider the possibilities.
If you find yourself in any of these situations, it may be wise to at least consider acquisitions as a vehicle for growth. An acquisition may even serve as a “tipping point” that sets the stage for stronger organic growth going forward.