Every executive loves to see growth, it is a primary indicator of success and a sign that strategies, business processes, workflow, and management in an organization are moving in an upward direction overall. Generally, when starting up a business, the goal is to experience, growth and expansion which would eventually catapult each organization’s operation to the next level of success. However, in today’s industry, the traditional or organic strategy for business growth is evolving. Most organizations in an effort to avoid the roller coaster highs and lows of building a new business from the ground up are seeking a different strategy for growth through mergers and acquisitions.
An organization’s growth strategy is of utmost importance, that growth strategy becomes even more vital over the years as organizations hope and plan to be in existence in an industry for any significant number of years. With this in mind, it is prudent for a forward-thinking executive and leader to have a framework or a roadmap that will allow their organization to overcome current and future challenges and capitalize on noteworthy opportunities, resulting in growth and expansion.
Growing a business is sometimes about scaling up and expanding. Sometimes it’s about entering new markets or producing new products. However, in every situation, expansion is about growing the organization’s value. There are many strategies that executives and leaders may choose to implement for growth, mergers and acquisitions is among the fastest-growing growth strategies in the business world today. M&A as it’s called in the business world, has quickly become the latest trend for business growth strategy mainly due to the impending exodus of retiring “Baby Boomers” and a quickly changing economy and marketplace. This article will look at why mergers and acquisitions (M&A) have become a high-growth strategy for many organizations today.
Organic Growth vs. Growth by Mergers and Acquisitions
Organizations use a variety of growth strategies, but they are usually divided into two types: organic and inorganic. While both approaches desire growth, they differ in terms of available resources and the rate of increase. Choosing between organic and inorganic growth is not a one-time event. Instead, it necessitates a continuous assessment of the organization, the industry’s situation, the state of the private capital markets, and the personal objectives of the organization. Continue reading to learn about the two approaches and which will be more advantageous to your organization’s growth process.
Organic growth: A natural continuation
Organic or internal growth entails starting an organization from scratch. It means increasing the organization’s size, profitability, and operations without merging with or purchasing other businesses.
For many organizations pursuing organic development, reliance on internal resources can be perceived as either a positive or a negative. On the one hand, relying only on internal resources means that an organization may expand at a relatively regulated rate and negotiate multiple market cycles and turns. On the other hand, growth dependent on existing internal resources implies that a company would likely see slower, incremental change.
If an executive or leader favors organic growth as a growth strategy, it will take strong management, internal resources, thoughtful planning, and a thorough grasp of the organization to ensure constant and successful sustainable development.
Inorganic Growth: Growth by Mergers and Acquisitions (M&A)
Inorganic or external growth focuses on expanding through mergers and acquisitions, partnerships, joint ventures, and franchising. A well-planned and executed merger or acquisition can provide an organization with rapid access to new markets, clients, and income streams. In addition, because of the combined value of the merged entities, organizations performing under an M&A framework the organization has a more stable financial profile.
Lastly, in growth by mergers and acquisitions, there is access to more experience and diversity of skill sets which becomes a major plus for the organization from a human resource standpoint.
Mergers and Acquisitions is also the perfect strategy for near-retirement business owners who want to maximize their organization’s value before selling it. For example, if an organization owner plans to sell in five years, a well-timed acquisition can boost revenues and market position, resulting in a significantly better value from an investor and an increase in sales, revenue, profits, and market share.
While the benefits of a ‘big leap’ are obvious and evident, there are additional compelling reasons why mergers and acquisitions are a prominent and influential growth strategy in today’s competitive business environment.
The following are some benefits of employing mergers and acquisitions as a growth strategy
1. Quickly enter new markets. Historically, gaining entry into a market has been known to take years (consider the networking, sales pitching….). However, acquiring a company can accomplish this goal relatively easily and quickly.
2. Enter a marketplace with credibility. Piggybacking on the previous benefit, gaining access to a marketplace alone does not equal success, rather gaining credibility in a marketplace yields true results, especially when markets can be oversaturated; true financial gain comes from being recognizable and trusted service or product.
3. Diversify products/services. Expanding the services and products your company offers can lead to sustainability and revenue. In fact, larger companies will diversify as a way to prepare for and protect themselves in the future. This trend is seen very often in the food industry. Take for example Mars acquiring Chappell Brothers years ago or Coca-Cola acquiring Odwalla as Americans became more health-conscious.
4. Acquire the intellectual property. Intellectual property refers to nonphysical assets such as copyrights, patents, and trademarks. Ideas can be turned into money-making services, products, and technology.
5. Acquire top talent. Mergers and acquisitions are a prime way of obtaining strong talent. It is essential that change management practices take place from the top down in order to retain these strong employees, which will, in turn, protect the value of the deal. That being said, when a strategic move is made, many employees understand the benefit of the decision as M&A is part of today’s business landscape.
6. Reduce competition. The assets that come with mergers and acquisitions can help your company operate at lower costs. A direct consequence of operating at lower costs is the ability to lower prices and, therefore, reduce competition.
7. More value for shareholders. M&A activity can generate more value for company stakeholders, and diversification through mergers or acquisitions can also put stakeholders’ worries at ease.
GROWTH is the fundamental purpose of mergers & acquisitions. Therefore, it is only imperative to view M&A as a significant aspect of every organization’s growth plan. It is evident that opting to build your organization through mergers and acquisitions instead of, as in most cases, organic growth offers many advantages for businesses as discussed above. We can confidently conclude that nothing beats mergers and acquisitions for long-term value growth when planned and executed effectively.
However, the success of M&A growth depends on the executive’s ability to maintain a disciplined approach to the undertaking. It would be best to have a thorough grasp of the activities and actions necessary to fulfill the goals of the M&A growth strategy, mainly producing value, both in the short and long term. To achieve the organization’s desired growth and to reap the benefits of mergers and acquisitions, executives and leaders must do a thorough business search, due diligence, and be willing to be patient with the integration process.
HWA Alliance of CPA Firms (HWAA) recognizes that new investments are always an exciting event for an organization, but with new investment comes risk. If your organization is on the verge of merging, acquiring or divesting an organization or asset, to successfully maneuver your objectives it’s imperative to conduct thorough due diligence to guarantee your investment yields the results you want. HWAA takes pride in its due diligence services, which cover all aspects of transaction research to assist you in making the best decisions for your business. Our expertise can help your organization better structure the deal, reduce risks, and highlight opportunities to create value and ensure the organization’s transaction is successful. With us, we ensure to close the deal with a sense of certainty!