The Decision to Grow Organically or Through Acquisition
The management of almost every company will at some point be faced with deciding whether to either grow the business through an external acquisition or to grow the business internally. Management may go through the analysis as part of the development of the strategic plan or as the result of an acquisition opportunity that unexpectedly presented itself. There are many factors that will play into the ultimate decision. So many in fact that books have been written on how to make acquisitions and the buy versus build decision. Many of the influencing factors are subjective in nature. For example could your existing management team effectively handle expansion into a new geographic market. One of the more objective factors impacting the decision is which method provides you with the highest estimated return on your investment. However, determining the return on investment (ROI) for both growth strategies will require a good deal of analysis on the part of management.
Determining the expected ROI on the internal growth strategy will involve management considering a number of factors. Some of the more objective considerations are:
If the company is expanding geographically what are the cost of:
Finding, securing and acquiring the additional facilities
Recruiting, training and/or relocating staff to the new location
Operating the additional location.
Cost of additional equipment to manufacture the additional products or provide the services.
If the growth is the result of expansion into a new geographic area; management needs to consider the consider cost of introducing itself into the new market.
If the growth is going to be the result of the introduction of a new product or service what is the cost of introducing the new product or service.
Additional personnel costs.
Cost of any financing.
There are also a number of considerations that are much more difficult to put a dollar value on. For example:
Is the expansion geographically or the introduction of a new product or service time sensitive?
How effective will the company be in introducing itself in a new market or the new products/services?
When will the company sees the first sales?
How quickly can the sales be ramped up?
Will the current operations suffer because management is distracted in opening a new geographic market?
Determining the ROI for an acquisition has its own set of factors that must be considered. Since the company is buying an ongoing business some of the key considerations of the internal growth analysis are not relevant. For example, management will most likely not have to consider the cost of:
Adding an additional facility,
Additional personnel costs, or
Cost of entering a new market or introducing new products/services.
In fact management should look to see if there are potential synergies to be realized which would benefit both companies’ operations. Are there duplicate facilities that can be eliminated? Are there similar processes that can be combined and a cost saving realized? Another point to consider is does the acquisition eliminate a competitor from the market? If it does eliminate a competitor is there any positive impact on your current profit margin?
There are two large benefits that a company has by expanding through an acquisition when it is entering a new market or introducing a new product/service. The first is that because you are buying an ongoing business you have immediate sales. So there is no ongoing investment as the company ramps up its revenue stream. Second, you are acquiring a management team and personnel that have worked together successfully. This is a big benefit in that building such a team from scratch can take time and be expensive.
A potential significant cost associated with the acquisition strategy is the expense of the integration of the acquired business into your existing operations. This expense comes in the form of actual dollars expended (ei: IT systems integration) or the negative impact the integration might have on the operations of the companies.
The above list of factors to be considered is not all inclusive for either strategy. Each business will have its unique set of cost factors that need to be considered in estimating the ROI for each growth strategy. While having the best estimated ROI is important; ultimately the decision may come down to the intangibles such as the uncertainty of being able to effectively integrate the target company into your existing business.
