Growth by Acquisition vs. Organic Growth?

Organic Growth vs. Acquisition: Which Is Better for Your Manufacturing Business?

When you’ve built your manufacturing business from the ground up and have experienced several years of steady revenue, you may start thinking about how to grow it even further and gain additional market share.

That raises an important question:

Should you pursue organic growth, or would an acquisition be the better strategy?

Both approaches can create value, but they work very differently and come with different risks, costs, and timelines.

Organic Growth: Building From Within

As Investopedia explains, organic growth is the expansion a business achieves by increasing output and sales from within the company.

In other words, organic growth is driven by internal efforts, such as:

• Developing new product lines
• Promoting specific products
• Improving customer service
• Expanding sales efforts
• Increasing production capacity

Organic growth is important because it demonstrates that a business is capable of increasing revenue and expanding market share through its own operations.

It can be especially meaningful when growth is funded by reinvesting company earnings rather than relying on outside capital.

However, organic growth also comes with challenges:

• It can take a long time to achieve the desired results.
• It may require additional expertise, labor, and equipment.
• There is no guarantee that it will deliver the desired market share.
• Growth initiatives can take time and attention away from current value-generating activities.

For manufacturers, organic growth can be very effective, but it often requires patience and sustained investment.

Growth Through Mergers and Acquisitions

Inorganic growth refers to growth achieved through a merger or acquisition.

According to Forbes, M&A can offer several advantages when compared with organic growth:

• It can provide a faster way to acquire new skills and knowledge.
• It can immediately increase market share and assets.
• It can provide access to new customers and markets.
• It can create opportunities to expand capacity more quickly.

However, M&A brings its own set of challenges.

The acquired business has to be integrated properly. Culture matters. Employees matter. Branding, quality assurance, customer relationships, and operations all need to be handled carefully.

If the integration is poorly managed, the very value the buyer hoped to acquire can quickly be diminished.

When an Acquisition Can Accelerate Growth

In general, the objective of an M&A should be to strengthen your company’s position within its existing market or help it enter a new one.

McKinsey lists several common types of acquisitions that can be aligned with accelerating growth.

Audience Consolidation or Expansion

If you’ve already established a successful product line, you may be able to accelerate growth by acquiring a business with a similar or complementary customer base.

This can allow your company to:

• Increase production
• Expand into new geographies
• Strengthen product credibility
• Reach new customers
• Enhance the value of existing offerings

Of course, the acquisition still has to be executed well.

If customers are not retained or integration is mishandled, the expected benefits can disappear quickly.

Filling Gaps in Your Product Offering

If there are gaps in your current product or service offering, an acquisition may provide a faster solution than developing those capabilities internally.

In this situation, it is important to determine whether the target company’s intellectual property, products, services, or expertise truly address the gap.

It is equally important to determine whether those capabilities can be successfully integrated into your existing operation.

Acquiring Skilled Talent

If your company needs highly specialized talent, an acquisition can sometimes provide access to skills that are difficult to recruit individually.

This can be especially valuable in manufacturing, where experienced engineers, machinists, programmers, and technical specialists may be difficult to find.

However, it is critical to understand the target company’s workforce and have a thoughtful plan for retaining key employees after the transaction.

An acquisition only solves a talent problem if the talent stays.

Entering an Adjacent Market Faster

If you’re looking to expand into an adjacent market, M&A can provide a faster path than building a new operation from scratch.

The key is understanding the new market thoroughly.

You need to know why the target company succeeds there, what differentiates it, and how its capabilities will complement your existing business.

Without that understanding, entering a new market through acquisition can create more complexity than value.

A Successful Acquisition Requires Disciplined Planning

As Deloitte Insights points out, successful growth through M&A requires a disciplined approach.

You need a clear understanding of:

• Why you are making the acquisition
• What value the target is expected to create
• How the two businesses will be integrated
• Which employees and customers are critical to retain
• What synergies are realistic
• What needs to happen immediately after closing
• How value will be created over the long term

The strongest acquisitions are not made simply because an opportunity becomes available.

They are made because the target fits a clearly defined growth strategy.

And when an acquisition is successful, it can also provide a stronger platform for future organic growth.

Organic Growth and M&A Don’t Have to Be Either-Or

Manufacturers sometimes view organic growth and acquisition as two completely separate paths.

They don’t have to be.

An acquisition can provide new customers, new capabilities, new employees, or access to a new market.

Then organic growth can build on that stronger foundation.

Likewise, a company that has already achieved strong organic growth may be in a much better position to successfully complete and integrate an acquisition.

The right strategy may ultimately involve both.

Get Experienced Help Before Making an Acquisition

If you decide to acquire another manufacturing business to accelerate growth, it is critical to determine whether the target company offers the right strategic fit and whether the transaction can be completed in a way that creates long-term value.

In both of these areas, the support of an experienced M&A advisor can be extremely valuable.

By relying on the expertise of an M&A broker who specializes in your sector, you can better evaluate acquisition opportunities, identify potential risks, and build a stronger foundation for the next stage of growth.