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Growing a business – what’s the difference between organic and acquisitional growth?

16-05-2022|Anthony Gougeon

By Paul Williamson, Managing Director of Selling My Business

Having built your business from the ground up, brought it to market and successfully commercialised a product or service, the next step will be to guide your business to the next stage of maturity.

Although the growth targets of developing businesses will appear similar at the first sight, such as breaking into a market, establishing a customer base, or retaining market share, the respective paths will differ based on industry, sector, growth needs, and the financial health of the business.

The next stage of business development after securing a reliable supply chain, income stream and financial backing is expansion. For some businesses, this could mean multiplying sales nationally and internationally, whereas some businesses may consider achieving growth by acquiring or merging. We run through the two main types of business growth – organic and acquisitional.

What is organic growth?

Organic growth is natural growth achieved by a business using resources from the company to fulfil the growth potential of the business. This differs from inorganic growth as the business depends on internal operations to grow the business, such as increasing sales and expanding service offerings.

Organic growth is often longer and more labour-intensive than inorganic growth as the business depends on assets and funds born out of the business to support expansion, rather than acquisitions or mergers.

What is inorganic growth?

Inorganic or acquisitional growth is when a business is acquired using external resources to increase market share or enter a new market. Inorganic growth is often faster than organic growth, as rather than depending on internal efforts, such as increasing sales and growing a customer base which takes time and investment, inorganic growth involves purchasing a readymade business to artificially increase growth.

Financing for business growth

Growing a company can be achieved organically, inorganically, or through a combination. Regardless of which route you take; one component will always remain the same – the requirement for sufficient cash flow and working capital to fuel growth.

As such, the options available to businesses may be limited based on access to cash and affordability. Lack of working capital can push company growth and expansion on the back burner, leaving business owners fantasising about the true potential of their business, which is where growth finance can present a solution.

If the business requires a cash injection to expand operations, purchase more stock and increase coverage, business finance can establish a suitable launch pad through which to achieve this. A tailored facility can feed funds into the business in instalments to help achieve growth that is sustainable and long-lived.

This may vary from gearing the business to take on more customers (organic growth) or acquiring a business to inherit market share (inorganic growth).

There are many growth finance solutions available to businesses that can be tailored to different applications, such as:

Working capital –You will need a dedicated income stream to invest in the business, buy more resources and increase capacity. Without consistent income all year round, you will not be able to accept larger jobs, grow your team, and expand the business, which is where working capital can assist.

Working capital comes in many forms, including invoice finance. Invoice finance lets you unlock funds tied up in invoices and pump money back into the business faster.

Asset Finance – If you can increase turnover by introducing new equipment or machinery into the business, asset finance can help facilitate this without having to bite into working capital already earmarked for company overheads. Through asset finance, you can buy new assets and choose a repayment method to suit you, i.e., hire purchase, lease financing or refinancing.

If you need to raise funds to acquire a business, acquisition finance may be suitable or asset-based lending (ABL) which is also a popular option. ABL is when the assets of the business that you wish to acquire are used as collateral for a loan.

A combination of growth finance solutions can help business owners grow market share and bolster performance at unprecedented levels. This works hand in hand with increasing investment appeal, attracting customers and securing long term viability.

Paul Williamson is Managing Director of Selling My Business, an industry renowned business broker outlet, founded in 1956.

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