Organic growth or acquisitions - which is the way forward?
Birmingham Post Article - August 2011
By Lucas Markou, partner at Solihull-based accountants and business advisors Jerroms LLP
Well-established and ambitious companies will often consider whether it is better to go for growth by buying other businesses or adding more products, services and customers to enhance their existing operations.
The acquisition path can result in a quantum leap forward, but it can be risky. The deal has to be strategic and the target selected carefully.Opportunistic purchases can bring real problems for the buyer and it is always important to understand the reasons for sale.
One deal that can work, especially in fragmented markets, involves buying a competitor, increasing the group's standing in the market and potentially lowering costs through economies of scale.
Other successful deals involve buying a company with an overlapping customer base, offering prospects of building sales through selling a wider range of products to a larger number of established customers.
A review of the management accounts and budgets for the target is essential, as is a cash forecast for the combined businesses.
The financial history of the target company also has to be reviewed, ensuring, for example, that it has paid its taxes and has no potential legal issues such as infringements of the Bribery Act, health and safety legislation or competition law.
Beyond this, one vital area is to establish customer loyalty and supplier relationships going forward. The buyer needs to make sure that any patents are properly registered and that key executives are on board and incentivised to make it all work.
When buying businesses, companies have to be very careful that they do not pay too much and they have the finance. There are also tax considerations involved in buying shares or assets so advice from a professional tax advisor is essential.
So, why take the risks of an acquisition? The answer lies in the instant revenue gain. A strategic acquisition can lead to a rapid transformation in the prospects of the buyer's business. Growing organically is less risky but will take longer, especially in the current economic climate.
Often, innovation is the key to internally generated growth even in mature markets such as mobile phones, where suppliers have been boosted by the advent of smart phones.
Improved productivity through investment can also help businesses to grow their existing client base and sell more to established clients. Generous research and development tax breaks are available in the UK and this makes product and process development even more worthwhile.
Exports can also be an excellent way of boosting organic growth, latterly helped by the weaker pound. Risks can be reduced by working with partners based in the overseas markets themselves. As with so many aspects of business, a balanced strategy is the way forward.
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