External growth of a business
Contributed by: Berley

External growth

When we talk about business success, more often than not we’re really talking about growth. Growth with respect to business often represents an increase in a business’s output, infrastructure or value.

Growth can also assume in two forms: organic and inorganic. In one of our previous posts, our business growth specialists discussed at length organic growth and the related strategies that aim to increase output and enhance sales through internal resources and processes. For the purposes of this article, we look at business growth in terms of its inorganic aspects, as well as the ways in which inorganic growth can be affected and implemented as a means of building a business and furthering its interests.

What is inorganic growth?

First and foremost, we shall define what inorganic growth is. Inorganic growth, aka external growth, is the process by which growth is achieved through the influence of resources that are classified as being ‘outside’ of the normal operations of a company. This can be achieved in many ways, including through acquiring or merging with another business, entering into partnerships with external parties, or through an influx of funds from an external contributor or sponsor.

Inorganic growth is often considered an attractive business strategy for small- and medium-sized enterprises (SMEs) due to its ability to easily implemented and integrated into a functional business. Furthermore, external growth is also a sound method for increasing profits quickly and can bring about considerable physical growth in circumstances where companies merge horizontally (we will discuss this further in the article). However, it’s also a risky strategy and warrants careful planning.

Advantages of external growth

Perhaps the most significant benefit that external growth is able to facilitate is a decrease in competition within the market. When companies enter into partnerships or build symbiotic relationships through mergers or acquisitions, their share of the market is guaranteed to become bigger (given that they have performed the necessary due diligence).

Further to this, external growth can have the following impact on a functioning business operation:

  • New resources, skills and knowledge: when companies affect external growth strategies, they are essentially boosting their resources, which in turn filters down to an increased pool of skills and knowledge.
  • An increased market share: by acquiring a competitor, or by entering into a partnership that sees resources shared, you can effectively rule them out as a competitor and assume their share of the market.
  • An increased customer base: simply, a bigger share of the market generally translates to a bigger customer base.
  • New segments of an existing market: if the company you acquired operates in a slightly niche position within the market, you are able to transition into this market and gain more of a share.
  • New distribution channels: depending on the structure and setup of the company you acquired, you may have new channels of distribution open to your business.

It’s important to note, however, that while there are a number of advantages to external growth, this is by no means a foolproof way to ensure success. Proper due diligence must be done, and proper planning is always required. Sudden growth must be met with preparation in order to handle the new demands of the business and ensure a smooth transition.

Mergers vs Acquisitions

An acquisition means one business is fully taken over and controlled by another entity. A smaller company is often acquired, and becomes part of the larger business (conglomerate) and ceases to exist. A merger, on the other hand, arises when two separate businesses combine to form a new, joint organisation. This is the result of a deal between businesses who may decide on growing through horizontal or vertical integration.

In horizontal mergers, two companies in the same market merge, decreasing competition as a result. In vertical mergers, the merging companies are in different stages in the supply chain process within the same industry. Both obviously have their advantages, and both are effective mechanisms for ensuring that the ‘new’ business or partnership is able to establish a stronger foothold in the current market.

While this is often conducive to success, it can have its ramifications. Companies entering into agreements need to be totally aligned with respect to their targets and interests – if they’re not, this can have considerable side effects down the track. This is why it’s always advisable to consult a specialist accountant before entering into a contract with a competitor.

How can Berley help small businesses?

Whether you’re considering an acquisition or a merger, formulating an appropriate business strategy and skillfully executing it is the key to the successful external growth of a business. Run your growth plan through our business growth specialists at Berley and we’ll provide extensive insights into how you can find the best strategy for your business. With over 30 years of experience in business growth, we can help you establish a solid foundation and strategy to grow your business this year and in the future.

So call us today on 020 7788 8261 to get started.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.