Business Growth Strategies: Organic Growth and Acquisitions

While 46% of the businesses we surveyed in the last year* reported significant growth, a notable 33% experienced a growth slowdown. So, what’s the key to sustaining growth, especially when aiming for rapid expansion? 

Key elements for fast growth

Businesses targeting high growth generally need to have in place 2 key elements; (i) a well-thought-out strategy and (ii) a strong management team that is aligned to the company's vision and knowledgeable as to market demand.

Businesses can pursue one of 2 growth strategies: (i) organically growing the business through new client wins, product development etc; or (ii) inorganic growth through acquisitions. 

An acquisitive strategy typically delivers faster results, giving an immediate increase in market share or unlocking access to new products or technologies and often new talent. It can enable the acquirer to strengthen its competitive position in a sector, which may improve its profit margins, or it may create cross-selling opportunities, increasing underlying revenue growth. This route requires a healthy balance sheet to support the acquisition cost and the business must consider the financial risks of undertaking a purchase, particularly if additional debt or equity is being raised as part of any transaction. Merging two distinct groups can also bring cultural differences, making communication and integration plans critical for successful execution of an acquisition strategy.

An organic strategy will generally be a slower route but still requires significant investment in time and resources, depending on the details of the growth plan.  This strategy does however allow for more control over the pace and direction of the business and can be more iterative than an acquisition led strategy, allowing plans to be adjusted depending on results. There are generally fewer cultural or people risks with an organic strategy, which can better support employee retention and loyalty in the long term.

At the heart of any business is its management. To drive fast growth, an effective management team needs to understand the market dynamics of the business to develop and then clearly and effectively communicate the growth strategy. The most successful management teams can make informed decisions at speed, manage budgets and financial reporting, and anticipate emerging trends, and adjust plans in the face of unexpected challenges. Those who can take their leadership to the next level will reap the benefits of highly motivated employees and fostering an innovative and creative culture within the company.

Possible challenges

Overly aggressive expansion, whether organic or inorganic, especially if carried out over a short space of time and without thorough due diligence, detailed plans or cultural assessments, can result in growth stalling.  Taking time to properly evaluate a particular growth opportunity is critical to ensure management is aware of potential risks and can put appropriate plans in place to manage these and ensure they do not impede the success of the strategy.

Overestimating market demand can lead to overproduction and financial strain, whilst paying too little attention to customer feedback can see customer service standards to slip as a business grows and ultimately impact future performance. Similarly, growing business may often fail to foresee difficulties scaling up operational aspects of the business alongside higher revenues, which can result in inefficiencies and much higher costs, impacting profit margins.

Any growth strategy will typically place increased demands on cashflow, whether to directly fund an acquisition or growth investment or to service any associated financing. This can ultimately hinder growth if there’s insufficient cash available to support future growth opportunities. Businesses should be particularly mindful of possible increased working capital needs that may flow from successfully delivering on their growth ambitions and ensure they have allowed for this in their plans so that they retain sufficient liquidity for their day to day needs.

Overcoming challenges 

Planning and preparation are crucial to success, which relies on a strong management team. Communication of these plans across the wider business also plays a central role. Working with experienced advisors can be invaluable way for management teams to obtain additional support as they will have worked with other clients on similar transactions and understand the specific challenges to help guide on pitfalls and propose solutions.

External funding can also be instrumental. If structured appropriately, 3rd party funding can help support liquidity to ensure a business has the means to deliver on a growth strategy which it would not have the cash on balance sheet or near term cashflow to fund alone. This may allow a strategy to be executed more quickly whilst the market opportunity remains clear, or for a series of acquisitions to be pursued sequentially. Financing may be arranged from a variety of sources; often SMEs first port of call will be their existing day-to-day bank, however increasingly SMEs are turning to specialist lenders to provide more bespoke solutions, for example:

For businesses with sufficient and sustainable profitability, raising bank debt in the form of a corporate leveraged loan can provide flexibility and deliver funding for multiple acquisitions. 

Private equity backed firms may opt for unitranche loans to finance acquisitions. This facility provides a single secured term loan, simplifying the capital structure.

For asset heavy companies with more volatile cash flows, asset-based lending (ABL) could be the solution. Businesses in sectors like transportation and logistics may have a high proportion of cash tied up in assets. This solution leverages the value of those assets to secure financing. 

In summary, embarking on a high growth strategy is an exciting yet challenging journey for UK businesses. Setting out a clear plan, building a skilled team, securing suitable funding, and detailed preparations are the cornerstones of success. With these in place, business owners can navigate the complexities and succeed with their ambitions.

*Shawbrook SME Research 2024