Many business owners dream of building their small businesses. Getting there means tons of decisions to make along the way. But one of the most profound is how you’re going to build your small business.
One way is to expand organically, which involves building your revenue by increasing your client/customer base, and reinvesting profits. Organic expansion includes actions your small business should take internally to move your business to the next level.
These “actions” may include strengthening the skills of your team, marketing new services and/or products, and continuously training your salespeople to help them close more deals.
Another way to expand is through merging with or acquiring another business, this is often referred to as inorganic expansion. This can immediately increase your client base and give you new channels that can accelerate the expansion of your business.
Small companies often view business building as a “do-it-yourself” organic approach, while large companies tend to turn to acquisition. But the reality is that businesses of any size should be able to successfully do either one. The key is building and basing the expansion strategy on the right business case.
When you grow your organization yourself (organic expansion), you know the business inside and out and have the satisfaction of seeing your vision come to life. You can control your rate of growth and may even decide to sell the business when it’s reached a certain size.
On the other hand, if you buy another business (inorganic expansion), your assets and market share are immediately expanded. Your expanded business is more valuable, which will make it easier for you to get working capital when you need it. You could also benefit from the skills and expertise of added staff members.
Should you elect organic expansion, expanding your business on your own could limit your resources, or you may find that you can only expand to a certain point. Competition and other factors are threats to your strategy, and keeping your business’ cash flow going year after year tends to be a continuous challenge. You also must keep marketing and selling in order to keep expanding in an organic fashion.
However, if you’ve acquired or merged to obtain inorganic expansion, you’re suddenly larger and must ramp up your capabilities and systems immediately—there’s a ton more to deal with. You could be headed in a new direction, this means a steep learning curve, and you might not be able to control the rate at which you’re expanding. You’ll absolutely have financing debt, and accurately calculating how you’ll service that debt from your new expansion is critical to staying solvent in inorganic expansion situations.
How do you know which expansion strategy is best for your business? Because both organic expansion and inorganic expansioin have advantages and disadvantages.
We can’t stress enough that defining and pursuing the best expansion strategy for your business—organic, inorganic or even a hybrid approach—all depends on your analysis.
What are the right questions to ask? Here are a few that should be asked (and answered) when deciding whether you’re going to pursue organic expansion, or if inorganic expansion offers advantages based on your company’s situation and needs.
Answer these questions and your decision should be much easier. You’ll at least be more informed.