Organic vs. Inorganic Growth: Which is better?

There could be many reasons to choose growth or your business. Perhaps it’s to build a legacy. Perhaps it’s to establish family security. Maybe it’s simply to see how far a business can go. For most owners though, it’s to grow to a point where a sale of the business is the next progressive step. Because we’re entrepreneurs, and the joy of creation, and then sending that creation into the stratosphere as a prospering entity without us, is an event that’s always been the ultimate personal achievement to us.

So, let’s talk growing a business toward an eventual sell-side M&A event. But first, to unpack the notion of growth in detail, we need to consider its two constructs – organic and inorganic.

Organic vs Inorganic Growth

Organic growth and inorganic growth are two different ways that businesses can expand. Organic growth is when a business expands by developing new products or services, opening new locations, or increasing its customer base. Inorganic growth is when a business expands through acquisitions, mergers, or partnerships.

There are pros and cons to both organic and inorganic growth. Organic growth can be slower and less expensive, but it can also be more sustainable in the long term. Inorganic growth can be faster, but it can also be more expensive and riskier.

Let’s delve a little deeper into the machinations of these growth structures, some pros and cons to each, and which would be better for your business’s future.

What is organic growth?

Organic growth is when a company expands by developing new products or services, opening new locations, or increasing its customer base. This type of growth can be slower and less expensive than inorganic growth, but like we mentioned, it can also be more sustainable in the long term.

There are several advantages to organic growth:

• It allows you to control your own destiny. When you grow organically, you’re in charge of your own success. You’re not reliant on anyone else, and you’re not as exposed to new risks.
• It can be more profitable. Because you’re not spending money on acquisitions or partnerships, more of your profits stay within the company.
• It builds brand equity. When customers see that you’re expanding without resorting to acquisitions, they perceive you as being stronger and more successful. This can lead to more customers and more profits.

There are also some disadvantages to organic growth:

• It can be slower. Developing new products or services takes time, and it can take even longer to get them off the ground.
• It can be expensive. Investing in research and development, opening new locations, and increasing marketing efforts can all be costly.
• There’s no guarantee of success. Even if you have a great product or service, it doesn’t necessarily mean that customers will flock to you. You still have to work hard to attract and retain customers.

What is inorganic growth?

Inorganic growth is when a company expands through acquisitions, mergers, or partnerships. This type of growth can be faster, but it can also be more expensive and riskier than organic growth.

There are several advantages to inorganic growth:

• It’s often faster. When you grow organically, you’re moving forward a little at a time. What’s more, when you grow inorganically, you’re building on someone else’s success. This can help you to expand quickly and gain market share.
• It can give you access to new markets or products. If you partner with another company, you can quickly enter into new markets or start selling new products.
• Additional leadership – acquiring another company can give you access to additional management resources.

There are also some disadvantages to inorganic growth:

• It can be riskier. When you acquire another company, there’s always the risk that it won’t work out as planned. You may end up overpaying, or the culture clash may cause problems.
• It can be more expensive. Acquiring another company or entering into a partnership can often be more costly as you are buying future cash flows and often paying a premium for these.
• More debt – because of quick growth, additional debt may be accumulated, which increases risk, substantially.

Which growth strategy is right for your business?

The best growth strategy for your business depends on your individual circumstances. If you have the time and resources to invest in organic growth, it may be the better option. If you need to grow quickly and are willing to take on more risk, inorganic growth may be the better choice.

Still not sure which growth strategy will match your business best? Destined can help. Here at Destined, our passion is working with businesses as they transform into industry superstars – and we strive to get you to that point. Because your journey is our journey – and you’re Destined.