Startup vs. Acquisition: Assessing Organic vs. Inorganic Startup and Business Growth Strategies
Entrepreneurs can be both built and born. The same is true for the businesses themselves.
Some are born organically, and some grow inorganically.
There’s no single right or wrong strategy for growth.
When it comes to growing a business, entrepreneurs and executives have two primary options: they can either buy an existing business or build one from scratch. Both strategies come with unique benefits and drawbacks, making it important to carefully assess the pros and cons before deciding which route is best for you and your business.
No matter which option they choose, entrepreneurs will likely face a variety of challenges along the way. With hard work and dedication, however, it is possible to achieve success and build a thriving business either way.
Let’s explore both organic growth (building) and inorganic growth (buying) as viable startup and business growth strategies by outlining their respective pros and cons.
Inorganic vs. Organic Business Growth Explained
Organic vs. inorganic business growth strategies refer to the two primary options entrepreneurs and executives have for growing their businesses. Organic growth entails building a business from scratch, while inorganic growth involves buying an existing business through a merger or acquisition.
Both approaches come with their own advantages and disadvantages, making it important to carefully assess the pros and cons before deciding which strategy is best for you and your company.
Pros of Building a Business from Scratch
There are many positives that can result from building a business from the ground up. Here we outline just a few.
Total Control: When building a business from scratch, the founders are in complete control of their vision and can easily adjust the course of their business to meet changing needs or goals. Additionally, they have ownership over all aspects of the company, including its culture and operations.
No Need to Assume Debt: When starting a business from the ground up, entrepreneurs don’t necessarily need to take on any debt in order to get the business off the ground. This allows them to focus more of their resources on growth and expansion rather than repaying loans.
Deeply Rooted Brand Loyalty: Starting a business from scratch gives the opportunity to create brand loyalty that is deeply embedded into customers. This comes with creating an entirely new product offering or service, as well as marketing it in such a way that resonates with potential customers and clients.
A Sense of Pride: It can be extremely fulfilling and gratifying to one day say you are the CEO of a company that started from a home office or your garage. Many entrepreneurs are driven by more than just the bottom line as well. Some businesses give them a greater sense of purpose and direction, particularly if the business has a mission that aligns with internal values and a mission that is greater than just one person. You can’t typically get the same from an acquired company.
Cons of Building a Business from Scratch
As one who has both built and bought, I can say that there are often more frustrating cons when it comes to building a business from the ground floor. Starting from scratch may offer companies more control over their product offering, but it also requires significant resources in order to get off the ground.
Slow Process: Starting a business from scratch can take a significant amount of time, delaying the opportunity for growth and success. This timeline could be even longer when taking into account the process of product or service development as well as securing customers or clients.
Significant Investment: Building a business from the ground up requires major financial investment in order to get off the ground. This could include investing in the necessary personnel, raw materials, and other resources needed to launch the business successfully. Time is money, and if you’re starting from scratch, there will be plenty of menial tasks the entrepreneur will need to do which probably don’t add much immediate value to revenue or operations.
Difficult Competition: When starting a business from scratch, there is often stiff competition from incumbents that needs to be overcome in order to make it successful. This could include competing against existing, established businesses or convincing customers to switch to a new product or service, particularly if you are entering a red ocean industry. The best startups go after markets where no or little competition exists.
Pros of Buying or Acquiring an Existing Business or Business Assets
Accelerated Growth: Buying an existing business significantly reduces the timeline needed to get up and running compared to building one from scratch. Additionally, it allows entrepreneurs to immediately tap into an existing customer base and start profiting right away. Finally, less time will need to be spent on development and testing, as the existing product or service is already established. There is also lower costs associated with marketing and advertising since there is an existing customer base. In short, buying a business has the advantage of speed.
Established Capital: When buying a business, the entrepreneur doesn’t need to worry about haring up capital in order to get the business off the ground. This means that they can focus their resources on other areas of growth and expansion such as marketing or product development.
Knowledgeable Employees: When buying an existing business, the entrepreneurs gain access to a team of experienced and knowledgeable employees. This allows them to hit the ground running without having to invest in training new hires.
Cons of Acquiring an Existing Business or Business Operations
There are some risks associated with purchasing something that has already been established. It’s not all roses and rainbows.
Costly Transaction: Purchasing an existing business can be incredibly expensive, especially if the entrepreneur is buying an established company with a large customer base and market share. This could require taking out a loan or issuing equity in order to purchase the business. This fact alone might preclude many buyers. Some sponsors or founders resort to private equity or other high-net-worth investors to assist in raising the equity to make the acquisition even possible.
Limited Control: When purchasing an existing business, entrepreneurs give up a certain amount of control over their vision for the company. This includes adjusting operations to meet changing needs or having the final say on personnel decisions.
Resistance to Change: Existing customers and clients may be resistant to any changes the entrepreneur wants to make, as they are accustomed to the way things were before. This could create a difficult situation for new owners who wish to update or improve upon existing products and services.
Increased Risk. Acquiring a business typically includes increased risk. Not only is the transaction costly, but taking on significant business debt could potentially require the need for a personal guarantee on the loan. And, in today’s higher-interest-rate environment, the risk increases exponentially. Additionally, the entrepreneur may assume (especially in the case of a stock acquisition) any legal issues that the business may have. This could include fraudulent contracts or other issues with vendors and suppliers.
A Hybrid Model
In most scenarios business organic and inorganic business growth strategies are not mutually exclusive.
For instance, some startups eventually get large enough to acquire other firms which help them better vertically or horizontally integrate within their niche.
On the other hand, some search funders or fundless sponsors actually take the time to acquire a business and then scale it up by expanding services into ancillary market segments.
That’s actually what we did with Marketer.co. It’s a startup within an already-established business that was acquired five years ago. However, the marketing service focus is slightly different, giving us the ability to target new and different niches than we did before.
Starting a business from scratch or purchasing an existing one both have their advantages and disadvantages. It’s critical for entrepreneurs to carefully weigh the pros and cons of acquisitions vs. the pros and cons of a business startup before making a decision. Building from ground zero allows for more control, but takes significantly more time and resources to get off the ground. Buying a business accelerates the timeline to launch, but can be expensive and requires giving up some control over operations. Understanding the differences between the two options will help entrepreneurs make an informed decision that is right for their situation.
The bottom line is that both building a business from scratch or buying one come with their own risks and rewards. Entrepreneurs will need to take into account the resources, timeline and control they require in order to make a decision that works best for their business.
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