With the numbers of startups and SMEs increasing all the time, many are wondering if it is better to have M&A investment or attempt to get the same results with organic growth. There are clearly benefits to both, but ultimately which is going to be best for your company?
With M&A investment from a larger company, growth can often be quicker and safer. Although many startups are agile and have the ability to innovate and implement quickly, they often lack the most powerful tool for companies - capital.
After an M&A investment, there is capital to be spent and growth can be faster, better people can be brought in and salaries can be increased for the most influential in the organisation. With a vested interest in the success of the company there will be advice available from those in the ‘senior’ company who have been through similar processes before to help maximise ROI from this capital.
It also means that there will be access to the ‘senior’ company’s processes and internal systems. This can be an important cog in growth as it allows software or expertise that would be out the budget of many smaller companies. As the ‘senior’ company in this case have a monetary interest in the success of the company, the chances are that new systems that may not have been at either company can be bought with the new funds available.
The management of an M&A deal can often be complex and require skills from both sides that many will never have needed to think of before. For instance, even at the basic branding level it can become complicated with smaller companies wanting to maintain a degree of independence but the larger company wanting to have their involvement known.
In the current startup climate, many have begun work at a startup because of the flexibility and the culture that generally exists there. As soon as a company is bought or merged with another, the culture will change. This could lead to situations where despite monetary benefits, the most important and passionate employees will leave to seek out the startup culture elsewhere.
Growth is expected to be rapid, meaning that management of an increasing number of new recruits, production costs and suppliers can often take it’s tale and lead to mistakes. A previously seamless and well oiled machine can quickly grind to a halt when it goes beyond a certain size. This pressure for growth can often lead to other problems, such as senior managers needing to work in stricter conditions, where they used to experiment, with decisions now under a microscope there is often a tendency to take the safe route.
With organic growth, the people who had the initial idea for the company are likely to maintain the vision that has seen them get to this point. It means that company culture can stay the same and people understand the way that the company works. Senior and influential employees who have helped to create this culture are more likely to stay and help to promote it further as growth increases.
The growth will not be as fast as M&A backed growth. This allows management to target specific areas of growth to make it more sustainable, creating areas of the business that need to have the most attention to achieve future growth rates.
M&A backed companies may get a larger capital to grow the business quicker, the ultimate goal of this is for those who have invested to make profit. This is not the case with organic growth. Once the growth has reaped the rewards of increased profits, this can be ploughed back into the company, without a cut being taken out by those who have made an investment. This means that as the company becomes more successful, the success breeds more success and growth, creating a spiral of profitability.
With M&A investment another company has an interest in yours, so will do everything it can to stop it falling into financial trouble. This is not the case with organic growth. Although it may ultimately end up with more profitability for those who worked to create the company, if a big decision fails and puts the company in trouble, there is nobody to pick up the pieces. With M&A it could be argued that there is a safety net, whilst organic growth means you are there on your own.
Speed of growth is not as quick. This is because there is not an initial capital injection or access to new expertise or services that help to fuel growth. M&A organisations may put pressure on companies to perform to a certain level, but this comes with significant investment to help achieve their expectations.
Both options will appeal to different companies and different industries. Service based industries for instance, will not necessarily require as much capital investment as retail or manufacturing simply by their nature. It means that payment (or at least part of it) for the service often comes in before the task is undertaken, whilst with those producing physical products, this is not an option, so investment is needed initially to produce the products that will eventually be sold.
There is no clear cut better option as both hold significant benefits and flaws. If you want to grow a business quickly then M&A is the best way to do so but if you want to be patient then the payoffs from organic growth can be significantly larger.