Accelerating Growth: Buy or Build?
Fridays with Vistage is a webinar series on relevant, timely and actionable business topics to help you generate results in your business. On April 10, Colin Cunningham of Axial will present, “Accelerating Growth Through M&A: The Keys to Effective Corporate Development.” You may register for it here.
When it comes to a business’ growth strategy, almost every CEO understands the importance of having a clearly defined “organic” growth strategy and executing it well. Whether it’s hiring more salespeople, developing new product lines, upselling existing customers, or investing more in marketing, these tactics are usually top-of-mind when a CEO or business owner is thinking about growing her business.
Most mature businesses, however, find that their growth rates naturally plateau when investing solely in these traditional growth efforts. At this stage of development, many CEOs recognize the need to look externally to identify new opportunities for growth. A strategy known as “inorganic” growth — a “buy” versus “build” decision that allows them to expand faster by merging with or acquiring other businesses.
The benefits of integrating an M&A or acquisition strategy are well-documented. In a 2013 study by Bain & Company, researchers found that companies who pursued acquisitions most aggressively over a 10-year period created 21% more value for their shareholders than their peers who pursued no acquisitions. Similarly, a Boston Consulting Group study found that highly acquisitive companies — those making acquisitions in at least 5 of 10 years — had average annual growth rates of 29.7% per year versus 17.3% for companies that only grew organically.
Despite the attractiveness of “buying” versus “building,” growing through M&A has long seemed out of reach as a viable growth strategy for most lower middle market businesses. Corporate acquirers have historically and dominantly been Fortune 2000s with healthy amounts of cash on their balance sheets, making it seem impossible for smaller companies to mirror these acquisition strategies.
In recent years, however, there has been a noticeable trend in increasingly smaller businesses pursuing growth through M&A — and many are finding success. On the Axial network, where private companies can discover acquisition opportunities and access capital to finance these transactions, there was an 83% year-over-year increase in the number of $10-100M revenue businesses looking to make an acquisition in 2014. And this growth in smaller corporate acquirers is happening despite stiffer competition for acquisitions: Sutton Place Strategies, an M&A research firm, recently reported that larger companies are increasingly buying smaller and smaller businesses. In 2014, more than 70% of the acquisitions made by the 25 most active corporate buyers were valued at less than $50M.
So what’s enabling more and more CEOs of lower middle market companies to pursue growth through M&A?
Technology. While M&A competition has stiffened and the universe of intermediaries representing sellers has further fragmented, technology has made it easier than ever for private companies to execute an acquisition strategy. A transformation of the private capital markets is democratizing access to both opportunities and capital, lowering the cost of implementing an M&A strategy and empowering every lower middle market CEO to accelerate their business’ growth.
To learn more about the specific trends in the private markets that are enabling smaller businesses to pursue an acquisition strategy, join me Friday, April 10, for a Fridays with Vistage webinar, where we’ll further discuss why it’s become easier than ever for companies to acquire other businesses and how you can begin planning your own M&A strategy.