Organic vs. M&A Growth: Choose Wisely, Your Vision Depends On It!

“Grow or die.”

These three words are frequently used in the entrepreneurial community and produce varied reactions from founders, investors, and leadership teams. For some, “grow or die” means that organizations must generate revenue and profit to survive. For others, these words are symbolic of the overwhelming pressure to grow that is prevalent within entrepreneurial organizations.

For me, “grow or die” signifies something very different. I first came across this phrase while reading Dan Weinfurter’s book Second Stage Entrepreneurship. Dan is a seasoned entrepreneur who has been CEO of multiple organizations on the Inc. 5000 list, including Parson Group, the No. 1 company on the list in 2000.

Back when I first read these words, we were a team of five at AG. Today, we are a diverse group of over one hundred accounting, finance, and technology professionals . . . and “grow or die” remains just as pertinent now as it was then.

Growth is at the heart of everything we do—the growth of our team, our clients, and our ecosystem. Growth is intrinsic to human nature: personally and professionally. It is the lifeblood of an organization, and is not just required to appease investors, expand operations, boost team morale, or enter new markets—it is more than that.

The math is simple: growth creates profits. Profits create an improved ability to withstand challenges. Entrepreneurial organizations face a multitude of challenges, making profitable growth essential to survival.

Death may be inevitable for people, but it is not so for organizations. Many founders dream of creating a long-term sustainable organization that enables their vision to live far beyond their own years. Vision-driven organizations endure longer, and more successfully than their counterparts. A clear vision answers the “why” and informs the “what”, and “how” for an organization while driving outsized performance and longevity. With a sustainable vision, organizations can ensure their longevity, and prevent their own demise.

With the phrase “grow or die,” Weinfurter sets out a clear—but not always obvious—purpose for founders: drive growth first and foremost to create opportunities for your team. Without opportunities, no matter how loyal they are, your best people will leave. Without your best people, you stand no chance at sustainability. Without your best people, your company will ultimately wither away to dust.   

Types of growth: M&A vs. organic

There are two options for growth: organic and inorganic (M&A). As CEO of Accelerated Growth (AG), I’ve had to choose between the two on several occasions. I’ve also helped scores of our clients do the same over the last decade by leveraging our firm’s expertise in accounting, finance, and technology. I’ve personally chosen organic growth at AG, but believe me when I say: the choice is not easy.

In the past year, despite a pandemic creating chaos and severely dampening global economic progress, M&A has been a very enticing mechanism for growth. Global M&A hit a record high of $5.8 trillion in 2021, up 64 percent from 2020. And market experts say they don’t see this momentum slowing down.

Given the continued frothy valuations projected in the months and years to come, many entrepreneurs are, for the first time, considering an M&A deal to grow. M&A can be a formidable weapon in an entrepreneur’s arsenal to scale. If done correctly, M&A can increase shareholder value and create outsized returns. However, not all M&A deals work out as planned.

In business, organic growth is achieved by increasing output and enhancing sales internally. Organic growth requires capitalizing upon existing activities and relentlessly enhancing core business competencies, such as sales, operations, pricing, and marketing.  

Before choosing between organic growth and M&A, founders must consider the pros and cons of both approaches in the context of their organizational vision and mission.

Here is an overview of the benefits and risks of both M&A and organic growth.

The benefits of growing through M&A

1. New opportunities for your team

People are at the heart of every organization. As Weinfurter says, creating opportunities for your team will no doubt create strong business outcomes for your company. Being acquired or merging with a company allows you to be a part of a larger organization and often provides further opportunities for your team’s learning and growth.

2. Mitigating your financial risk

Founders and leaders within entrepreneurial organizations know that as you scale, the financial opportunities for you and your team scale as well. However, financial risk also increases just as proportionally, if not more so.

Whereas your payroll was once $100,000 per month, it’s now $1,000,000 per month. You now spend more on consultants in one year than you made in the first three years of your venture. There are possibly hundreds of people (and their families) that rely on you. In short, the financial pressure can be daunting.

It’s not just the financial risk of day-to-day operations that can be a burden. In the early days, the company may not have had much financial value (after all, it started as just an idea). As you scale, you have revenue, profit, account management, contracts . . . all of which have tangible financial value. While this can be exciting, it also creates a scenario where you have more to lose if the organization fails.

Growth through M&A often allows founders, investors, and key executives to “take some chips off the table” and be able to rest easier with the financial risk they face personally.

3. Enhancing your competitive position 

Generally, combined entities post-M&A have a larger client base than pre-M&A. This provides them with more opportunities to cross-sell products and to grow service lines. In addition, M&A generally creates access to larger sales teams and marketing efforts that have the potential to become more consistent and focused. With a larger customer base, organizations can often weather tough times and handle competition more effectively.

The challenges of growing through M&A

1. Diluting or destroying your vision

For most founders who are thinking about an M&A transaction, selecting a partner with whom there is vision alignment is critical. As a founder, you want a partner who sees your vision, understands it, and will help you achieve it faster and better than you could by yourself. Ultimately, if the founder is not bought into the transaction, their team will not be bought in. If their team is not bought in, the transaction will most certainly not achieve its desired outcomes.

If an M&A transaction lacks vision alignment, founders risk their vision getting diluted—or worse, destroyed.

2. A quick win? Think again.

M&A is both an art and a science. It takes time for an M&A transaction to be successful, and there are often roadblocks along the way.  

This is true both in the entrepreneurial space (at AG, we’ve worked on more than a hundred M&A and capital-raise transactions) and in larger organizations. Remember the mergers between Microsoft and Nokia, Google and Nest, Yahoo and Tumblr, eBay and Skype? At valuations ranging from $2.6 billion to $12.5 billion, these marriages turned sour fast.

The resources and opportunities lost during a failed M&A transaction can never be recovered.

The benefits of growing organically

1. Maintaining control

Growing organically often allows founders and their teams to retain control of their destiny. In a typical M&A transaction, the list of stakeholders to whom a founder and leadership team must report increases substantially. There is often a new set of investors, board members, and leadership team members to consider when making decisions. Whereas pre-M&A, an organization may have had the ability to pivot quickly, post-M&A, they often must follow process and governance protocols to execute on both strategy and tactics. Don’t get me wrong, some of these processes are necessary and, in fact, drive growth, but in some instances, they hinder growth. Organic growth takes place when an organization is in control.

2. Avoiding distractions

M&A can be extremely distracting. From the initial diligence to integration, focusing on earn-out goals, and cultural alignment . . . there is just so much to consider. At AG, we’ve worked with organizations that are not ready for diligence in accounting, finance and technology, and it can be a painful process to catch up. Sometimes it’s easy to forget about your day job. Far too often, we’ve seen the distraction caused by M&A negatively impacting company performance. 

The challenges of growing organically

1. Building leaders

Different leadership traits are required at different stages of growth. In Marshall Goldsmith’s book What Got You Here Won't Get You There, he states that leadership teams must evolve at each stage of growth—or risk being ineffective.

In an M&A transaction, the acquirer or investor often brings onboard leaders with significant experience. In an organic growth strategy, founders must often “build versus buy” their leaders, which can be a time-consuming endeavor. To be clear, both these strategies are difficult to execute, and ultimately strong leadership is the most critical component of any growth strategy.    

2. Increasing your financial risk

As you grow, your financial risk increases: both the risk of day-to-day working capital needs and the risk of not monetizing your investment at the right time. With an M&A growth strategy, founders have the opportunity to monetize and de-risk, which is often a crucial factor missing in organic growth.

For either route: build to sell

The reality is: when it comes to growth, there is no one-size-fits-all trajectory.

In the book Built to Sell, author John Warrillow advises founders to focus on building a sellable business even with an organic growth strategy. Businesses that are intrinsically tied to their owners’ personal involvement are less valuable than those whose founders have been able to elevate out of the business.

At AG, we’ve worked with hundreds of companies to implement the right infrastructure for scale within accounting, finance, and technology. We’ve seen how effectively an organization can grow when that infrastructure is built right, and how painful it can be to scale, when done wrong.

Irrespective of your growth plans, Warrillow says to aim at maximizing market value, building in the qualities that make the business attractive enough to be sold any time—even if there is no predetermined intention of cashing out or stepping back.

Though there is no one-size-fits-all trajectory for growth, what we do know for sure is this: grow or die.
 

Contact us today to learn more about how we can help you create the right accounting, finance and technology infrastructure to scale both organically or through M&A.