In today’s competitive economic environment, growth is essential to your business’s success. Growth not only keeps your company’s culture aligned for success but is an essential ingredient in the valuation of your business. We outline the various external growth strategies for your business.
The right one can set you on a course for rapid, profitable expansion.
Realizing your business’ growth potential is one of the most challenging and rewarding pursuits you face as an entrepreneur. A properly executed external growth strategy can help you realize maximum growth potential at the right pace, particularly when internal growth opportunities are limited by financing or other constraints.
A merger is defined as a voluntary agreement between two firms (that are rarely equal participants) to amalgamate as a single company rather than being owned and operated as two separate entities. The two participants in a merger are referred to as the ‘target’ and the ‘acquirer.’ As the acquirer in a merger, you attempt to buy a company while as the target you are the subject of a merger attempt. A merger is rational only if you perceive an additional strategic value for your business. There are, however, other hidden costs associated with integration.
There are various types of mergers, each with its own tax and legal consequences:
- Horizontal merger – You merge with a direct competitor; a company that has similar product lines and markets
- Vertical merger – You merge with either with a customer (forward vertical) or a supplier (backward vertical).
- Market-extension merger – you merge with a company that sells the same products in different markets.
- Product-extension merger – You merge with a company selling different but related products in the same market.
- Conglomeration – You merge with a company that shares no common business areas.
Although acquisitions are synonymous with mergers, there are differences between the two. An acquisition can be defined as the process of taking over another company and clearly establishing yourself as the new owner. From a legal viewpoint, the target company ceases to exist as you ‘swallow’ the business, while your stock continues to be traded. Acquisitions can help your company acquire new growth-skills. An acquisition is similar to a merger in the sense that you seek out improved market connectivity, effectiveness as well as bargains of weight. The major difference between the two is that acquisitions usually involve a hostile purchase that does not entail exchanging organizational reserves or allying as an entirely new organization.
In a partnership, you join with one or more organizations to carry on a trade or business, whereby each organization contributes assets (money, property, labor or skill) and expects a certain share in the profits and losses of the newly formed entity. Reasons for engaging in a partnership may include a common business idea that you and your partner(s) wish to test or the realization of synergistic advantages such as increased capital funding, shared responsibilities and improved decision making. The downside to partnerships includes disagreements and conflicts between partners, no special tax treatment and the fact that you have to share your profits.
Licensing is a marketing and brand extension tool that involves leasing a legally protected (that is, trademarked or copyrighted) entity, known as the ‘property’ or ‘intellectual property’ of an organization, for use in conjunction with a product. This process allows you to extend your brand into new stores or completely new categories altogether. It is the easiest way to move your company into new businesses without making a significant investment in processes or facilities. As the ‘licensee,’ you maintain control over the brand image and how it’s portrayed via contracts with the ‘licenser.’ You not only reap the benefits of additional revenues (as royalties) but also gain exposure to new channels, allowing your brand to grow substantially.
For large organizations, although situational factors vary from organization to organization, mergers tend to serve as the best strategy for external growth. Despite costing you more than other growth strategies due to the higher legal fees involved, mergers help your company realize several economies of scale (technical, bulk buying, financial and organizational) to justify the expenses. Furthermore, they help eliminate the threat of international competition, allow greater investment in R&D (leading to better quality products), promote greater efficiency as a result of redundancies, can provide protection if you operate in a declining industry and allow you to diversify your business, paving the way for greater profit potential.