Inorganic Growth: Definition, How It Arises, Methods, and Example

A merger is when two companies combine, which forms a new firm, while an acquisition is when one company purchases another company outright. In addition to standard mergers and acquisitions, there are other types of M&As, including consolidations, tender offers, acquisition of assets and management acquisitions, to name a few. Whether a company pursues organic growth or inorganic growth is a matter of choice. Companies must choose growth strategies that reflect prevailing environmental conditions, match the firm’s strengths and managers’ beliefs and attitudes and minimise the firm’s weaknesses. That’s why foreplanning of business growth is inevitable in any business.

This allows them to enter into markets that would be impractical or difficult to enter alone and creates a lot of potential. Every company loves to see growth – it’s a signifier of potential success and that things are “working” within the organization. Any type of M&A transaction – e.g. add-on acquisitions and takeovers – are risky endeavors that require substantial diligence into all the factors that can impact the performance of the combined entity.

Measuring Organic Growth

Like virtually every other type of business dealing, there are multiple flavors of M&As, and rarely are two cases exactly alike. Understand that “mergers” and “acquisitions” have different meanings, but these two terms are grouped together as an umbrella for any number of business transactions. Scale Finance LLC () provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. When deciding between organic or inorganic growth strategies, the most important factors are timing and goals. By consulting with senior management teams, board of advisors, and trusted peers, business owners can determine when and how to pursue either strategy.

M&A is also disruptive to the core operations of all the companies involved, particularly in the early phases of integration right after the transaction has closed. Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain. These are just a few examples of companies that have grown through inorganic means. M&A activity has seen drastic improvements since 2011, which only had 24 deals. There were 110 transactions with a combined $10 billion value in 2012, 173 with nearly a $6 billion value in 2013, and 196 with a $6.8 billion value in 2014.

Organic vs Inorganic Growth

Or, a company that is want for engineering talent might complete an “acqui-hire” and buy a competitor for its deep engineering talent. The inorganic strategy allows business owners to “buy” their desired solution, rather than “build” it in-house. Add inorganic growth to one of your lists below, or create a new one. “Business is a race and growth is the fuel point” should be the new integrated metaphor of every organization.

The company could develop and launch a line of iced tea products, but this could take time and involve a great deal of expense. That’s why companies will turn to acquisitions—inorganic growth—to maintain their competitive edge and keep shareholders happy. However, inorganic growth strategies can also be risky and costly and may require significant financial investments and careful due diligence to identify suitable partners and integration challenges. Therefore, companies must weigh the potential benefits and risks of inorganic growth before pursuing such strategies. The organic growth concept is a solid growth strategy for many businesses. This approach depends on internally-generated growth, rather than through acquisitions, and is a particularly viable option for a business that does not have sufficient cash to acquire other entities.

Lessons on managing a fast growing business

Inorganic growth is considered a faster way for a company to grow compared to organic growth. Inorganic growth is a result of a company using mergers and acquisitions (M&A) and/or takeovers to increase revenue. An M&A is when two companies consolidate using various forms of financial transactions.

However, this type of growth tends to be rather slow, especially when compared to the massive sales gains that can be achieved through an acquisition strategy. Also, organic growth could be in a sales segment that does not generate much cash flow, whereas an acquisition could generate sales in a more profitable segment of the market. The general consensus is that inorganic growth is a faster way for a company to grow than organic growth. All of these are totally valid, if not entirely typical, solutions for any company to grow, create wealth and add market share. Organic growth is pretty much just like it sounds — growth generated from within. This means increased output and more sales, both of which boost revenue, with the company relying on its own resources to achieve this growth.

Is M&A Inorganic Growth?

These deals have been driven primarily by a stronger state economy and low interest rates. The outcome of any plan is dependent on the execution of the strategy, meaning that poor integration can lead to value destruction instead of value creation. Take your learning and productivity to the next level with our Premium Templates. Copyright © 2008–2023 Scale Finance, LLCSecurities and offering services through Charles Towne Securities, LLC. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

In the worst-case scenario, attempting to pursue inorganic growth can actually cause a decline in growth and erode a company’s profit margins considering how costly M&A can be. Inorganic Growth is achieved by pursuing activities related to mergers and acquisitions (M&A) instead of implementing improvements to existing operations. Offering new products or services and moving into a different market, i.e., diversifying, are also examples. On the other hand, non-equity alliances are created through contracts. Examples of non-equity alliances are franchising and licensing agreements, in which one company provides products, services, or intellectual property to another company in exchange for a fee. Conversely, an acquisition is a financial transaction in which the acquiring company (bidder) purchases a controlling stake in a target company.

Since finances support all company actions and is a key for all future growth, not having systems in place that can sustain the new growth is a huge (and unfortunately common) mistake. Funding a merger or acquisition usually means a sizable upfront cost. If your company doesn’t have cash on hand, you’ll likely have to rely on taking on debt, which can make the merger or acquisition less attractive to investors. If the integration doesn’t go well, this could also mean a lot of debt that you’re suddenly unable to pay off. M&A activity is like dominoes—once companies in an industry begin merging, it puts the heat on all the other companies to grow more quickly than is organically possible, or they may be left behind. Competitor’s influx of resources and business may allow them to lower prices or employ other tactics to steal market share, making it more difficult for smaller companies in the industry to grow.

In short, balanced growth involves using organic growth to build the company as well as inorganic growth in acquiring other companies to help boost growth. Acquisitions can lead to faster sales growth and quicker cashflow, but may be unpredictable. Organic growth is advantageous because it is familiar and inherent to the company, although sales may not be as robust. Acquisitions can be accretive to earnings, but the implementation of the technology or knowledge acquired can take time.

• Firms must also consider whether the growth will take place within the home country or foreign country.
• That’s why companies will turn to acquisitions—inorganic growth—to maintain their competitive edge and keep shareholders happy.
• That being said, larger and more profitable organizations may pursue all options at once, since they have the financial resources to do so.
• Without mergers or acquisitions, entrepreneurs have more control over the direction the business is headed.

For instance, acquiring a company located in a different country could expand the global reach of a company and its ability to sell products/services to a broader market of customers. Growth in organic sales is often described in terms of comparable sales or same-store-sales when referring to retail outlets. In other words, these sales occur naturally and not through the acquisition of another company or the opening of new stores. Some analysts consider organic sales to be a better indicator of company performance.

Utah & Becoming an Acquisition Target

The company may use all its resources and time to grow, while another firm may opt for an inorganic growth strategy. Unlike M&A transactions, strategic alliances do not involve a complete exchange of ownership between the participating companies. Instead, companies combine their assets and resources for a certain period of time to achieve predetermined goals while remaining independent.

Gradual and solid expansion usually means that the company’s is building fundamental business strengths. In other words, when it is building inorganic growth meaning new markets and developing new products. Organic growth means that companies are using their resources efficiently to generate profit.

On the contrary, inorganic growth is the acquired growth hailed from mergers and acquisitions (M&A) or the takeover of another company. Merging and acquiring other companies to foster business has been in place for ages as it immunes a company with a quick booster shot. The process includes expanding your wings—opening new outlets or branches or merging with other companies and joint ventures. By doing so, you are gaining access to their existing market shares and assets, and thereby, the overall capital increases.

• Acquisitions can lead to faster sales growth and quicker cashflow, but may be unpredictable.
• Besides hiring additional team members, improving infrastructure and customer experience also echo your organic output.
• If your competitors are growing quickly or if your industry has high M&A activity, then growing too slowly can mean you’ll be quickly overtaken by competitors.
• This is a defensible view, but investors should still take time to understand the risks and potential rewards of each approach and pay attention to broader trends on the company’s balance sheet.

The dependency on internal resources can be viewed as either a benefit or drawback for many companies seeking organic growth. On one hand, using only internal resources means a company is growing at a very controlled pace and can quickly navigate through different market cycles and turns. On the other hand, growth contingent on available internal resources means that a business is likely to have slower, incremental growth. Mergers and acquisitions are the most commonly used method of inorganic growth. When two companies combine, or when one takes over another, that is considered an M&A and a legitimate strategy for inorganic growth. Another strong benefit of inorganic growth is the ability to bring new products and/or services to the market quickly.

Companies can also pursue other inorganic growth strategies, such as buying out a competitor, acquiring new technology, or licensing intellectual property. A company’s specific strategy depends on its goals, resources, market conditions, and competitive landscape. One of the key benefits of this strategy is its ability to deliver very substantial changes to a business in a very short amount of time.

In the end, mergers or acquisitions rely on the buy-in of both parties for a successful implementation. If cultures are too different or operations don’t adapt to manage the influx of employees, resources, or sales, then the merger or acquisition will likely become unsuccessful. Since there’s no infusion of market, product, assets, or resources, a company growing organically must do so at a sustainable pace. This means growth can’t overshoot the personnel, support, and resources available.