Pros and cons of each strategy
Entrepreneurs can be both built and born. The same goes for businesses.
Some are born organically, and some develop inorganically.
There is no single right or wrong strategy for growth.
When it comes to growing a business, business man and executives have two main choices: they can buy an existing business or build one from scratch. Both strategies have their own benefits and limitations, it’s important to carefully evaluate the pros and cons before deciding which route is best for you and your business.
Whichever option they choose, entrepreneurs are likely to face many challenges along the way. However, with hard work and dedication, you can achieve success and build a thriving business any way.
Let’s explore both organic growth (building) and inorganic growth (buy) as viable startup and business growth strategies by outlining their respective pros and cons.
Explaining organic and inorganic business growth
Organic and inorganic business growth strategies refer to the two main choices entrepreneurs and executives have to grow their businesses. Organic growth entails building a business from the ground up, while inorganic growth involves buying an existing business through a merger or acquisition.
Both approaches have their own advantages and disadvantages, it is important to carefully evaluate the pros and cons before deciding which strategy is best for you and your company.
Advantages of building a business from scratch
There are many positives that can be the result of building a business from scratch. Here we outline just a few.
Control it all: When building a business from the ground up, founders are in complete control of their vision and can easily adapt the business process to meet changing needs or goals. In addition, they have ownership over all aspects of the company, including its culture and operations.
No Debt Assumption Needed: When starting a business from scratch, entrepreneurs don’t necessarily have to take on any debt to get the business going. This allows them to focus more resources on growth and expansion than on debt repayment.
Deeply Rooted Brand Loyalty: Starting a business from scratch offers the opportunity to create ingrained brand loyalty. This comes with creating an entirely new product or service, as well as marketing it in a way that resonates with customers and prospects.
A sense of pride: It can be incredibly satisfying and gratifying when one day you say you are the CEO of a company that started out in your home office or garage. Many entrepreneurs are not only motivated by profit. Some businesses give them a clearer sense of purpose and direction, especially if the business has a mission that aligns with internal values and a larger mission than just one person. You usually can’t get the same from an acquired company.
Cons of building a business from scratch
As someone who is both a builder and an acquirer, I can say that there are often more annoying downsides to building a business from the ground floor. Starting from scratch can give companies more control over their product offering, but it also requires significant resources to get started.
Slow process: Starting a business from scratch can take a significant amount of time, delaying your chances of growth and success. This timeline can be even longer when it comes to product or service development and customer safety.
Substantial investment: Building a business from scratch requires large financial investments to get started. This can include investing in the necessary personnel, raw materials, and other resources needed to launch a successful business. Time is money, and if you start from scratch, there will be a lot of trivial tasks an entrepreneur will need to perform that may not bring much immediate value to revenue or operations.
Tough competition: When starting a business from scratch, there is often stiff competition from incumbents that need to be overcome in order to achieve success. This could include competing with existing, established businesses or persuading customers to switch to a new product or service, especially if you are entering the red ocean industry. The best startups pursue markets with no or very little competition.
Advantages of buying or acquiring an existing business or business asset
rapid growth: Buying an existing business significantly reduces the time it takes to set up and operate compared to building a business from scratch. In addition, it allows entrepreneurs to instantly tap into the existing customer base and start making profits immediately. Ultimately, less time will be required for development and testing, as the existing product or service is already established. There are also lower costs associated with marketing and advertising because of an existing customer base. In short, buying a business has the advantage of speed.
Establishment capital: When buying a business, the entrepreneur does not need to worry about raising capital to start the business. This means they can focus their resources on other areas of growth and expansion such as marketing or product development.
knowledgeable staff: When purchasing an existing business, entrepreneurs have access to experienced and knowledgeable staff. This allows them to get to work right away without having to invest in training new employees.
Disadvantages of acquiring an existing business or operating business
There is some risk involved in buying something established. It’s not all roses and rainbows.
Expensive transaction: Acquiring an existing business can be extremely expensive, especially if the entrepreneur is buying an established company with a large customer base and market share. This may require taking out a loan or issuing equity to buy the business. This fact alone can deter many buyers. Some sponsors or founders use private equity or other high net worth investors support to increase own capital to make the acquisition even possible.
Limited control: When buying an existing business, entrepreneurs give up certain control over their vision for the company. This includes adapting operations to meet changing needs or having the final say on personnel decisions.
Resistance to change: Existing clients and customers may object to any changes the entrepreneur wants to make, as they are used to the way things were before. This can create a difficult situation for new owners looking to update or improve existing products and services.
Increased risk. Acquiring a business often involves increased risk. Not only is the transaction expensive, but taking on a large business debt may require a personal guarantee for the loan. And, in today higher interest rate environment, the risk increases exponentially. In addition, the entrepreneur can assume (especially in the case of stock buybacks) any legal problems the business may face. This could include fraudulent contracts or other problems with sellers and suppliers.
In most cases, a company’s organic and inorganic business growth strategies are not mutually exclusive.
For instance, some startups end up being big enough to acquire other companies that help them better integrate vertically or horizontally in their niche.
On the other hand, some search or unfunded sponsors actually take the time to acquire a business and then scale it up by expanding services into ancillary market segments.
That’s really what we did with Marketer.co. It’s a startup within an established business that was acquired 5 years ago. However, the focus of marketing services is a little different, giving us the ability to target new and different niches than before.
Starting a business from scratch or buying an existing business both have advantages and disadvantages. It is important for entrepreneurs to consider carefully pros and cons of the acquisition Compare the pros and cons of starting a business before making a decision. Building from scratch allows for more control, but takes significantly more time and resources to get started. Buying a business speeds up the launch, but can be expensive and requires giving up some control over operations. Understanding the difference between the two options will help entrepreneurs make an informed decision that’s right for their situation.
The bottom line is that both building a business from scratch or buying one has its own risks and rewards. Entrepreneurs will need to take into account the resources, time, and control they require to make the best decision for their business.