There is no question that inorganic growth can be an effective strategy to rapidly grow a company. When executed correctly, it can help catapult your company to new heights.
With that said, there are multiple inorganic options, each having their own benefits and drawbacks. Before taking action, it’s important to understand the different types of M&A strategies available, so you can choose the one that best suits your goals and risk tolerance.
In this blog post, we’ll unpack 10 types of M&A strategies that you can use to supercharge your business.
Why Focus on Inorganic Growth?
There are a number of reasons why inorganic growth should be a key focus for businesses that want to scale quickly:
- It allows you to enter new markets quickly and removes the need to build up infrastructure or a customer base from scratch. This can be especially beneficial if you’re looking to expand or extend the geographic reach of your existing products and services.
- Gives you access to new technology, products, intellectual property and talent. This can help you shortcut the innovation and R&D process and get to market faster.
- Can be very lucrative: inorganic growth can provide a significant boost to your revenue, profit, and overall enterprise valuation.
Here’s the punchline: there is no faster way to grow than by buying adjacency businesses that support your core business. If you currently have revenues of $5M per year and acquire a competitor with $5M in revenue, you can effectively double the size of your business overnight.Â
Now that we’ve covered some of the reasons why inorganic growth can be beneficial, let’s take a look at seven different types of M&A strategies to consider.
10 Types of Inorganic Growth
Here are the 10 types of M&A opportunities we’ll walk through:
- Buy & Build
- Buy & Bump
- Divestiture
- Joint Ventures
- Recapitalization
- Fix & Flip
- Carve Outs
- Bolt Ons
- Talent Infusion
- Asset Purchase
1. Buy & Build
The buy-and-build strategy involves acquiring companies in the same or similar industry and then integrating them into your business. This can be done through a series of smaller acquisitions (tuck-ins) or by purchasing a larger company that can serve as a platform for future growth.
If you already have a platform company, you can purchase multiple tuck-ins related to it. These tuck-in acquisitions can help you quickly fill any gaps in your product line, enter new markets, or add new capabilities.
The goal of this strategy is to create synergies between the different businesses, which can lead to cost savings, operational efficiencies, and an expanded product offering.
One of the benefits of this approach is that it can be less risky than starting from scratch while giving you the ability to rapidly increase top line sales and EBITDA.
The buy-and-build strategy can be very beneficial for businesses that want to quickly expand their reach and market share. This is because you’re able to piggyback off of the existing infrastructure, customer base, and market share of the companies you acquire.
Another benefit is that it can be less expensive than other growth strategies, since you’re not investing in new product development or market entry.
However, there are also some drawbacks to this strategy. One is that it can be difficult to find companies that are a good fit and complement your business. Another is that it can be challenging to integrate the different companies and cultures, which can lead to internal conflict.
Last but not least, this strategy can be very time-consuming, since it requires a lot of due diligence and negotiation.
2. Buy & Bump
The buy-and-bump strategy involves purchasing a company, improving performance quickly, and looking to sell at a higher enterprise value. This is often done by implementing operational improvements (i.e. streamlining processes, cutting costs, and increasing efficiency).
The goal is to create value by improving the performance of the company you acquire, and then selling it within a few years. With buy-and-bump, you’d be targeting a fairly shorter time horizon and not pursuing additional acquisitions.
You’ll notice this strategy is often used by private equity firms and venture capitalists, as its an attractive option for investors looking for a high return on investment.
While it has a lot of upside, this can be a high-risk strategy, as you are relying on being able to quickly turn around the company you acquire.
Market conditions can change rapidly, and if you’re unable to improve the company’s performance, you may end up selling at a loss.
You also need to be aware of the potential for moral hazard, as the management team of the target company may take excessive risks knowing that they will not be around to see the consequences.
3. Divestiture
The divestiture strategy involves selling off non-core assets in order to focus on your core business. This type of M&A activity is often used by businesses that are looking to streamline their operations and/or raise cash.
The goal of this strategy is to rid your business of underperforming assets and use the proceeds to invest in more profitable ventures. This can be a great way to improve cash flow and refocus your business on its core competencies. According to Bain & Company, “corporations that take a disciplined approach to divestiture not only sharpen their strategic focus on their core but also create nearly twice as much value for shareholders.”
4. Joint Ventures
A joint venture is a type of M&A activity in which two or more companies come together to form a new entity. This can be done for a variety of reasons, such as to share risk, access new markets, or develop new products.
Joint ventures can be a great way to pursue growth without incurring all of the costs and risks associated with starting a new business or pursuing a pure acquisition. Ideally, you each bring complementary attributes to the table to create a win-win scenario.
However, it’s important to carefully consider whether a joint venture is the right move for your business. This is because you’ll be giving up some control over the direction of the new venture.
You’ll also need to find a partner that you can trust, and who shares your vision for the joint venture.
If not managed properly, joint ventures can often lead to conflict between the partners. So it’s important to have a clear understanding of everyone’s roles and responsibilities from the outset.
Here is a quick video (under 4 min) from Jay Abraham to stimulate some ideas around what’s possible with joint ventures:
5. Recapitalization
The recapitalization strategy involves bringing in new investors to provide capital for growth. This can be done through a variety of means, such as issuing new shares, selling debt, or raising private equity.
The goal of this strategy is to raise capital without having to sell a controlling stake in your business. This can be a great way to finance growth without giving up control of your company.
However, it’s important to note that recapitalizations can be complex and risky. So before pursuing this strategy, make sure you consult with a financial advisor to ensure that it’s the right move for your business.
6. Fix & Flip
The fix and flip strategy involves purchasing a distressed company, turnaround, or liquidation. The distressed company is then rapidly reorganized and sold. This strategy generally relies on the company’s ability to be quickly and inexpensively repaired so that it can be sold at a significant profit.
The key to success is to be able to identify these companies and then execute the turnaround quickly and efficiently. This can be a challenge, as many times the company’s existing team is resistant to change.
In order to be successful with this strategy, it is important to have a good understanding of the business and the market. It is also important to have a good team in place to execute the turnaround.
This strategy can be very profitable, but it is also high risk. If the turnaround is not executed properly, the company can quickly become worse off and may even go out of business.
7. Carve Outs
Carve outs involve acquiring underperforming business units from larger company. The goal is to improve performance by making the necessary changes to the business unit. This can be done through a variety of means, such as changing management, selling assets, or closing locations.
Often times, you can find diamonds in the rough with carve outs. Although they might be losing money right now, it’s possible they could be profitable after being separated from the larger company or private equity firm (often they’ll be forced to absorb overhead allocations that skew their profitability).
You might also be able to find a company at the end of a private equity lifecycle (typically 7 years), with the PE group willing to offload the assets at a fire sale price.
In the right situation, this strategy can be a great way to quickly turnaround a struggling business. On the flip side, it’s important to go in eyes wide open and remember that carve outs can be complex and risky.
8. Bolt On
A bolt-on acquisition is an acquisition of a company that is complementary to your original business. The main purpose of a bolt-on is to extend your product or service offering into a new market or to fill a gap in the current offering. It could involve anything from strengthening your team to adding new competencies, technology, or product offerings.
One of the key benefits of bolt on acquisitions is that they can help you quickly scale your business. By acquiring smaller businesses, you can gain access to new customer segments, new product lines, and new geographies. This can help you diversify your revenue streams and reduce your dependence on any one particular market or customer group.
Another benefit of the bolt-on strategy is that it can help you build a competitive advantage. By consolidating your industry, you can eliminate competition and become the dominant player in your space. This can give you a significant advantage when it comes to pricing power, negotiating with suppliers, and winning new business.
Bolt-on acquisitions are typically smaller than other types of acquisitions, such as a merger or an acquisition of a major competitor. The advantage of a bolt-on over other types of acquisitions is that they are typically less risky and easier to integrate because they are complementary to the acquirer’s existing business.
Bolt-on acquisitions can also be a good way for a company to grow without having to make a major investment or take on a lot of debt.
As with the other strategies, it is important to ensure that you have the right team in place to execute bolt-ons effectively.
The right team will have experience in identifying and acquiring small businesses, as well as integrating them into your existing operations. They will also be able to help you navigate the challenges that come with rapid growth, such as managing cash flow and scaling your infrastructure.
9. Talent Infusion
A talent infusion involves acquiring a business and bringing your own team in to drive growth and increase enterprise value.
This can be done by acquiring a competitor or a business in a complementary field. The goal of a talent infusion is to bring in superior talent and new perspectives to help drive change and improve performance quickly.
With this strategy, its critical to have a management team ready to plug in and run the business. If the acquired business did not have professionalized management in place, you can bring in the necessary expertise (i.e. CFO, COO, Head of HR) and quickly improve the valuation.
One example of a talent infusion is when Google acquired DoubleClick in 2007. They brought in their own team to improve performance and grow the business. This helped Google become the dominant player in online advertising.
The downside of this method is that it can be disruptive to the acquired company’s culture and operations. There is also the possibility of alienating employees of the target company which can lead to turnover.
10. Asset Purchase
This is when a company buys the assets of another company, rather than acquiring the whole business. This can be done if the purchasing company only wants certain parts of the other business, such as its customer base, patents, or the attention of ideal prospects through media assets.
An asset purchase is often less complex and less expensive than an acquisition, as it doesn’t involve buying the whole business. It can also be quicker to execute, as you’re not dealing with the same level of due diligence and financial implications.
However, there are some disadvantages to an asset purchase. One is that you might not get the full picture of the business you’re buying, as you’re only seeing certain parts of it. This can make it harder to assess the true value of the assets you’re acquiring.
Another disadvantage is that you might not get the same level of talent or knowledge transfer with an asset purchase. This is because you’re not acquiring the whole company, so you’re not getting the team that built the business. This can make it harder to integrate the assets into your own business.
If you’re considering an asset purchase, it’s important to speak to a lawyer or accountant to assess whether it’s the right option for you.
Conclusion
Each of these types of mergers and acquisitions has its own risks and rewards. The key is to carefully consider your options and choose the strategy that makes the most sense for your company.
Done right, inorganic growth through M&A can be an effective strategy for quickly scaling your business.
No matter which strategy you choose, its important to have a solid plan in place to ensure the success of your M&A efforts. This should include due diligence, clear financial goals, and a team of experienced professionals to help you execute the transaction.
Have you considered any of these 10 types of M&A strategies in the past? Let me know in the comments below.
