smallbusiness.co.uk: Helping your business think big

Michael Jackson is chairman of Elderstreet Investments, which he founded in 1990. He was formerly chairman of Sage, the accounting software group. He takes a look at which path to choose: organic growth or acquisition?

'Last year (2007) you couldn’t help but believe the easiest way to grow your business was to go on a mad acquisition spree.

'After all, that’s what the big boys were doing, as shown by media agency Thomson’s bid for Reuters, and US aluminum provider Alcoa’s offer for its Canadian rival Alcan.

'The reasons for this merger mania vary but if you’re a small company, this strategy can make sense. If, for example, you are in an area of the market that has negligible growth, you can easily find your operational gearing in decline, leading slowly and inexorably to extinction.

'It is here that the benefits of a merger come to the fore. A smartly judged takeover can present an opportunity to cut costs at every level and, if you’re number one in the market after the deal, increase prices.

Find the right market
'Acquisitions often work when you are operating in a highly fragmented market. At Computer Software Group (CSG), we found this in the software market for not-for-profit companies like charities and trade associations.

'There was something like 12 separate companies serving a market of some £70 million in total. The problem was that each company competed against the others, often in areas where their products were not appropriate.

'Heavy discounting became the norm. To a degree, customers lost out because there wasn’t enough profit to encourage companies to re-invest in new product development and first-class customer support.

'So at CSG we identified an opportunity to consolidate the market and, in the space of a year, we acquired six of the 12 companies in the sector.

'Despite being told that we would end up competing against ourselves, we found a surprisingly small amount of overlap. This was achieved by being strict with our respective sales forces – focusing their strengths so they didn’t chase everything - and concentrating on product positioning and marketing.

Growing from the inside
'It should be remembered that organic growth could also augment the value of your business. You will probably say that your ability to grow depends on the market in which you are operating and your relative competitive position. The right place and the right time, you might say. This is too simplistic.

'I am constantly amazed by the way companies in mature markets generate fantastic growth by innovation. There are many examples, such as Burberry in fashion, Toyota in cars and Nokia in mobile phones.

'There is no doubt that if you achieve sound growth, the value of your company increases enormously. Yes, there’s a price to pay: the costs involved have to be written off in your profit and loss account and you have no guarantee of success, however much you test the market beforehand.

'But there is a range of techniques you can use to limit the downsides:

- Don't build too fast. Try and form partnerships and keep your infrastructure costs as flexible as possible.

- Use product line profitability to see if you have some strong but under-invested areas to which you can add investment. This is often because the sales are small relative to the core business or the business model needs to be changed to let the area grow: rental programmes rather than outright sales might be an example.

- Use strong budget control and make sure you’re conservative with your sales projections. Remember that things always take longer to gear up than you think, so be careful with your cash.

- Last but not least, overseas expansion is intrinsically more risky than staying at home. If at all possible, try to get a foreign national involved in the business; someone who is reliable and knows the local market from the inside.

So there you have it: the holy grail of strong organic growth backed up by intelligent strategic acquisition. Good luck.

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