Expanding your business through M&A or organic growth

There’s little doubt that growth through mergers and acquisitions is high on the agenda for many businesses at the moment. As economic uncertainty continues, opportunity for organic growth remains scarce and many companies with healthy cash reserves look to acquisitions as the quickest route to growth.

This is not to say that organic growth isn’t a viable option for some. For example, JLA, the laundry firm founded by entrepreneur John Laithwaite, recently announced further investments prompted by its growing market share and healthy turnover.

Chief executive, Stephen Baxter, spoke to a local newspaper about the company’s outlook: “We are growing,” he stated. “Double-digit growth is happening right now – organic growth. We are taking market share.”

So how is JLA achieving what seems like the impossible for many small businesses? The fact that its products and services are niche and in demand among growing sectors, such as care homes and hotels, has much to do with it. The company has developed laundry technology that helps to reduce the spread of infection, which means it has a strong appeal to hospitals, while its products also helps customers cut costs.

The company is focusing on and stimulating its organic growth through the opening of a £1 million support centre in Yorkshire. Despite its organic growth, however, JLA is not afraid of mergers, and its purchases of Citinet, Mason of Blackpool and Expert Service South West has provided another growth stream. “[The firms we buy] must be quality companies that either add new capability and accounts to our core business of laundry, or provide our customer base with new products and services,” explained Mr Baxter.

So when should a small to medium business think about buying or merging with its competitors? One of the main reasons that small businesses decide to acquire is because they are operating in an extremely fragmented market. When a large number of businesses are competing for a relatively small market base, it is possible that none will truly succeed as price wars ensue and profits suffer. When a situation like this occurs, the businesses involved lose out, with little opportunity for growing market share, and customers are also affected as so little cash is available for investment in new products and services.

Firms that decide to merge in this situation, thus consolidating their market and increasing their share, can markedly improve the business and turnover, enabling them regain control of pricing and strengthen their negotiating position with suppliers.

Pub company Fuller, Smith & Turner is an example of a business that has confidently and effectively carried out acquisitions in recent years. Its latest purchase of 15 pubs from debt-ridden rival Enterprise Inns allowed it to expand into new geographical territory, while taking advantage of its competitor’s weaknesses. While Enterprise is desperately offloading its often profit-making sites to further reduce its debt burden, Fuller’s knows it can take on these sites and immediately reap the benefits.

Fuller’s explained that the 15 pubs it bought from Enterprise made £1.7 million in profits in the year to the end of September 2011. It is confident that the new additions will prove immediately profitable under the Fuller’s brand. Michael Turner, Fuller’s chairman, told the Financial Times at the time of purchase, “These pubs are carefully selected, quality assets and their acquisition is wholly consistent with our long-term strategy.”

The firm’s managing director, Simon Emeny, added, “This deal will take the total number of pubs acquired by Fuller’s on the last 12 months to 29, giving the business tremendous momentum as we head towards the summer of 2012.”

The quotes from Fuller’s management illustrate the importance of both timing and value when considering buying a business. There are several basic reasons for making acquisitions and, providing a small business owner has identified which of these benefits he or she is aiming for, that they carry out appropriate due diligence, there is no reason why this route to growth cannot be a winning formula.

Moving into new geographical regions is a common reason for small business M&A. Fuller’s recent acquisition was identified as a great opportunity to take the London-based Fuller’s brand to regions outside the capital, for example.

Bringing in a brand that has a far-reaching appeal can also increase profits, while adding new manufacturing capabilities can help a business to grow substantially. Health food brand Wessanen has just announced the purchase of Fair Trade tea brand Clipper, for example. This acquisition offers “huge growth potential” according to Wessanen’s chief executive, Patrick Cairns, who added, “We very much admire what the team at Clipper has achieved and want to build on this, invest in the brand and manufacturing capability.” This is expected to involve the retention and expansion of Clipper’s Beaminster factory, which employs 90 people.

Some acquire for access to talented teams of experts with or without intellectual property – teams that would otherwise take years to build up through traditional recruitment methods.

It’s not difficult to see why companies that have the cash for expansion are opting to take the mergers and acquisitions route in droves. From the very largest companies, like AT&T, eBay and Johnson & Johnson, which have all opted for growth through acquisition in the past year, to the smallest local enterprises, purchasing a complementary business can offer the best chance of growing profits and market share in these tough economic times.

However, it is always vital to look after new and long-term personnel during and after the deal process, as losing staff can very quickly reduce the value of a target business. Paying the right price is also vital and can make or break a deal in terms of its long-term impact on a small business.

Finally, businesses that are merging need to assess whether they are compatible with each other, while sales teams and marketing should be carefully evaluated and controlled to avoid firms competing with each other after a merger has taken place.

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