“Should I grow my business through acquisitions or organically through marketing?” Sometimes I hear variations on this question – “I would much rather grow through acquisition than through marketing – it’s much less risky”. More and more frequently I am being asked some form of this question so I thought I would share some of my insights. There are a number of considerations to evaluate. This is not a comprehensive list but a few of these include: 1) Financial, 2) Technological, 3) Your appetite for risk, 4) Access to capital and 5) Your infrastructure and systems.
On the assumption that you can purchase a customer base for around 1X (give or take), you will be paying one year’s worth of revenue for this customer base. If we are to compare this to a moderately successful marketing initiative (organic growth), you should also be able to acquire a new customer for one year’s worth of revenue. Of course some marketing methods may generate a higher cost per new customer, ex. a poorly performing campaign, however, other sources may be much less expensive, such as obtaining a new customer from a strong referral program giving you a very low CPA. The overall point is that you should have a cost per acquisition (CPA) figure of 1X or less through organic growth. You can, and I would argue, should also use this process for comparison for all values. For example, if you are able to purchase a company for 0.5X or 1.2X, how does this compare to your alternatives from a financial standpoint? This should not be the only driver in the decision making process as there are other considerations – some of which are discussed below but at the very least you should be clear about what the numbers are telling you.
If you are purchasing a customer base, technology considerations such as compatibility of control panels, billing software, support for custom applications, location of servers etc. should all be considered. These are components that if you have not done your due diligence and a plan has not been set, could be serious challenges to successfully monetizing these new customers. These of course are not factors under an organic growth model. If a technical challenge arises and this results in not being able to monetize some of all customers (Ex. you lose some customers due to a botched migration or your ability to up sell other services is not possible due to compatibility issues), your effective purchase price has just gone up – possibly way up.