Should I Buy Customers or Grow Organically? – Part 2

Appetite for Risk Purchasing customers is certainly more risky than growing organically due to some of the areas I’ve mentioned. The upside however is growth is much faster and may give you a boost in market share and will ideally lead to economies of scale that may provide you with a boost to your bottom line.

Access to Capital How do you intend to fund an acquisition? Generally it will require a significant upfront cash payment. Marketing expenditures tend to be more evenly allocated and are generally more liquid as they can be spent or reallocated as needed. Payment for acquisitions is tied to the legal terms of the purchase agreement. Financial risk regardless of its source (retained earnings, debt financing or an equity partner) poses its own set of risks. If you draw down your cash reserves from retained earnings, a slower economy or the loss of some key accounts may tip you over the edge. If over leveraged, debt financing may be painful – especially if you have no reserves to deal with the difficult times. Equity partners may take control of your company if you break agreements or covenants. You need to ask yourself: “How comfortable am I taking this risk? “

Infrastructure and Systems Here I’m referring to human resources as well as processes, procedures and support systems. Do you have a team and systems in place to thoroughly evaluate an opportunity? If so, are you confident that you can successfully migrate the customers if that is the option you decide or is required by the buyer? Can you handle the increase in support tickets and possibly hours if the target acquisition customers are used to longer support hours than you provide? If you are to compare this to organic growth, new customers know what they are getting from you (hopefully). They can read this on your website or through your SLA so there are no surprises. You can scale gradually as is warranted by your rate of growth so there is less likelihood that you will be caught off guard not having the required systems.

So how do I answer this question? Truth be told I don’t make recommendations in this regard but rather address these considerations individually but ultimately the decision must rest with the business owner or company decision maker. This becomes a question of fit for the company and the business owner or management team. You should also consult with your lawyer and accountant to get their perspectives as they will have their own insight for your specific situation.

Posted July 10, 2010
Categories: Blog, Advertising and Marketing General
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