December 16, 2021
Joseph J. Lebel III
For companies of all sizes, the question of “buy vs. build” – whether to pursue opportunities to acquire another business or to grow organically on the existing base – can be complicated and perplexing. Many companies in the so-called middle market, often defined as having annual revenues between $10 million and $1 billion, are increasingly choosing “buy” as the answer. According to one investment banking firm, there were more than 2,650 merger deals among middle-market businesses, for a total value of $235.5 billion, through the third quarter of 2021. That’s an increase of 21% in the number of deals and 87% in deal value from a year ago.
But many middle-market business owners readily admit that growth through M&A isn’t always the right path for them. The National Center for the Middle Market reports that 70% of the middle-market companies that did M&A deals in the last three years had little or no prior experience in acquisitions. For a novice buyer, the challenges of integrating and managing two sets of operations, teams, customer bases and cultures can be daunting.
Clearly, this is a decision that each business owner must make based on their specific needs, circumstances and opportunities. Often, the right course will be a combination of acquisitions and organic growth. At OceanFirst, for example, we have followed a “build and buy” strategy, growing organically by adding talent, extending our banking footprint into new geographic markets, new lines of business and investing in services such as corporate cash management, while also completing seven acquisitions since 2015 and announcing another this year.
For middle-market business owners who are embarking on a strategy of organic or acquisition-assisted growth for the first time, there are many issues to consider. Whether it be for an acquisition target or an expansion of their company through organic growth, a few points to evaluate in an assessment include:
- Is their best option to invest in the expansion of existing products or services, or to pursue a new segment or geography? Is an acquisition the best way to access new products, services or markets?
- How extensively have they analyzed the addressable market for the strategic expansion?
- What are the qualities and capabilities needed in order to compete and succeed in a new venture?
- What investments in talent, technology, capital equipment or facilities will be needed to support their growth plans? Can an acquisition speed up the process?
- And, importantly, can they pursue growth opportunities, whether they be organic or through M&A, without “taking their eye off the ball” of the core business?
At OceanFirst, we have worked with many middle market clients that have successfully addressed these issues in reaching their growth goals. We’ve provided financing for new equipment, new locations, additions to buildings and working capital for the organic expansion plans of many clients, including those with multi-state operations across the country. We’ve also provided acquisition financing when organic expansion wasn’t the best option, or when opportunities arose to purchase a competitor or affiliated business. Most importantly, in both scenarios our relationships with our clients allowed for thoughtful, focused strategic advisory sessions to discuss the best course of action and how we could help.
The lesson to be learned is that “buy or build” growth strategies must be constructed upon a solid foundation – strong customer relationships, a reputation for quality products and services, engaged employees motivated to go the extra mile, effective management of existing operations, and a clear-eyed understanding of the investment required and the challenges to be faced. Your success will be determined by how well your organization has mastered these challenges – and whether you can apply that knowledge and experience to your next venture.