What are some examples of external growth strategies?

01 March 2022

When you’re growing an owner-managed business, there are plenty of internal growth strategies you can utilise e.g. increasing your product line or upskilling your team. But if you want to quickly grow the size, scope and output of your business, an external growth strategy is a more productive way to achieve these goals.

James Maxwell looks at how acquisitions, mergers, partnerships and strategic alliances can help to expand your business, and the benefits of focusing on external growth as a company.


What do we mean by an external growth strategy?

As a business owner, you may be aware of all the more traditional ways of growing your business. It’s important to understand that there are two quite distinct types of growth; the more common kind of internal growth and the less well-understood type of external growth.

Internal growth is generally more organic. You can strengthen your team through training. You can improve your product and invest in R&D. Or you increase the number of shops, branches and workplaces in the business. In short, you grow the areas that are under your control.

External growth focuses on the areas you don't have direct control over, including capturing new customers. Generally, this means acquiring another business, merging with another competitor, or looking at strategic alliances and partnerships to achieve your overall growth goals.


Mergers and acquisitions – how do they help your external growth strategy?

Acquisitions are a great way to quickly expand your operations. At Haines Watts, a significant part of the firm’s external growth strategy is to buy out other accountancy practices and to be proactive about growing our firm both locally and nationally.

Targets need to have their own internal growth opportunities as well as the current business’s strategic objectives and needs.

There are many benefits to this approach but once an acquisition has taken place, we then focus on the internal strategy as well. This means focusing on improvements and training that help the newly acquired firm, and the wider Haines Watts business, to move forward.

The primary drawback to acquisition is the need to fund the purchase at a value sufficiently attractive to secure the seller. This is often the limiting factor in making a desired deal happen.

An alternative option to consider is a merger, where two existing companies merge together to form a larger concern. For example, the two movie giants Disney and 20th Century Fox merged in 2019 to create one of the biggest players in the sector, with a 35% share of the movie market.

With a merger, consideration can be via an all share deal, or a contribution of shares and cash.

An acquisition or merger can be a great way to solve a particular issue in your own company, or to expand your reach as a business. For example, if you’re a company like Xero, that produces online accounting software, it’s a logical step to purchase a company like HubDoc, that scans and digitises financial documents in the cloud.


Strategic alliances and partnerships – what are the benefits of these alliances?

Strategic alliances are another important option to consider as part of your growth strategy.

We use strategic alliances frequently at Haines Watts, partnering with an external company that can supply a specific service that our main firm doesn’t offer. That could mean partnering with a specialist legal firm, or bringing in technology specialists to help broaden the range of services we can bring to our clients.

Alliances can also help to broaden your offering outside of your home territory. Our international alliances, via the Geneva Group International (GGI) network, have allowed us to build relationships with other international professional services companies. If a client goes overseas, we can introduce them to these overseas advisers and be confident that clients are getting the best advice in those countries.

Joint ventures are another option, where you form a new business with an external partner with an ownership split between the two parent companies. This is a good way to share costs, expertise and resources and for both partners to see the end return on investment.

A well-thought-out alliance or joint venture can help your business to enter new markets, or diversify your product offering. For example, a property developer may partner with a local estate agent to sell to the local market place.


What are the key challenges to focus on to ensure your strategy is successful?

If your external growth strategy is going to be robust and successful, it’s good practice to begin working with an experienced corporate finance adviser.

You should be planning at least 15 months in advance of going to market with any acquisitions or merger strategy. The important thing is to have a short, medium and longer-term strategy, and to run all your goals, plans and targets past your adviser as early as possible.

There are certain elements that will always be outside of your control when it comes to planning. External threats such as Covid, economic downturns, or new entrants into your market can’t ever be 100% predicted. But what you can do is review your short, medium and long-term strategies and keep on top of reacting to any potential threats and opportunities.

A poor strategy can lead to a lot of negative impacts:

  • You might not have staff buy-in for your external growth strategy, leading to disengaged staff, low motivation and poor performance.

  • Your goal-setting may be below par, meaning that there’s very little follow-through on your plan and luke-warm performance towards the agreed growth goals.

  • You might have poor alignment and leadership, leading to a lack of proper communication and a chaotic set of tactics that don’t achieve your end growth goal.

Any acquisition or merger comes with risks. While these can be mitigated to a degree through thorough due diligence and legal contracts it’s important to understand that some risk remains. There should always be a clear and meaningful upside to the business.


What should you focus on in your external growth plan?

Any strategy without a coherent plan of action is unlikely to succeed. It’s vitally important to focus on your external growth plan and to ensure you’re covering all the right bases.

Here are some of key objectives to include in your plan:

  • Understand the culture and the values of your company – define the culture and values within your business, so you know what you stand for and what makes you different in the marketplace. Carry out the same process for the company you intend to acquire/merge with, or the partner you intend to forge an alliance with.

  • Know what you’re trying to achieve with your external growth strategy – think about what kind of company you want to create once the strategy has taken place. Consider the steps needed to achieve your goals and the specific tactical actions required to make this happen.

  • Define the WHY in your strategy – have a very clear idea of WHY you’re acquiring/merging/partnering with this company. Is it access to their clients? Do they have really good technical staff? Is it their intellectual property (IP) or their new R&D outputs that you’re after?

  • Create the right team around you – to make this plan work, you need a great team behind you. That means building a team of proactive people with excellent get-up-and-go. You need to keep some diversity in that team, so you don’t just pick people who fit your unconscious bias.

  • Do your homework re the competition – it's vital to do some research into your competitors in any new market, and to look at benchmarking yourself against the current industry or sector standards. Who are those competitors? What do they have that you don’t? Do your homework and make sure you’re informed.

  • Know how to position your new brand – as the company grows through acquisitions, mergers or new joint ventures, your brand position will also need to change. If you move from being the 25th biggest company to the top ten, that needs to be factored into your positioning, marketing strategy and your messaging as a brand.

  • Build flexibility into your plan – you need to be fluid with your thinking and have a number of options lined up. This allows you to react and pivot if your initial plan doesn’t work out. Plan out various options and avoid putting all your energy into one thing.

How can working with a good adviser improve your external growth strategy?

At Haines Watts London, we know the challenges and have the first-hand experience of putting these external growth strategies into action.

A well-planned external growth strategy, while holding no guarantees, is a proven strategy for getting results. But you do need to be thorough with your planning and due diligence. To this end, you need good advisers and access to the right specialists – and this is where our experience, knowledge and networks really do come into their own.


If you’re planning on external growth, come and talk to one of our specialists