SBI recently spoke with Charlie DeLacey, the vice president of corporate development and strategy at the Kenan Advantage Group. The company is a $1.5 billion dollar transportation and logistics business. And their growth rate has been in excess of 10-15% on an annual basis. Charlie is responsible for driving and shaping the strategy of the organization, and had great insights to share.
The topic of our conversation was the different types of revenue growth and their impact on company valuation. Charlie answered 3 key questions for our audience regarding the impact of different types of revenue growth.
#1 – Do different types of revenue growth earn different returns on capital?
“There’s no question they do,” says Charlie. He buckets it into two distinct categories. The first bucket is organic growth. “Going out, blocking and tackling, and grubbing the business from the ground floor up,” is how Charlie describes it. The second bucket is inorganic growth, or another words acquired growth. Both of these types of these growths have different capital requirements, and drive different returns on those capital investments.
#2 – Is organic growth better than growth through acquisition?
“I think it depends, but if I had to generalize, I would say, typically, yes,” said Charlie. Given the opportunity to grow, organic growth versus acquisition drives more value creation. He went on to give a specific example. “If I’m going to go out and acquire $5 million of revenue, I will need a significant capital investment,” says Charlie. Essentially you would be capitalizing all of the future cash flows of that business.
By the way of comparison, if you are able to drive $5 million dollars of organic growth, you will need a certain investment in the sales function to pursue that. Presumably that investment will be less than an investment to acquire the same level of growth. Because when acquiring a business, you are paying for the future stream of that business cash flow. But if you’re building it, it’s a more cost-effective manner.
#3 – How should you decide between organic or inorganic growth?
The first thing Charlie recommends considering is timing. Typically, when you’re going out and building something organically you have to ask yourself a couple of key questions – first, how much time am I willing to invest here? Do I need to make this move quickly, or do I have the time to execute it? Next, you must evaluate your capabilities. Do you have to the talent needed to pursue organic growth in a particular sector? Or do you need to acquire the capabilities?
Charlie also recommends evaluating your execution risk. What is your execution risk to pursue the growth channel organically? And what is the execution risk on acquisition? Finally, another question to ask is regarding capital requirements and value proposition. If you were to compare organic growth versus inorganic growth, what are the investment requirements for both of those decisions?
Ultimately not all revenue growth is created equally. And your primary objective is to increase shareholder value, so you must understand which is the best way. If you need more help, consider downloading our 10th annual workbook, How to Make Your Number in 2017. It’s your roadmap to the consistent and predictable revenue growth.