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Integral to long-term success, growth is a word that may come with mixed emotions for business owners over the past few years. Between inflation and higher interest rates to uncertainty around the 2024 election, many business owners have been focused on strategically managing their businesses and bottom lines, prioritizing management and cash flow over finding ways to grow. Now that we have entered a new year, with anticipated interest rate cuts on the horizon and a new administration coming into office, business owners may be feeling ready for growth in 2025.
Options for growth
When working with my business clients who are ready to grow, I often walk through three main paths to explore: organic growth, capital investments, or mergers and acquisitions (M&A).
- Organic growth is exactly what it sounds like. This growth comes through a myriad of efforts to bolster your existing business — that is, increased sales efforts, new marketing campaign, or renewed focus on improving the customer experience.
- Growth through investment is primarily when you make a capital investment in your operations, usually by purchasing new equipment, implementing an additional shift, or expanding plant or warehouse floor space and capacity.
- Finally, the last type of growth is merger and/or acquisition of another company (M&A). Management needs to evaluate whether an acquisition of a company with competing or complementary products or services makes sense, or if a company that is “upstream” or “downstream” of your existing product or service (i.e., vertical integration) is a good fit as well.
If your business is prioritizing growth this year, it may seem overwhelming when it comes to taking steps to begin — but the right banker can walk you through the entire process from start to finish. Your commercial lender, who should know your business inside and out, can offer advice to help structure a debt facility, along with treasury services, that best fit your needs.
Navigating mergers and acquisitions
If you are in a spot where buying another business would help gain the capacity to integrate either upstream or downstream in your supply chain, it’s probably time to weigh your next steps and considerations.
Think about things outside of your own company, such as economic factors, timing and financial health — current and future — of the company you want to purchase. These could include:
- The macro economy. Inflation and interest rates impact M&A deals as much as they do other business tactics. Watch for movement in 2025, as any change helps time a purchase when it would be the most advantageous to your business.
- The local economy and timing implications. According to The Texas Lawbook, a publication focusing on lawyers who represent businesses in litigation, transactional and regulatory matters in Texas, 135 Texas-related M&A deals reported in 2024 reached or broke the $1 billion mark. While a majority of deals are below the $1 billion mark, it speaks to the larger trend of increased interest and momentum for M&A as we begin 2025.
- Financial health of the target company. One of the most widely used measures of a company's success is earnings before interest, taxes, depreciation and amortization, or EBITDA. This is a true measure of the company’s operations before accounting adjustments. When EBITDA fluctuates, it is important to evaluate the drivers of that fluctuation carefully. Pointing to a consistent trend in EBITDA suggests sales and operational stability.
- Plans for improvement. Prior to settling on a purchase price, which is often based on a multiple of EBITDA, have a plan for how you will maintain performance for the period that you based the acquisition price on (i.e., 3x of EBITDA implies you have confidence in being able to at least perform at the same level for three years). It’s also important to map out how you will increase EBITDA so you are maintaining performance from when you purchased the business as well as growing it long term.
Once you walk through these considerations, you’ll have a better understanding of your tolerance and game plan for growth in 2025.
Michael P. Grace is senior vice president, commercial manager for UMB Bank Fort Worth. He is responsible for business development as well as managing new and existing client relationships, including project management, analyst, credit and client services activity.