Buying versus building a business

ENTREPRENEURSHIP is an extremely arduous and challenging endeavour. Survival is your main priority most of the time with little bandwidth for any other considerations.

Unless you survive, achieve the breakeven point and finally profitability, only then is there breathing room. How long this takes varies from business to business as there is no standard conformity in terms of timeline.

While certain sectors may achieve profitability faster (specifically capital expenditure-light businesses), the majority of honest entrepreneurial endeavours take a fair amount of time.

Just last week, I was reading SME Corp Malaysia’s report card on its 2025 performance, which highlighted the data on micro, small and medium-sized enterprises (MSMEs) in our country.

Of the 1.29 million MSMEs, comprising 96.2% of all businesses in Malaysia, micro enterprises account for the largest percentage at 77.4% (around one million companies), small enterprises account for 21.4% (around 277,000 companies) and medium enterprises account for only 1.1% (around 14,800 companies).

This indicates that the majority of the companies in Malaysia are battling for survival every day, wondering whether they can pay bills or salaries on time. Only a small percentage of the business community has reserves to enjoy profits after all committed expenses.

Organic versus inorganic growth

When survival is on the line, growth is the last thing you think about. Ironically, it is the growth of a company that brings it out of the vicious cycle of making ends meet.

There are essentially two types of growth we often speak about: organic versus inorganic growth.

To get ahead, other means such as corporate mergers and acquisitions (M&A) are referred to as inorganic growth. Organic growth, on the other hand, relies on bootstrapping, where profits are conserved and re-invested into the business.

Inorganic growth is the opposite, where corporate transactions involve the buying of companies within the value chain, achieving vertical integration, or M&A exercises involving competitors to increase market share.

Both have their pros and cons, and there is no right or wrong.

Organic growth, while slower, allows the owner of the business to retain absolute control of the business without diluting their shareholding.

The owners have the full say with no interference from other directors or minority shareholders.

The capital outlay is minimal as expansion is dependent on the company’s balance sheet health. Whether the company sinks or swims is determined by the capability, strategies and execution ability of the owners.

Inorganic growth usually requires a bigger capital outlay as M&A involves paying a premium.

Most of the time, no business owner will sell their business without asking for a premium unless the business itself is in a detrimental state with mounting liabilities.

M&A can only be undertaken by business owners who have a strong balance sheet and access to funding to conduct the corporate exercise. Failing which, there is no way that the M&A exercise can proceed.

The only exception is if it is a listed company where a share swap or share issuance can come into play.

Different markets have different preferences

The type of business or sector that warrants organic or inorganic growth is highly correlated with whether it is a mature market or whether there is still room for expansion.

If it is a fully developed market, the only way to get a bigger market share is to embark on an M&A exercise. Organic growth will not make much of a dent any further.

Conversely, if there is still room for growth, organic growth, while slower, can still be an option. The addressable market is an important determining factor in deciding which strategy to adopt.

This is why in Western countries, we see the proliferation of M&A activities compared to Asian markets. M&A is a norm in business with no hard feelings whatsoever.

So long as it makes sense for shareholder returns, an M&A exercise will be conducted for market share consolidation or to eliminate a competitor.

In Asian countries, family legacy and heritage play a big consideration in deciding whether to sell a business. This makes M&A exercises more challenging to execute.

Although this mindset has been changing in recent times, the majority of business owners today still remain focused on organic growth.

The idea of spending a huge amount of capital to acquire other businesses without certainty that it will pay off requires a big risk appetite and a strong tolerance for failure.

Nobody wants to be the person who decides to throw good money after bad.

Capital markets’ vibrancy

Funding also plays an important role in determining the survival and growth of a business.

Although there are more funding channels today beyond traditional credit-based financing than in the past, and support programmes for new startups, the competition is ever more intense with new entrants (local or foreign) crowding in.

This means that building a business from scratch and surviving are getting harder.

More resources are required to subsist against domineering incumbents, and innovative strategies need to be put in place to remain ahead of the competition.

While the team and I build up our business from scratch, we are also privileged to be in the business of money where we invest and make acquisitions of other businesses.

The experience puts us in a very unique position compared to traditional money managers.

The daily learnings and observations allow us not only to analyse high-potential businesses but also to get up close and personal with business owners.

It is remarkable to see how they build and grow their business over time. The stories you hear can cause cold sweat to run down your spine.

One thing is for sure, not everyone is meant to be a business owner. There is no shame in being professional managers, who are equally important in the life cycle of a business.

As a company grows, the demand for professional managers becomes crucial to ensure that there is proper governance and compliance. Institutionalisation of a business is paramount to helping the company get to the next level.

An initial public offering (IPO) is the next growth journey of a company’s lifecycle.

Conventional credit funding will evolve to funding via equity value. The power of equity has multiplier effects beyond the fixed value of traditional credit.

That is why vibrant capital markets and a healthy stock market that allow the value of companies to grow exponentially will determine whether buying a business is better than building a business.

Nothing is smooth sailing

In my time running the fund, I have yet to come across a single business owner or entrepreneur who told me that their early days were smooth sailing.

Upon achieving the scale or success they have today, I have noticed different patterns of behaviour. Those who are used to bootstrapping, organic growth is their preference.

They do not see the value in M&A as it gives them more headaches if they were to embark on such an exercise, including inheriting legacy issues of the previous business owners.

If organic growth is too slow, they accept the lower growth rate and are content with where they are.

The opposite is also true, where those who want a faster growth rate and market share wrestle daily with the decision on the next M&A exercise.

Throughout this journey, there are always hits and misses. It all depends on whether the hits are more than the misses.

A good example would be The Walt Disney Co’s acquisition of Marvel and Lucasfilm, which turned out to be an amazing M&A exercise worthy of a textbook chapter in every business degree course. That is a story for another day.