Organic vs Acquired Growth

A company growing 20% annually sounds impressive. Whether that’s organic or acquired determines if it’s impressive or just expensive.

The formula

Organic growth = (Current period revenue − Prior period revenue − Revenue from acquisitions) ÷ Prior period revenue

Acquired growth = Revenue from acquisitions ÷ Prior period revenue

The tricky part is defining “revenue from acquisitions.” Most companies count acquired revenue for 12 months post-close, then roll it into organic. Others use the acquisition date as the baseline. The definition matters more than the formula.

What organic growth measures

Organic growth measures the performance of businesses you already own. It answers: are your existing operations growing, or are you just buying revenue?

Strong organic growth (above market rate) suggests competitive advantage — customers choosing you, products winning, operations executing. The business is generating momentum from within.

Weak organic growth (flat or declining) suggests the opposite. Existing businesses are stagnating. Any headline growth comes from adding new companies to the portfolio, not improving the ones you have.

What acquired growth measures

Acquired growth is revenue you bought. It tells you how much of headline growth came from writing cheques rather than winning customers.

This isn’t inherently bad — serial acquirers like Constellation Software grow primarily through acquisition and create enormous value. But acquired growth and organic growth have different implications:

Acquired growth is purchased. You paid capital for that revenue. The return depends on acquisition price, integration execution, and whether the acquired business performs post-deal.

Organic growth is earned. It comes from the existing business without additional capital deployment. It’s higher quality in the sense that it didn’t require buying something new.

The distinction matters because a company can report 15% revenue growth while its underlying businesses shrink. The acquisitions mask organic decline.

What the split hides

The organic/acquired split hides the quality of each component.

Not all organic growth is equal. Price increases count as organic growth but don’t indicate competitive strength. A business raising prices 8% while losing 5% volume shows 3% organic growth — technically positive, but the customer base is eroding. Similarly, organic growth from a single large contract win is lumpier and less reliable than broad-based growth across many customers.

Not all acquired growth is equal. A bolt-on acquisition of a competitor has different economics from a transformational deal in a new market. The revenue contribution might be similar; the risk and integration complexity are not.

Currency effects muddy everything. A multinational reporting organic growth might be benefiting from currency translation rather than real operating performance. Constant-currency organic growth strips this out, but not all companies report it.

Where it breaks down

Definition games. Companies have discretion over how they calculate organic growth. When does an acquisition stop being “acquired” and become part of the organic base? How do you handle divestitures? Cross-selling acquired products through existing channels — is that organic or acquired? The lack of standardisation makes cross-company comparison unreliable.

Timing manipulation. A company can time acquisitions to flatter the split. Close a deal in January, and you have twelve months of acquired growth before it becomes organic. Close in December, and it almost immediately joins the organic base. The underlying reality is identical; the reported split looks different.

Integration blur. After a few years, acquired businesses become operationally indistinguishable from organic ones. A company that made five acquisitions three years ago has no meaningful “organic” baseline — everything is blended. The split becomes an accounting exercise rather than operational insight.

M&A synergies complicate attribution. If an acquisition enables the legacy business to grow faster — through cross-selling, shared infrastructure, or market access — that growth shows up as organic. The acquisition created it, but the metric credits the legacy business.

The decision it enables

The organic/acquired split answers two questions:

For investors: Is this company growing through operational excellence or financial engineering? Consistent organic growth above market rates suggests durable competitive advantage. Growth entirely from acquisitions suggests a roll-up strategy that depends on deal flow and integration execution.

For operators: Are the businesses we own actually performing? It’s easy to hide organic stagnation behind acquisition activity. The split forces honesty about whether existing operations are healthy.

The healthiest serial acquirers show both: organic growth in existing businesses and disciplined acquisition activity. Organic decline funded by acquisitions is a treadmill — you have to keep buying just to stand still.

The metric series: Part of a series on metrics that reveal what headline numbers hide.