Answers / Financial Due Diligence
How do you separate organic from acquisitive (inorganic) growth in a target's revenue, and why does it matter to a buyer?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
You build a revenue growth bridge that strips out the effect of acquisitions and disposals made during the period, plus FX and any one-off contracts, to isolate like-for-like organic growth. Mechanically: pro-forma the prior period to include acquired businesses for the same number of months (or remove the acquirer's partial-year contribution), adjust for disposals, and translate at constant currency. It matters because acquisitive growth is bought and not repeatable without further M&A spend, and it can mask flat or declining underlying performance — a target showing '20% growth' that's almost entirely from bolt-ons is a very different (and lower-quality, lower-multiple) business than one growing 20% organically. Buyers also need organic growth to underwrite the forward plan and the multiple. So I'd present the bridge clearly: organic vs acquisitive vs FX vs one-offs, and trend organic growth over several years to see the real trajectory.
WHAT INTERVIEWERS LISTEN FOR
- ✓Build a growth bridge: organic vs acquisitive vs FX vs one-offs
- ✓Pro-forma acquisitions to a like-for-like basis; adjust disposals and currency
- ✓Acquisitive growth isn't repeatable without more M&A spend
- ✓Organic growth underpins the forward plan and the multiple
COMMON MISTAKES
- ✗Taking headline growth without splitting organic/acquisitive
- ✗Ignoring FX and disposals in the bridge
- ✗Underwriting a multiple on bought growth
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