If you are looking to enter a new segment of the market or expand your business offering, how do you determine whether you should BUY or BUILD?
A useful starting point is to determine whether BUY is an available option and for this there are 2 key questions:
Is the new product / service currently offered in the market? and if so;
Are any of the current market participants available for sale, or a potential acquisition target?
If BUY is an available option, keys items (financial and non-financial) to consider as part of the evaluation and decision-making process include (note, there may be others relevant to your proposed venture):
COST:
What is the cost to BUY the target business vs. what is the cost to BUILD the business?
Having a robust financial model which assesses each option is imperative.
For the BUY decision, it is important to consider all costs, including the purchase price, advisory and due diligence costs, integration costs and any other incidentals.
For the BUILD decision, there may be external costs (product development and testing, advisory, recruitment costs) and internal costs (management and staff time).
TIME:
How much time is available under your Strategic Plan to enter the new segment and achieve the targeted level of revenue or market share?
Entering the segment with a BUY is likely to be a quicker way to achieve your Strategic goals, notwithstanding that a typical acquisition process typically takes between 3 and 9 months, depending on size and complexity.
With a BUILD decision, you not only have to develop / test / refine the product or service, but it will take time to market and grow the business. For a services business, this includes recruiting skilled and experienced staff that can deliver the service to the desired level.
If your Strategic Plan does not allow for much time to execute on this component of the strategy (e.g. you are looking to divest your whole business within 12-18 months), a BUY may be preferred.
STRENGTHS / CAPABILITY:
What are the strengths and resources of your existing business?
A BUY decision will require investment of resources in integrating the acquisition into your business, including people time, software implementation etc.
A BUILD decision will require investment of resources in establishing / testing / refining the new product / service and then marketing the product / service to create the market or win market share.
Is your Existing Business set-up to be a sales & marketing machine, or do you have redundancy to allow key staff to step away from existing duties to focus on integrating the new acquisition?
CULTURE:
How strong is the culture in your existing business and is an acquisition likely to disrupt that culture?
A BUY requires the target business to be integrated into the culture of your Existing Business, which can present challenges including resistance to change.
A BUILD allows you to leverage your existing culture.
FINANCING:
How do you intend to finance entry into the new segment?
If you are wanting to use Debt Finance, it is important to bear in mind that securing Debt Finance is likely to be easier with a BUY.
With a BUY, the financier can lend against the cash flows generated by the business being acquired (called a cash flow lend).
With a BUILD, a financier is likely to have less appetite as the new offering is unproven and there are no cashflows to commence with.
A BUY vs. BUILD decision has many facets and complexities to it. Considering the above items will help come to a well thought out and analysed decision.
Written by Tim Maclean, Managing Director at Zealth Advisory
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