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Don’t Build It if You Can Buy It!

by on March 28, 2014

build-buyThink your business is ready to expand?

Deciding whether to expand your business organically or through acquisitions is the ultimate ‘build or buy’ decision. It’s similar to the choice between buying an existing home or building your own, but we’re talking about your livelihood here—not to mention your employees’ well being and your investors’ returns.

Mind you, for businesses, the buy and build paths aren’t mutually exclusive. You can certainly grow your business in hopes of adding more operations down the road and you can buy new businesses with the intent of growing them organically.

Both strategies have a lot in common. They require similar disciplines in terms of cost-benefit analysis and careful execution. And the hazards along each path often pop up to varying degrees in similar areas.

Build or Buy? The Basic Benefits – and Costs

On the surface, expansion through acquisition makes a lot of sense if you’re looking to enter a new product line or a new market. Setting up shop in a new location and building from scratch is costly and time consuming. Finding acceptance for a new product can be a slog.

What you get is an instant infrastructure, customer base, cash flow, inventory, physical plant, distribution network and supply chain – all the vital ingredients for a functioning business.

Buying to fill a solution or technology gap also makes sense.  Buying a developed solution that has already passed beta testing and has been launched in the marketplace advances your product development life cycle by months if not years.

Building can allow you to move at your own pace, pull back if circumstances change quickly on you and guard your business culture. However, the pace of execution could cause you to miss a market opportunity.

Build or Buy? Three Things You Must Have in Both Cases

Whether you’re embarking on a buy or a build strategy, you want to make sure that your existing business is on solid ground.  Three things – the strength of your team, infrastructure to support new customers, and solid financial controls and metrics – are essential to any building strategy, as well as an acquisition strategy. But if you’re seriously looking at pursuing acquisitions, there is another critical element: experience at deal-making.

Build or Buy? One Thing You Must Have in an Acquisition Strategy

In an ideal world, your whole top management team would have some expertise in closing and integrating an acquisition, but that’s seldom the case. Hopefully someone in your top ranks has solid experience in the area. But failing that, you’re going to have to bring in a corporate development person.

Before settling on an acquisition target, acquirers must take a hard look at their core strengths, weaknesses, and strategies for growth. Instead of buying a company because it is available or attractive in its own right, make sure the acquisition fits into your company’s overall strategy.

Build or Buy? The Decision

Ultimately the decision on whether to build a new business versus buying another company comes down to whether you want to get into a new geography or product line right now. If so, making an acquisition is likely the way to go.

But if you’re the more methodical type who needs to put your stamp on every aspect of your business and does not handle well the fear of the unknown (and every deal has an unknown), then a build-out strategy is probably the best course of action for you.

p.s.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn How to Quickly Increase Your Valuation – A Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

Related Articles:

Think Small to Win Big

Fast Growth is Different

The Game is Growth

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2 Comments
  1. Ralph D'Altilia permalink

    Agree the buy strategy to grow many times would be a more viable and a better alternative to organic growth.As important when a company decides to grow through acquisition it is essential a clear profile of the class and type company to be targeted is developed before embarking on this strategy.

    Ralph D’Altilia
    Principal Xcelr8 Partners

  2. Reblogged this on dbusbybiz and commented:
    Take out much of the risk of starting a business from scratch.

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