Corporate Development: Build vs. Acquire

Strategic planning is the time to think big. Ask what is possible and ask what it would take to get there. You may emerge from strategic planning with a clear objective and little guidance on how to reach that lofty goal. One common question that arises is: Should we build our internal capacities through investment or acquire a company to accomplish our strategic objectives?

A thorough build versus buy analysis is fraught with complexity. Each situation is unique, but there are common considerations that must be addressed in any scenario.

Know Your Timeline and Fundamentals

The starting point for these conversations is around timing. A good exercise is to fill in the blanks in this sentence: Our goal is to ________ by _________. The first blank may be something like ‘grow revenue by 50%’ or ‘add a new service’ and the second blank is your initial deadline.

This information is critical for guiding your strategy. The additional groundwork you need to do is a deep dive into your operating fundamentals. This includes self-awareness of your customers, revenue drivers, competitive advantages, and weaknesses. 

This is one place where an outside perspective can be extremely helpful. One option is hiring an M&A advisor. You should select advisors who are familiar with your industry and the larger marketplace. They can help you look at your operating fundamentals with fresh eyes, offering insights they have gleaned from similar situations they have experienced with other clients. 

Making the Case

To compare a build versus buy scenario you must create a business case for both options. There will be many similarities between the two, but each has its unique specifics that must be fully fleshed out in order to arrive at the best path for your company. 

Common to both cases will be an analysis of the marketplace. Here are some of the questions you need to ask yourself:

• Will the current market support continued expansion?
• How strong is the brand recognition and the customer loyalty for the existing companies you will be competing against?
• What does the future of this market look like?

Considerations for Building Up

Building up a business unit is generally a lower risk proposition with a longer time frame than pursuing growth through an acquisition. There are several reasons for this. First, you can do it gradually. There may be large expenditures (i.e. a new facility, extra staff, etc.) but these can be planned for and integrated into budgets more slowly than having to spend millions of dollars to fund an acquisition all at once. 

A pitfall of this approach is being able to secure the resources you need to accomplish your goals in a timely fashion. For example, if you have retail locations and want to open another one in a larger metropolitan area you may have to pay a premium for the space (or it may not be available when you need it). 

A new facility or location carries immediate costs (construction or a lease) and significant ongoing operating costs that need to be planned for. You will also need to build up a customer base which may require spending new money on marketing. It will likely take several years for you to ramp up to your targeted run rate of the business. 

Both the feasibility of your plan and the availability of the resources to accomplish are two other places where outside eyes can be valuable. A corporate development team with good self-awareness will have the mindset of: We don’t know what we don’t know.

Considerations for Buying

An acquisition is typically a bigger undertaking. In general, the risk-reward calculations are greater. Things like expenses, revenue, and expectations are more immediate.

Considerations that are more specific to an acquisition strategy include the value of the brand you would be acquiring, the people who would come with the company, and the costs associated with integrating two businesses (both the hard costs and culture-related expenses that can be harder to calculate).

Keep in mind that an acquisition will almost certainly draw the attention of your leadership team away from the day-to-day operations of your business. 

When to Get Outside Help

Deciding whether to build out or buy up a company is a tough decision. Thorough evaluation of each option is important. For instance, if your brand is strong within a market and an appropriate location is available, building a de novo might be the best strategy. However, if you need to establish a brand just to enter a market that might make an acquisition more strategically advantageous. Overall, both options present a return over a specified time period and carry certain risks. 

If there is even a chance that you will go the acquisition route it makes sense to engage M&A advisors. They can help you model various scenarios to validate your assumptions and be valuable partners to your company’s leaders as they navigate the M&A process. They will bring fresh eyes to your business operations and knowledge from their experience closing other deals in the past.