Buy or Build? That is the question
I was recently at an FD Recruit Breakfast seminar and the discussion question was “Buy or Build, Acquisition or Organic Growth. Which is better for SME’s?”
This is an age old conundrum, however the question is not a binary one. Assuming you buy well. The underlying businesses will grow and therefore give a larger platform for future acquisitions. Whilst funding, integration, loss of customers and over stated assets are an ever present risk with acquisitions, they are an exponential accelerator of growth if selected carefully.
That said, I recalled a simple decision tree I employed during my time at an acquisitive group. We had no desire for land and buildings as our supply chain had capacity or we could sub contract. We had no desire to enter greenfield markets as we were good at what we did and following the adage of “stick to what you do best”.
The decision to pursue a target was based on three questions:
Does the acquisition bring new customers in our market?
Does the acquisition bring new geography in our market?
Does the acquisition bring product line extensions or product lines complimentary to ours?
The rationale was simple and based on the cost and risks of customer acquisition. A “me too” product would be expensive to develop and always under price pressure to gain share. A new geographic expansion is fraught with unknowns, risks and hence cost. Winning new customers with the same product relies on significant sales and marketing investment with no guarantee of success.
A potential target company that passed one of the tests was looked at but often passed over as an expensive and difficult acquisition. If the target had two of three we engaged with the target to assess the depth of value and costs of integration. Where we found all three boxes ticked we actively pursued the target and would be willing to invest more generously in time and resources to achieve the win.
This is no silver bullet answer to the question, only an attempt to rationalise the decision making process. We found that with the above process, we reduced the time wasted on potential targets and when it came to the deal, we were crystal clear in what we wanted, and when we would walk away.