There are two main ways to expand a company – buy into another company or build up your own operation. Buying is generally quicker but can be risky. Building it yourself is generally cheaper. So what are some of the key factors to consider when you’re at this crossroads? Let’s break it down.

Why Buy a Business

For many, acquiring another business is the fastest way to grow. The motives can vary a lot, depending on who is doing the buying.

• The Startup Exit: Start-ups, especially in hitech, are often built to be sold. The founders invent the next big thing, then exit for a big profit after just a few years. That’s the theory anyway. In practice, a high percentage of startups fail, but that still leaves a good number that succeed and become prime acquisition targets.
• Instant Marketing Power: Most start-ups lack marketing muscle. A large acquirer may have a well-oiled international marketing machine ready to go.
• Fear of Falling Behind: Larger companies are often afraid of being disrupted. So they are willing to pay well for the right start-up that will keep them ahead of their competitors.
• Buying Market Share: Sometimes the goal is simple, buy a competitor to instantly gain their customers and market share.
• The Need for Speed: Publicly traded companies sometimes need to show the public fast growth. Buying the right company can quickly boost sales revenues and profits.
• Leveraged Opportunities: Some established companies have hit hard times and need to sell a product line to reduce their borrowings. A buyer with cash may pick up a bargain.
• Self-Financing Deals: Some m&a deals are structured so the purchase price is paid out of the selling company’s own future profits, often called an “earn-out.”

We recall one big deal where the seller wanted $0.5bn and the buyer was secretly prepared to pay $2bn. The reason was they each had their own market surveys that predicted very different sales levels. In the end, the deal collapsed due to a lack of chemistry and deep mistrust. Sometimes good advisors have to step in and avert a bad or risky deal.

The Case for Building It Yourself

Of course, buying isn’t the only way. Building a business up gradually has its own powerful advantages.

• Lower Cost & Risk: Buying a business is costly and can require a lot of cash or financing. And businesses are rightly afraid of paying too much or uncovering hidden risks like lawsuits or a sudden downturn in sales. They prefer to build their own business their own way.
• The “Cash Cow” Factor: A successful, well-run business can be a cash cow – why sell it? Many family businesses fall into this category.
• Protecting Your IP: A company with great intellectual property (IP) may prefer to generate its own profits year after year. Good IP can be a popular brand name or just goodwill that keeps customers coming back for more.
• Alternative Growth: A business may prefer to expand using a joint venture, franchising or licensing deal instead of an outright acquisition.

Your Strategic Choice

We at Advisors.biz want to help your business expand internationally. Buying a business or building your own business gradually are major strategic options. We can help you explore the possibilities and present the pros and cons of each.

Contact HQ@Advisors.Biz