The Build vs. Buy Equation
If you’re wondering what
your business might be worth to an acquirer, there is a simple calculation you
can use.
Let’s call it “The Build
vs. Buy Equation”.
At some point, every
acquirer does the math and calculates how much it would cost to re-create what
you’ve built. If an acquirer figures they could buy your business for less than
they would spend on both the hard and soft costs of re-deploying their
employees to build a competitive product, then they will be inclined to acquire
yours. If they think it would be less costly to create it themselves, they are
likely to choose to compete instead.
The key to ensuring that what
you have is difficult to replicate is focusing on a single product or service
and building on your competitive point of differentiation. When you create a
product that is unique and pour all of your resources into continuing to
differentiate it from the pack, you can dictate terms, because re-creating your
business becomes harder the more you focus on one thing.
The worst strategy is to
offer a wide range of services and products only loosely differentiated from
others on the market. Any acquirer will rightly assume they can set up shop to
compete with you by simply undercutting your prices for a period of time and
driving you out of business.
C-Labs Focuses On Building
An Irresistible Product
Chris Muench started C-Labs
in 2008 to go after the burgeoning opportunities presented by the
Internet-of-Things (IOT). He began by writing custom software applications that
allowed one machine to talk to another. In 2014, he got the industrial giant
TRUMPF International to acquire 30% of C-Labs, which gave him the cash to
transform his service offering into a single product.
By the end of 2016,
Muench’s product was showing early signs of gaining traction but C-Labs was
running out of money.
In the end, TRUMPF acquired
C-Labs in a seven-figure deal that could stretch to eight figures if Muench is
successful in hitting his future targets. Why would a large, sophisticated company
like TRUMPF acquire an early-stage business like C-Labs? Because they knew that
re-creating Muench’s technology would cost much more than simply writing a
seven-figure check to buy it outright.
In other words, TRUMPF used
The Build vs. Buy Equation and realized that buying C-Labs was cheaper than
trying to reproduce it.
Selling too many
undifferentiated products or services is a recipe for building a business
that—if it is sellable at all—will trade at a discount to its industry peers.
By contrast, the trick to getting a premium for your business is having a
product or service that is irresistible to an acquirer, yet difficult for them
to replicate.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
