Charting New Growth Directions

November 2014

At some point, organic growth reaches a plateau, and you begin to consider newGrowth options. Generally speaking, there are three paths to take: You can expand your footprint by building new capabilities or properties, acquiring a competitive or complimentary organization, or by creating a partnership or joint venture to gain the intellectual property or abilities you’re after.

The path you choose, says Bill Theofilou, founding partner of Boston-based growth consult Axia, is dependent on a wide range of factors, but, “it’s driven chiefly by the opportunity you have in the market. If you have a product or service that needs to be in-market quickly, then building might not work for you—acquisition or partnership is a better choice. If, on the other hand, you have a competency in developing similar services or products, you might be in a good position to build.”

That said, each approach has its benefits. Shelly Berman-Rubera, founder and president of SBR (Small Business Results) in Newton, and Michael L. Mason, partner at Bennett & Belfort, P.C. in Cambridge, offer a brief breakdown of the advantages by type:

  • Build. It’s all about ownership and control. You retain any intellectual property you develop (technology, processes, etc.) and you control the process. Building new products, services, and/or capabilities offers the opportunity to reposition your firm in the marketplace, further differentiate yourself from competitors, and reach new prospects, while upselling to existing clients.
  • Buy. Acquisition helps you gain the benefit of existing brands, human and intellectual capital, relationships, and most important, the ability to quickly come to market with a proven property 
  • Ally. Somewhere between the investment of time needed to build and the infusion of capital acquisition requires lie joint ventures. They’re flexible, efficient, and create new chances to bring properties to market quickly, without making a long-term investment of either time or money.

In the real world, Theofilou adds, the choices aren’t necessarily that cut-and-dry. “Let’s say you want to build a new capability. Choice A is to build it yourself, which may mean hiring 14 new programmers and building an infrastructure,” he explains. “At the end of the day, it might cost, say, $3 million. If the same capability costs $5 million to buy or joint venture, which makes the most sense and what’s biggest cost? If, in building, you lag on your timeline and don’t get it right the first time, it could wind up costing you more than the $3 million. What if takes a full year to get it done? That might mean losing a year or more of revenue and EBITDA. If you’d bought or partnered, you’d already be in the marketplace. So you have to consider the true potential costs, juxtaposed against your own capabilities.”

In addition, there are some scenarios that are simply situationally driven. There are, for example, opportunities that require the complete buy-in of the other party for success, which means the creation of equity-based incentives. “Unless you offer a big earn-out, acquisition takes that incentive away,” Theofilou says. He points to the example of the healthcare field, where practices are often consolidated for greater profitability. For dentists, doctors, and other practice types, you want the practitioners to stay motivated to bring patients in. “It makes sense that this type of arrangement would be a joint venture,” he says. “What you’re really after is the entrepreneurship of the practitioner.”

Regardless of the route you take, the key issues involved are time and money. “Developing and building new products and services can take a significant—and unpredictable—amount of time and money,” notes Berman-Rubera. “However, this approach carries tremendous upside because you own all of the revenue, goodwill, and intellectual property that is generated. Acquisitions can mitigate some of the uncertainty, as the product or service is already known and ready to market.”

However, that head start comes at a price, given that you will be paying the creator of the product or service for the goodwill, relationships, and proprietary information that they developed over time, she adds. A strategic alliance involves the investment of less time and money, but it also limits the return from the new offering.

Based on time and investment, Mason says, building typically offers the highest total payoff potential, though it can take time to reach that potential. Acquisition comes with a high and relatively predictable payoff potential, but can be offset, to some degree, by the high upfront investment. Strategic alliances generally involve less investment, but, on the flipside, tend to feature lower returns.

Build, Buy, or Ally: How Much, How Fast, How Rewarding?

 

Financial Investment

Time to Market 

Potential Return 

Build/Develop   Middle  Longest  Highest
Acquisition  Highest  Middle  Middle
Strategic Alliance  Lowest  Shortest  Lowest

Key to any decision is ensuring that you seek the advice of qualified professionals. “Each of these strategies comes with its own unique set of risks and traps for the unwary,” says Berman-Rubera. “It is essential to have a trusted team of business, financial, legal, and marketing advisors to help select the right strategy and implement it successfully.”