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The Build vs. Buy Equation

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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 recreate what you’ve built. If 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
the product that is unique and pours 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.

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