When Vaughan Capital Advisors (“VCA”) engages a middle-market company, we assess what the company does well, or better than all of their competitors, or the company’s “unique ability”. Once we identify the company’s unique ability, we determine which buyers will pay a premium for our customer’s unique set of products and services.
The reasons why large companies acquire middle-market companies generally fall into a few categories. Here we examine “Buy vs. Build”.
It is fairly common for acquirers to evaluate a “buy vs. build” scenario when entering a new market. When they consider the “build” option they consider, among other things, how much it will cost in both time and treasure. There is a financial and temporal cost associated with hiring employees to actually build and market a new product. If a company chooses to build a product from scratch, it must also consider how many revenue opportunities it will miss while the company is building their in-house solution. There are huge operational and execution risks in connection with the quality of the product or service that is ultimately developed, and the ability for the assembled team to execute the launch of the new business line.
When the same buyer considers a “buy” scenario they evaluate how well a targeted company is taking advantage of the current market opportunity and how much of a handle management has on where the market is going. The buyer looks at the target company’s current clients and its sales pipeline to figure out how much time it might take for the acquiring company to build those same relationships and sell its products to those relationships in a “build” scenario. What VCA wants to demonstrate to a buyer is that the “buy” option is far superior to the “build” scenario because of the tremendous competitive and comparative advantages VCA’s customer has over the acquiring company’s option of trying to “build” the same product.
VCA wants the acquirer to understand that by acquiring VCA’s customer, acquirer gets into the desired market faster with far less product, operational, execution, and management risk. Acquiring VCA’s customer in a transaction that may take 3-6 months is a far better option than the 6-18 months it might take the company to enter the same new market – a market in which VCA’s customer will be one of several competitors with whom they would have to battle for market share.
Ultimately, VCA wants the buyer to pay a premium for time, certainty and reduced risk of execution in connection with acquiring VCA’s customer. We embrace our role communicating the merits of our customer’s company to many prospective acquirers in order to get our customer the best price for their company and deal terms customized to meet VCA’s customer’s personal and corporate objectives.