Episode 32: The Boutique: The Anatomy of the Buy vs. Build Decision

Episode 32: The Boutique: The Anatomy of the Buy vs. Build Decision

To sell your firm you must prove to a buyer that buying your firm is a better move than building the practice internally. Collective 54 founder Greg Alexander reviews a framework to assess the buy vs. build decision from the perspective of an investor.


Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host on this episode. I will make the case that to sell your firm, you must prove to a buyer that buying your firm is a better move than building the practice internally. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s, founder and chief investment officer. Greg has developed a framework to help you think through the buy versus build decision from the perspective of an investor. Greg, great to see you. Welcome.

Greg Alexander [00:01:11] Thanks, Sean. Good to be with you today.

Sean Magennis [00:01:13] So allow me to set the stage a bit before I begin asking you some questions. When considering an acquisition, a strategic acquirer starts with a fundamental question. Should we buy this boutique or build the practice internally and owners who want to sell their boutiques must make it more attractive for a strategic to buy. Greg, in this context, what makes it more attractive to buy?

Greg Alexander [00:01:41] Three things. Time, cost and probability of success.

Sean Magennis [00:01:46] So time, cost and probability of success. Let’s take this one at a time when you say time. What do you mean exactly?

Greg Alexander [00:01:56] Sure. When a strategic buyer is looking at acquisition it is often to fill a gap. The market shifts and at times larger firms portfolio of service offerings falls behind. Clients are asking them for help in a certain area and they cannot deliver. So they must often miss the revenue opportunity. This gap can be filled either by building the capability internally or it can be filled by purchasing a firm who specializes in the area. The urgency on which the gap needs to be filled drives the timeline. If the market allows the strategic enough time to build the capability internally, they will. However, if the market is moving very fast, the strategic will buy a boutique. This gives them the capability the day the deal closes. And this is much, much faster.

Sean Magennis [00:02:49] Excellent. That this makes total sense. So let’s now turn to number two cost. So in this context, how does cost impact the buy versus build decision?

Greg Alexander [00:03:01] Well, cost is just as important as time. So, for example, right now, marketing agencies are buying up tech specialists. Why? Their clients are demanding more and more digital capability from them. And it is very expensive to build this out internally. Those who have tried to do so have failed miserably and paid a lot of dump tax. It is much more cost effective to acquire boutiques with specific digital capabilities.

Sean Magennis [00:03:33] I can see that, Greg, and there are many examples of multi-million dollar technology mistakes. Number three is probability of success. I think I know what you’re referring to here, but please expand for the audience.

Greg Alexander [00:03:48] So probability of success is often added to time and cost when deciding to buy or build. Professional services firms are only as successful as their reputation allows. A few high profile failed projects and a firm could become worthless overnight. When a large firm expands into new service areas, they are putting at risk long standing client relationships and millions of dollars of annual billings. They cannot afford to stub their toe, so they often buy and pay up great boutiques just to be sure this is going to work.

Sean Magennis [00:04:30] These are great examples, Greg. So this three point framework to think through the buy versus build decision from the viewpoint of the buyer is very helpful.

Sean Magennis [00:04:43] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Charles Fenstermaker [00:05:09] Hello. My name is Charles Fenstermaker. My family owns CH Fenstermaker and Associates LLC. For over 70 years, we served customers in the energy market as well as state and municipal governments, primarily throughout the Gulf Coast region. Our clients turn to us for help with projects dealing with surveying and mapping, civil engineering and environmental regulatory challenges. If you need our help in the surveying civil engineering and environmental regulatory space, you can find us at www.Fenstermaker.com. That’s www.f-e-n-s-t-e-r-m-a-k-e-r.com.

Sean Magennis [00:05:49] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com.

Sean Magennis [00:06:05] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm, our preferred tool as a checklist. And our style of checklist is a yes, no questionnaire. We aim to keep it simple, by asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, strategics will find buying you is more attractive than building internally. If you to no, too many times strategics will most likely decide not to buy you and instead build internally. Let’s begin.

Sean Magennis [00:06:48] Question number one, as the market shifted, creating a gap in the service portfolios of the market leaders in your niche? Number two, are these market leaders aware of this gap?

Greg Alexander [00:07:03] Don’t assume that sometimes these big firms are just plotting blind. Yeah.

Sean Magennis [00:07:08] Number three is the gap, one that urgently needs to be filled? Number four, have you directly competed with the market leaders on a deal in this specific area? Number five, did you win?

Greg Alexander [00:07:25] Yeah, I mean, the quickest way to get people’s attention is be to beat them at that deal.

Sean Magennis [00:07:29] Question number six, do the market leaders know they lost to you? Number seven, do they know they lost because you have a capability advantage over them?

Greg Alexander [00:07:40] This is key. Very often they assume they lost because you were cheaper. What would be fantastic if the listeners could pull this off, is you competed head to head, you won and you were more expensive than them. That will really catch their attention.

Sean Magennis [00:07:54] Outstanding. Number eight, if they were to fill the gap, would it be faster to buy you? Number nine, if they were to fill the gap, would it be cheaper to buy? And number ten, does their probability of successfully filling the gap go up if they buy you?

Sean Magennis [00:08:16] In summary, the buy versus build discussion is happening with or without you. It is best for you to participate in and frame that discussion. Make a strong case that acquiring your firm is faster, cheaper and more likely to be successful than building out an internal practice.

Sean Magennis [00:08:40] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique Artist Start Scale and Sell a professional services firm. I’m Sean Magennis. Thank you for listening.