From The Due Diligence Show (Episode 5), the team at Thought Source admit his is such a common question that their clients ask. Many clients have a proficient engineering team who are eager to build something new. So should you give them some budget and get them onto it, or acquire another company that may have already learned from their mistakes and built some market reputation? The answer is never straight forward.

Adam Jaques: Welcome back to the deal room, we are back with another great topic. And this one is Andrew’s topic, should we buy it or build it? Andrew?

Andrew Borzycki: That’s one of those perennial things that engineers always ponder. Engineers are great at building things and I have been an engineer most of my career as well. It’s one of those “Surely we can just make ourselves” kinds of questions. That’s what we as engineers always feel. It’s also a desire to make. Absolutely, yeah, we want to make stuff.  The reason why this is such a tough decision is that the company, has a team who has the capability to make something and they know how to do it. But the dilemma is – if you buy an app from another company, this already exists. While if you build it, you have to actually make it. Does that actually meet the timeframes that your company needs to get something out to market in the required time frame that meets a specific need? Can the internal team deliver this according to the requirements in the given time? Another thing when you go internal versus getting buying from somewhere else is that there’s a lot more than just the coding to make something real. You need to have the marketing, the sales people involved in selling it. You need to have the business plans, the product vision. All of this can likely be done internally. But are you going to get it done? While this other organization over here, they’ve done it already and it’s there to buy.

Luke Silcock: Well, not only have they done it, Andrew. I think what they’ve learned from having gone past some validation steps and let’s imagine that they’ve achieved a certain size of customer base. They’ve learned from the school of hard knocks; they’ve deployed their technology live. They’ve configured it. They’ve made it work in their customer setting, and they’ve been delivering some value. Hopefully they’ve retained those customers. They’ve responded to them and evolved or matured the product, and the team has learned from that exercise. There’s a bit of a bias as well in certain situations. The engineering team, the R7& team in your company is thinking “we can do this”. Yeah. Well, can they even handily compare both options?

Adam Jaques: I think there are all sorts of angles to this. Another one is the fact that sometimes you’ll bring on a certain talent and knowledge and experience in a certain area. Although the existing engineering group could upskill, there’s no doubt a lot of IP and knowledge that’s been created within that new organization.

Andrew Borzycki: Especially once you get into some of the more exotic technology domains. There just is a lot of knowledge that there’s only one way you’re going to get it and that’s by doing it. And that’s where the value of the external company can really make itself present.

Adam Jaques: Companies also want to get rid of a competitor. Sometimes that happens too. Sometimes they want to bring across a customer base that’s perhaps already starting to use a product, with a view of being able to cross sell and upsell to that base in existing product set. There are many different reasons that do go beyond the core build or buy sort of decision.

Andrew Borzycki: Exactly. And that’s why this is such a holistic cross company decision to actually weigh which way you want to go.

Luke Silcock: You might be thinking do I do a build or buy assessment before I go and acquire a company, or do I do it in the middle of diligence? There is no hard and fast answer on this one. When you’re doing it in the middle of diligence, it’s a bit tricky because you’ve already signed a letter of intent and really the kind of rules of engagement at that point. You’re making a genuine offer to acquire the company. However, it is useful to know, and our clients sometimes ask us to run that parallel thinking process of – if it’s going to cost us this amount, total cost of acquisition is going to include the amount we acquire for. Plus, when we accumulate our findings during diligence under the banner of a go to green plan. It adds up it’s a total cost of acquisition and how does this compare to a development track where we built it ourselves?

Andrew Borzycki: Luke, you touched on a bit of bandwidth, the internal team deciding whether who’s going to do what. This is where it’s really important to have some distance between your internal teams and the possible acquisition company. If the deal doesn’t go ahead, you may have had your senior people working at understanding and learning confidential information from another company. This is contamination. Learning all of that confidential information, if they go back to their existing team, things can just get legally murky very, quickly. It’s good to know that you’ve got that barrier between your team protecting them and also the other organization, protecting them if the deal doesn’t work.

Adam Jaques: Typically, we’ll advise in that instance that you’re better to have less involvement from those core people within an engineering organization. Because it can be a problem if you go and build something that you were just about to acquire.

Andrew Borzycki: Another area to consider is from an investor lens perspective, if you build something you’re consuming your R&D budget and it can be going up – but nothing is visible as to why that’s actually gone up. While if you go in purchase a company you’ve got this nice visible line item that everybody in the market can see. They know that you’ve actually gone and done this transaction. That’s another thing to consider as well.



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