Should I Buy My Competitor?

That is a story for another day. Owner B, bought, acquired a $3 million competitor in month four for about $2.4 million all in, integrated over the next 100 days, made it to $7.8 million by the end of year two. Total cash cost, $2.4 million closing, plus $500,000 in integration overrun, which was about $200,000 more than budgeted.

Total time cost, 18 months of intense integration work, then 12 months of untangling stuff nobody flagged in diligence. Personal cost, a completely different kind of exhaustion. Not stress eating, just no room in his head for anything else for two solid years.

Both hit the number, neither of them had it easy. The industry mythology is that buying is the fast way. It's not at all.

It's the different way. The real question isn't which one won. The real question is which one was right for that owner at that moment with that team and that bank account.

That's what today is all about. Not should you buy, it's about should you buy. Yes, and I bet you if you ask either one of them whether it was the right path, they would probably choose the other one.

Sounds stressful. Grass is always greener, John. A thousand percent.

Both did well, but it's obviously they had to put a ton of work in in the meantime. Most owners ask, should I buy this competitor at some stage in their business, but what's wrong with that question? Should I buy this competitor is the wrong question because it starts with a specific deal and works backward to justify it. By the time you're asking about a specific deal, you're already emotionally halfway across the bridge.

That's not analysis. That's rationalization. The right question is upstream.

What's the fastest, cheapest, lowest risk path to my next growth stage? And does an acquisition generally serve that or does it just feel like it does because I'm tired? Buying a competitor is a strategy. It's not an opportunity that showed up in your inbox. When an owner reframes it this way, a specific competitor deal becomes one option in a portfolio, not the only path.

The other options in that portfolio are build, partner, license, joint venture, poach a team, hire a rainmaker, buy a customer list instead of a company. And any of those might be faster and cheaper than the acquisition you're staring at. Most owners never look at the portfolio.

They look at the one deal. And so they buy something they didn't need at a price they didn't have to pay to solve a problem they could have solved another way. The deal on your desk is not a strategy.

It's an antidote. Treat it that way. Right, right.

The shiny deal on your desk is a huge distraction. Yeah, I think if one of your competitors comes up for sale, it's so easy to go, Oh, this is the right decision. I've got to do this, especially if somebody else is going to come in and buy it on a larger company, because you could be put on the back foot.

I think we get distracted by it is what you're saying. It's really about having a strategy first. And if buying is the right strategy, then that's the time to approach it.

When does buying actually beat building? Not just in theory, because obviously, the theory always supports that, but in the real world. Yeah. So I think there's seven strategic conditions, right? If it if a deal doesn't hit at least two of these, buying is probably worse than building for you.

So I'm going to say these in order of strength. One, time. You need to be in the new state in under 18 months and building organically takes three plus years.

Buying compresses time in a way nothing else can. Two, barriers. The capability is generally hard to replicate.

Licensing, certifications, patents, geographic footprint, regulated skill, not hard to hire for, actually gated. Three, customer base. The target has a defensible book of business like contracts, recurring revenue, high switching costs that you'd need years and a lot of luck to build.

Four, talent density. The target has a critical mass of trained people in the market where your recruiting funnel has been stalled for a year. You're buying the team.

Five, cost structure. Real economies of scale, not slide deck synergies, right? Overhead, you can consolidate. Vendors, you can renegotiate.

Access capacity, you can absorb without hiring. It's a tough word for me. Sorry.

You didn't have the capacity for that word. I certainly didn't have the capability. Six, geographic expansion.

Entering a new region, cold costs with 18 to 24 months of losses, you are buying a rooted operator that can skip that curve. Seven, defensive. If a competitor gets acquired by a bigger player, your position gets materially worse.

The buy is a positioning move, not a growth move. Time is the one thing you can't buy back. If time is the strongest drive on that list for you, the acquisition now starts to earn its own case.

If time is not on the list, if you're not under a real clock, building is almost always cheaper, safer, and less disruptive to the business you already have. Owners buy when they're tired more often than they buy when they're strategic. Being tired is not on the list of seven.

Right, right. Time is the number one. So we're going to have a quick break.

And it fits, unfortunately, because this whole episode is about when you stop patching the thing and finally replace it. Go on. This is brought to you by Revolution Furnishings, family owned, made in New Hampshire, bedroom furniture that is not held together by hope.

This is a direct shot at somebody. Who? Me. Me again.

I have a dresser in my bedroom that I've assembled 15 years ago from a flat pad box every three or four months as a drawer stops closing. Right. And I have to take it apart on a Sunday and fix it.

That's the build option, John. You're building the dresser again every 90 days. Oh, lucky me, I am.

And by my count, I've now built this dresser approximately 27 times. At some point, the answer is buy, not build. That's right.

That is the entire episode. That is the entire episode. Revolution Furnishings does bedroom, home office and bath, platform beds, storage beds, dressers, nightstands, wardrobes, pedestal desks, bookcases, collections named after actual New England towns, Bedford, Boardsmith, Shaker, Exeter, real wood, real drawers, real craftsmen who do not need a Sunday every quarter to keep standing.

You are describing every acquisition I have ever recommended, which is get the professionally built version and stop being the professional builder. That is right. By the real thing, Revolution Furnishings, RevFurn.com. John, what the heck is a flat pack? I'm not sure.

When does building beat buying? What are you protecting the owner from? So building beats buying in most cases. That's the boring answer, but it's true. Five conditions where buying is a mistake, even when it feels smart.

One, your own operating system is wobbly. Books aren't clean. Cash is chaotic.

There's no leadership bench. If you can't run one business well, you can't run two. Adding revenue to a broken system multiplies the breakage, right? You cannot buy your way out of a broken operating system.

You will only add zeros to chaos. Two, you don't have the cash cushion. If the deal drains your reserves, one bad quarter, post-close, ends it.

Apocalypse, there you go, right? And it'll end it for both businesses. Build gives you a rate limiter. Buy removes it.

Three, your growth constraint is demand, not supply. If you're not fully utilized in your existing capacity, buying more capacity is buying a bigger problem. Fix the top of the funnel first.

Four, the synergies are hypothetical. If you have to squint at the model to make the math work, the math doesn't work. Real synergies survive skepticism.

Fake ones require enthusiasm. And then five, you're tired. This one gets its own bullet because it's the most common one and the one owners never admit to.

Buying to escape your current business is a $2 million vacation you'll still be paying for in seven years. If any of those five represent you, don't buy, build, or don't grow at all this year. Fix the foundation.

Growth will be there in 12 months. But the most expensive acquisition is the one an exhausted owner does to feel like something is happening. Right.

It feels like a shortcut. That line, super important. You can't buy your way out of a broken operating system.

That's super important, right? You're not going to get better just by buying something. You got to fix what you got. You're absolutely right.

Look at Apple versus Microsoft. Wow. Are you talking about my broken Mac? You just switched to Mac.

I did because Microsoft's broken. Once you go Mac, you don't go back. That's what they say.

That is what they say. The Mac or the the sweet of the juice. Say that again.

The Mac or the berry, the sweet of the juice. Okay. I've not heard that one.

Alrighty. So if owners are running the numbers and the numbers say buy, what's the trap in that math? The build versus buy spreadsheet almost always favors buy because the buy side is one number you can see and the build side is a fog of assumptions, right? The buy number is concrete, purchase price, integration costs, day one revenue. It looks like math.

The build number is a range, marketing spend, hires that maybe work out, maybe not, capacity, maybe fill. It looks like guessing. Concrete beats guessing in the human brain every time, even when the concrete number is wrong.

So four places the buy math lies. One, purchase price is not total cost. Integration cost is usually 30 to 50 percent of purchase price and always gets underestimated.

Owner B in our story budgeted $200,000 and spent $500,000. That was normal. It wasn't a disaster.

Two, synergies get counted, dis-synergies don't. You'll model the cost savings from combined vendors. You won't model the two key employees who quit within a year because the culture shifted.

Three, the revenue you're buying has attrition baked in, assuming 10 to 20 percent of the acquired customer base walks in year one. If you didn't model that, your effective purchase price just went up 15 percent. And four, the build number is missing the option value of not buying.

If you build and it doesn't work, you can stop. If you buy and it doesn't work, you own it. The build path has an off-ramp.

The buy path doesn't. The math isn't the problem. The math is just confidence disguised as arithmetic or capacity that I can't say.

The problem is what the owner doesn't put in the math. Right. Okay, so let's help people out.

What's a decision framework an owner can actually use? So say they're considering it this week, not necessarily a spreadsheet, but just a way to think. How do we help them frame it? So I think you have to ask yourself three questions and answer them in order. Answer them honestly.

And if you can't get past one, don't move to the next. Question one, is your current operating system running at seven out of ten or better? When I'm talking cash discipline, books, meeting rhythm, leadership bench. If no, you're not ready.

Right. Build or hold. Don't buy.

Question two, is the strategic driver time or one of the six other conditions from the buy list? Or is it this deal came up and it feels big? If it's the second one, walk. That's not strategy. That's opportunism.

Question three, would you do this deal at 20 percent higher than the asking price? If no, your walk away number is already below asking. You're not negotiating from strength. You're negotiating from wanting.

If you get yes on all three, buying is a legitimate strategic option. Not the winner yet. The option.

Now you can start running a real process. If you get no on any of them, the answer is not buy. It might be build.

It might be not this year. Both are fine answers. Not this year is a real strategic answer.

Owners forget that. They think growth has to happen on their calendar. The market doesn't care about your calendar and it doesn't care what Dave Ramsey says, whether you grow or die.

Right. If you're not honest with yourself here, the market will be honest for you in about 18 months. And it's cost more when the market does.

Right. Super important point there. We're going to we have an episode coming up about the three legged stool.

And it's about understanding the exit plan for the business, the the wealth plan for the owner, as well as whether the business is ready. Right. We're going to go into that in detail.

And what you're saying here is if you're not thinking about the wealth plan for the owner, there's no reason to force it. Right. You've got to let the business business has to be there in its own time.

And that has to tie into the other legs of those stools. Sure does. I can't wait to talk about furniture from Red Furniture and the stool episode.

Quick, quick break, John. I want it on record that I somewhat behaved this episode. Noted.

This one is Revolution Cabinetry. The other half of Revolution, Manchester, New Hampshire. I have opinions about cabinets.

Of course you do, Ryan. I once decided to build my own kitchen, big box store, flat pack cabinets. I looked at the price.

I looked at the video. I thought, I can do this on a Saturday. That is a classic build versus buy failure, Ryan.

You picked build. You were wrong. I was wrong for six additional Saturdays.

Two of the doors sagged inside a year. The soft close turned out to be aspirational. My wife looked at me the way a Q of E analyst looks at ad backs.

Revolution Cabinetry is what you buy when you finally accepted that your Saturday is worth more than the cabinets. Very high end cabinetry. Everyone is built in their New Hampshire shop by their own team.

Dovetail drawers, doors soft close because they're engineered to, not because a foam pad is doing its best. Cherry, walnut, white oak, maple painted, kitchens, vanities, closets, mudrooms, built-ins, home offices, fireplace surrounds, anything you're going to try to do yourself on a Saturday. You people also do custom millwork, which matters because there are people who care about that.

As a Canadian, I have deep opinions about millwork. We invented chimps. That's not true, but nobody's going to check.

That's your one. That's my one. Eight to 12 weeks from approved design.

They serve New Hampshire, Massachusetts, Maine, Vermont, all in New England. Revolution Cabinetry, RevCabinetry.com. Buy the thing. Do not build the thing on a Saturday.

This is a real principle. That is right. Okay.

The answer is buy. Let's talk about, talk a little bit about how people start. So say the framework says buy, where does the owner actually start this week? Not, don't deep dive into the process.

We've done that in other episodes and we'll continue to do that. But what is the first move here? You got to understand you are not ready for a deal yet. You're ready to build a pipeline.

Those are two different things. Your first move, write your investment thesis in one page. What you want to buy, why, what the strategic driver is, which are the seven conditions from earlier, what you'll pay and won't pay, what integration looks like.

If you can't write it, you're not ready. Second move, build a target list, 15, 25 companies that fit the thesis, not one target, a portfolio. The moment you have one target, you have a crush, not a pipeline.

Third move, talk to your advisors, not brokers, your accountant, your attorney, your banker. They know who's tired, who's for sale quietly and who's going to be for sale in a year. Brokers only show you the auctions and auctions are the worst way to buy and the most expensive.

Fourth move, score every target on a one page rubric, 15 minutes per target, revenue, EBITDA, customer concentration, key person risk, cultural fit, affordability. Most will get eliminated in the 15 minutes. That's the entire point of that exercise.

Fifth move, have a walkaway number written down before you ever meet with a seller, not after, before. If you don't have a number before, you'll invent one after and the number you invent is called whatever they're asking. That's it.

That's the first month. No LOIs, no lawyers, no signed anything, just thesis, targets, screening, and discipline. The whole IDEA framework, which is a proprietary system I came up with, IDEA, DEVELOP, EVALUATION, ACT, the four phases, the seven diligence workstreams, the 100 day integration sprint.

That's a future episode, bookmark it. But you don't need it yet. You need the front end done right or the back end doesn't matter.

It always seems like you're hitting the brakes, Ryan. Super excited. There's a deal on my desk.

I want to do it. And you're like, whoa, whoa, whoa, whoa, whoa. Pump the brakes here.

But there is a reason for that because people can very easily get ahead of themselves, get embroiled and waste money. You're throwing dollars at lawyers, right? Obviously, we've had owners that spend a hundred grand or so and end up with nothing at the end of the day. So pumping the brakes is appropriate, right? Yeah, you always break for moose, right? Why not break for a million dollar deal, right? No, I hit him.

That feeds us. That feeds us for a whole year. And you're on your sixth truck, right? So scary story.

I see this every single year. The owner falls in love. Oh, so nice.

Before doing the strategic work, signs an LLA, hires the most expensive M&A attorney that they can find on referral, spends the first 60 to 90 days in legal drafting back and forth with the seller's counsel in preliminary diligence. Bills at the end, about $100,000 in legal and accounting fees. Then real diligence reveals what the owner should have caught in his first screening.

Customer concentration was 50%, not 25. The founder's wife runs operations and is not coming with the deal. There's an ugly employee lawsuit no one mentioned.

And the EBITDA he underwrote turns out to be creative writing. That last one is a whole episode by itself this season, the ad back conversation. You think it's 1.5 million.

The Q of E says 900,000. Same conversation, whether you're the buyer running it or the seller getting it. Different side of the table, identical bad afternoon.

Deal dies, 100 grand gone, zero equity, three months of management attention pulled off the existing business, which is now behind on its own numbers. This is not a rare outcome. This is the modal outcome for owners who skip the strategic work and go straight to the deal work.

The way to avoid it, in one sentence, never sign an LOI without a written strategic thesis, a scored target on a written rubric, and a walkaway number in writing. Walkaway numbers are written before you fall in love, not after. After is when ego votes, before is when math votes.

The 100K trap doesn't kill the business, but it kills momentum for a year. That's the actual cost, not the fees, the year. You can't buy back a year.

Time is the one thing you can't buy back. It cuts both ways. Mm hmm.

Awesome. Okay, last break. And this one is both halves of the revolution, business, furnishings and cabinetry, same awesome owner, two divisions, whole house.

Which is on brand for this episode, one integrated business across two divisions. See what he did there? He turned the sponsor read into a callback to the show. That is a sign of a man who has been doing this too long.

I have been doing this too long. My wife will confirm. Here's the pitch, and it lines up with the whole episode.

You're a homeowner, every room in your house is build versus buy question. The answer is basically always buy. Correct.

The kitchen, revolution cabinetry, the vanities, the mudroom, the built-ins, the closets, the home office cabinetry, revolutionary cabinetry, the bed, the dresser, the nightstands, the wardrobe, the pedestal desk, the bath vanity, revolution furnishings. Instead of what you did, which was. Instead of what I did, which was hire six different people from six different websites and spend nine months of my life as an unlicensed general contractor.

There's a pantry door in my house that swings into the fridge. My wife has never let me forget it. Revolution cabinetry would hang that door on the right side because they design around how you actually use the room.

That's on their website. The pantry door is a metaphor for every acquisition an unprepared owner has ever done. One design conversation, same team made in the same New Hampshire shops.

Buy the integrated version. Do not build the DIY version. This again, the whole show.

Get the pros to do the whole house. Revolution. Revfern.com and Revcabinetry.com. All right, Ryan, let's start to wrap up here.

A owner's driving to the office right now with a deal on their desk. What is the one thing they do this week? One thing this week before you talk to a lawyer, before you talk to the seller, write your one page investment thesis by hand on paper, not in a doc. At the top, the reason I am considering acquisitions instead of building is, and if you can't finish that sentence in 15 words with one of the seven strategic conditions from earlier, you don't have a thesis, you have a feeling.

Then what specifically am I buying? Capability, customers, capability, capacity, geography, talent, but what am I willing to pay? What am I not willing to pay? What does year one integration look like? What am I giving up in my existing business to do this? One page, one hour, no lawyers. Show it to your integrator, your CFO, and more importantly, your spouse, in that order. If any of the three has a real reservation you can't resolve on the paper, the deal is not ready, pause.

The deal that survives the thesis is the only deal worth doing. The deal that doesn't survive the thesis just saved you $100,000 in legal fees. Next batch, we'll do the deep process episode, the four phases I've ideated, the seven diligence work streams, the hundred day integration sprint.

That's for when you are already know that you're buying. Today was about knowing whether you should. And next week, episode 14, three legs, one wobbly.

Exit readiness has three legs and every acquisition we just discussed is supposed to strengthen all three. Most strengthened one in week and two. That's next week.

All righty. Okay. So headline here and then give us a takeaway.

So the one thing the owner takes away from this episode and then lead us out. All right. So I think build versus bias is a strategic question.

It's not a deal question. Owners who ask it as a deal question, always overpay, always over emotional, always under deliver, right? We had two owners in our story, both got to 8 million. They both got their different roads, different prices, different scars.

The point isn't which one. The point is which was right for that owner at that moment.