Photo by Charles Forerunner
As a mid-market enterprise deciding on whether to enter a new, niche market, one of the pivotal questions to answer will be the how. Will you build it out from the ground up? Acquire an established business in that market? Or does a partnership make the most sense?
The build path is probably the first option the leadership team will discuss and can often be the more profitable route in the long run. However, it can take the longest to bear fruit – if at all. Depending on the market, this could be loss-making for months (or longer) and, just like any other new venture, has the potential to never be profitable. This can also be said for the buy path, as a well-functioning, established business is likely to come with a hefty initial investment as well. However, buying an established company with a proven business model should come with less risk than launching a new venture from scratch and should also be a much faster route to positive incoming cash flows (all other things equal). Of course, buying an existing business comes with its own risks to consider, as we have all seen M&A deals that look good on paper go wrong for many reasons.
On the other hand, the partner path is less obvious unless the leadership team already has experience with it. The partner path is open-ended and can be as simple or complex as needed. For a mid-size firm looking to enter a niche market, the partnership option may make sense if there is already a smaller firm out there with proven success in that niche, which is not efficiently or profitably replicated by building it from scratch, and if the acquisition route is not feasible or desirable for either party.
While there could be many reasons either firm would benefit from a partnership, a typical example is when the mid-size firm provides the boutique shop much-needed support to the front, middle, and/or back-office and provides brand recognition. In return, the mid-size firm participates indirectly in the boutique firm’s growth via some sort of revenue share agreement. A partnership can also be a reasonable trial period for a potential M&A deal down the road if the partnership proves synergistic.
In the end, there is no one-size-fits-all answer, and due diligence needs to be done on all three paths to see which one gives the best chance of success in the new market. Remember that success can mean different things, so the key is to clearly define the metrics of a successful market entry before evaluation. Once you have your destination clearly defined, you can map out the best path to get there.