Tear Down or Build Up

Almost daily we take our dogs for a walk. Meandering through the woods and a mixture of neighborhoods, depending on the route we take, we see a mixture of old and new houses. Kirkland has many small, older homes now being surrounded by newer, larger homes.

A little game my wife and I play is, “Which will be the next teardown?” In a way home teardowns are a lot like the business bell curve.

  1. An innovator type will be the first person on the block to buy an old house, tear it down, and build a new one. He takes the risk others will do the same so he’s not stuck living amongst houses that bring down the value of his house. The same is true for people who take the risk of starting a business, especially one with a new product or service. Of course, the innovator will get his teardown for a reasonable, if not low, price while businessperson pays for the learning curve (developing a market, product refinement, etc.).
  2. Other homeowners in the area and buyers will see this and soon more and more older homes on the block will sell. The price for the older homes will increase, because the next new house will not be the only one. In business, others will see the new market and, depending on the severity of the barriers to entry, decide to start a similar business. Less perceived risk, product acceptance, etc.
  3. Finally, most if not all of the homes on the block will be newer homes. The late buyer will find she has to pay more but her value is there because of all the other new houses. The late seller will get more because there’s more demand. In this case, everybody wins to some degree. Not necessarily the same in business. If the barriers to entry are too low more and more people will enter the niche. One person, and then more, will franchise it and soon it’s a commodity.

When it comes to buying and selling a business most buyers and sellers will want to be in the middle example, with some barriers to entry and definitely with a competitive advantage they can leverage. This is what leads a solid market share and sustainable profits.

“These are my values. And if you don’t like them, I have others.” Grouch Marx

 

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