Buy and build refers to companies expanding operations by acquiring, or ‘buying’, other businesses, thus ‘building’ the business further. It is a strategy adopted frequently by private equity firms, who purchase a ‘platform’ company and grow the business by acquiring additional businesses within the same industry to increase the value of the company via the benefits of scale.
A buy and build strategy involves identifying and acquiring businesses that will increase the value of the platform company upon exit. Here, we’ll go through different strategies and how they work.
What Is a Buy and Build Strategy?
A buy and build strategy is most commonly used by companies, operating in fragmented markets with a large number of smaller operators, which are looking to expand their operations and increase revenue and profitability or make the core business more attractive to an acquirer itself (particularly relevant in private equity investing as an exit is required to return capital to investors).
Target acquisition companies can deliver strategic benefits, such as:
- Possessing an area of expertise that the primary company doesn’t currently have
- Be active in geographies the primary company is currently not
- Have a new customer base
- Offer different products and services
These benefits are typically called “synergies”.
When looking to expand operations and grow a company, there are generally two options: organic growth via your own sales efforts and broadening of your offering, typically needing to displace a competitive business. The second is to buy an existing company with all the desired skills and customer base already established.
The latter option is what is called a buy and build strategy. The term can be used interchangeably with a mergers and acquisitions (M&A) growth strategy, which refers to when companies expand by acquiring other businesses. A buy and build involves the purchase of other smaller firms – often enabling a founder to exit – to eventually grow the primary firm to a materially greater scale. This generates higher value returns through the addition of different skill sets and abilities, cost benefits and the scale benefits that accrue from putting more revenue through a central cost base.
The purpose of a buy and build strategy is to:
- Increase the value of an organisation
- Grow at a greater speed than is possible organically
- Increase bottom line profitability
- Add new services and expertise
- Benefit from higher valuations as a larger company
When executed effectively, a buy and build strategy can see companies grow exponentially, in a shorter space of time than organic growth typically allows.
Buy and build in private equity
Buy and build is a popular strategy used by private equity firms. The investor initially acquires a well-established ‘platform’ company and, subsequently, bolts on a number of smaller companies. The intention is to deliver one central larger, faster growing and more efficient operation that should deliver a higher return and be of greater value as one entity than as fragmented smaller businesses.
Benefits of Buy and Build Strategies
There are many benefits to a buy and build strategy. As mentioned, it allows companies to expand and grow their operations at a faster pace than typically possible organically. But it can also enable organisations to acquire the skills and expertise they need to grow and add value, rather than develop the skills internally, which can take significantly more time and it can allow material cost savings.
Expansion and growth opportunities
The primary purpose of a successful buy and build strategy is to accelerate expansion and growth. Growing an organisation organically takes time and resources and if it involves a new market, a company is usually faced with established competitors with longer track records. In those circumstances, buying into the sector is often the most effective approach. Similarly in highly fragmented markets, particularly those with rising regulatory or other cost pressures, there can be opportunities to pick up smaller companies at lower valuations, giving an immediate uplift in value for the consolidator.
Expand services and skillsets
A buy and build strategy can also allow new services and skills to be added to the company’s workforce, which support the growth of the platform company. This is particularly valuable in circumstances where the platform company already has a large established customer base to whom it knows these newly acquired services can be offered and an effective sales team that can cross-sell these acquired services effectively.
In the vast majority of buy and builds, an element of cost saving is a significant part of the strategy. This can come from:
- Central cost savings from the removal of duplication in roles and functions in the acquired business, where the platform already has these in house
- Gross margin and other supplier term benefits from the greater purchasing power of the larger combined operations
- Other efficiency savings, such as where existing sales teams in each business can sell the other’s products, reducing the cost of customer acquisition and potentially accelerating revenue growth
In most industries, smaller, less established companies command lower EBITDA multiples on sale. This is primarily for risk/reward reasons, whereby there is usually greater risk in these smaller businesses from issues such as customer concentration, key man risk from reliance on founders or key salespeople and disparities in negotiating power with large customers or suppliers. This also flows through into deal structuring where lower levels of finance may be available to a smaller company than a larger one, and so on.
Buy and builds can take advantage of this by acquiring at these lower valuations and then immediately benefiting from the uplift in valuation of the acquired business via it now being lower risk as part of the greater whole. When combined with potentially greater growth opportunities, cost savings and better margins, the overall uplift in company value can be significant.
Buy and Build Factors to Consider
Like any business strategy, buy and build can have its pitfalls if not executed properly. It is important to consider the following factors:
Acquiring, and later integrating, multiple businesses can be a difficult task, especially if not thought out carefully. Therefore, having a well thought out strategy behind both the acquisition and integration stages is essential.
Pre-acquisition, it is important to consider how each business will work together, as well as what they provide in terms of value. Most importantly, for a smooth integration, it is essential to have a highly detailed plan that is realistic in terms of timescales for delivery. Each new business must be acquired and integrated carefully, with care taken to ensure everything is aligned before moving on to the next company.
A regular downfall of buy and builds, particularly in fragmented sectors with a lot of targets, is that the M&A side of the strategy takes precedence over the integration of the acquired companies. This often means that the benefits of things like cost savings and cross sells are not delivered, and the company becomes unwieldy with duplicate systems and processes.
Choosing the platform
It is key to choose a platform company that sits well in the chosen industry, has the key central functions and systems required to allow smaller companies to be integrated and can perform within the sector, to drive profitability and success. Again, a regular pitfall is to bolt companies on to a platform that is not ready for them and does not have the required management infrastructure and systems.
Complete due diligence
As with any investment, you should complete due diligence when working on buy and build strategies. Doing so will ensure that all facts and information are known to all parties involved and the best decisions are being made before moving forward. In particular, a cynical eye on anything that is not clearly identified and evidenced as cost saving is important to ensure that downside risks are covered, and upside synergies are identified.
The success of a buy and build strategy also depends heavily on the acquired businesses working well together and with the platform company, so it is crucially important to consider this as part of the acquisition. While there are buy and builds where the acquisitions are essentially customer base purchases and where the platform business can deliver services in its existing manner, there is more usually significant reliance on the acquired business and its team to continue to deliver in the new environment. In these circumstances any difference in culture can derail what otherwise looks like a good fit on paper.
Private equity investments are high risk and speculative which means there is no guarantee of returns and investors should not invest unless they are prepared to lose all of their money. Past performance is not a reliable indicator of future performance. This type of investment is illiquid so can’t be easily accessed until the exit point. The investor is unlikely to be protected if something goes wrong.