Buy-and-build is a deliberate strategy for increasing value by acquiring smaller firms in a row through a well-positioned platform company. One or two acquisitions made throughout a holding period do not indicate a buy-and-build strategy.
A typical example of a buy-and-build strategy is when a private equity firm acquires a well-positioned platform company which would further develop other smaller companies. The main reason for such acquisitions is to leverage expertise in a specialised area to grow and increase returns.
Although buy-and-build strategies have existed for as long as private equity, they have never been as popular as they are now. The strategies are popular since they provide a potent remedy for multiple rising transactions.
They provide GPs with a means of capitalising on the market’s propensity to value larger firms more than less significant ones.
When smaller firms are merged under the ownership of a new corporation, a lot of value may be produced if a buy-and-build strategy is followed appropriately.
Example of a Buy-and Build Strategy
Investment Z acquired a London factory for around $410 million in 2007; the company has already gained ground in the rubber business.
After seven years and four strategic acquisitions later, investment Z decided to sell the factory to XY Capital for $1.43 billion.
Since then, XY has doubled down on the buy-and-build strategy by making four more major acquisitions and a scattering of smaller ones.
How does buy-and-build work?
Buy-and-build works in sectors where the private equity firm has deep expertise, and strong management teams are ready to transition their company into a platform.
The transition is not as easy as it sounds, and it may require a unique skill set as sometimes competitors are acquired to integrate the supply chain vertically. The buy-and-build strategy involves a lot of change. Thus, management teams who can create strong teams and further develop a scalable structure are important.
The ideal market for buy-and-build is highly fragmented and fast developing in terms of market volume and participation. Many enterprise options in a market are crucial because only a small fraction of shareholders are ready to sell their company.
Investors must establish themselves against competing bids in today’s competitive buying climate.
Implementing a buy-and-build acquisition is not straightforward. For the procedure to be successful, careful planning and effort are required. The best deals typically take several different routes to value creation.
On this note, there must be a strong syncronization between the acquired and acquiring companies. Corporations should go for established companies that will work well together strategically and culturally.
Also, to avoid margin loss while concentrating on revenue development, it is advised for buy-and-build strategies to predominantly purchase successful and healthy businesses. Business models primarily relying on people are likewise less suited for buy-and-build ideas.
Who is a Buy-and Build Consultant?
A buy-and-build consultant is a professional that sources investment and acquisition possibilities for private equity firms, consulting companies, acquiring companies, and individual investors. They can also be called authorities in deal creation, making it their goal to find excellent acquisition possibilities to support business expansion.
What does a buy-and-build consultant do?
Creating deals demands perseverance, a smart approach, and a grasp of the mechanics of a successful plan. Here are the roles of a buy-build consultant.
- They take time to know your business and investment objectives.
- They Perform manual research to understand your target sector and how to source the businesses likely to fit your strategy.
- Consultants short or longlist your target companies.
- They qualify interest from eligible firms and serve as a link between them.
- They use their expertise to approach companies you would like to meet.
Consultants use several channels to find the individuals their clients want to speak with and personally obtain and verify their contact information rather than relying on automation. The most acceptable off-market strategy in history won’t mean a thing if the vital target person never sees it. Consultants make your target company see you.
Also, consultants don’t restrict themselves to investors; they assist corporate enterprises and private equity firms operating on behalf of trade entities with their acquisition, targeting projects of all sizes and specialities.
Even though they adapt to the client’s specific requirements, they follow the same strict methodology as any other acquisition brief.
Who can employ a buy-and-build strategy?
Naturally, certain industries are more suited than others to employ buy-and-build strategies. Distribution-related industries have experienced significant levels of consolidation. Once you have access to the suppliers, distributing goods around is not too difficult.
After that, establishing local offices and distribution warehouses in each country is all that is required.
On a keener and more realistic look, it is better to acquire industries that are capital intensive because small family companies are rarely bouyant enough to invest in new units of production.
Capital-intensive industries are also well suited for acquisitions as small family companies often don’t have the funds to invest heavily in new factories or production units.
Moving on, the internet also opens up opportunities for consolidation because once established. Cloud platforms can host many clients. Processes can be automated, and therefore the combination or addition of customer portfolios can have a very interesting effect on a company’s profitability.
Buy and build strategies are unavoidable in developing a successful, highly defensible business.
However, one of its uncomfortable truths is how it can be challenging to build acquisition capability, even though it is a lucrative investment strategy.
At the other end of the spectrum, integration can help private equity firms to craft their buy & build strategy in a specific sector and assess a company’s capability to be used as a platform.
However, badly integrated acquisitions can substantially impair or even jeopardise strong organisations. For this reason, buy and build requires experienced consultants and teams who can see the deal from sourcing through integration.