Is ‘buy and build’ a winning strategy?

Tim Mills, partner at PM+M Corporate Finance, looks at why the buy and build strategy is a powerful tool to establishing a pre-formed market presence.

‘Buy and build’ activity within Europe is at its highest level ever recorded with a total of 619 add-on deals recorded in 2017, up from 574 in 2016.

This is reflected within Lancashire with the deals market remaining buoyant, which is good news for all. The market appears especially good for buy and build deals, most notable is the recent acquisition of 762 American convenience stores by Blackburn-based EG Group.

The buy and build strategy is when a company expands its operations by acquiring a platform company with a developed expertise that it can then build out. Buy and build strategies are an increasingly popular way for both trade and financial buyers to achieve additional scale and profitability.

Private Equity firms often use buy and build to speed up growth and improve returns, particularly in a slow economy where, even after improving operational efficiency, organic growth may not deliver the required return on investment. However, over the last few years we have witnessed an increased level of financial buyers also deploying this strategy.

For vendors, this type of acquirer is often more attractive because the buyer will be taking a long-term view and vendors, who are often concerned for the future security of their businesses, are reassured knowing that the company they founded will form part of a larger, growing entity that will receive attention and investment from the acquirer.

For acquirers these strategies can be challenging as it takes longer to acquire several companies and integrate them. This is largely evident for privately owned trade buyers inexperienced in post-deal integration. Buy-and-build strategies give rise to numerous financial, legal and tax considerations that are not necessarily inherent in a one-off transaction. However, this doesn’t need to be a stumbling block; with the correct tactics in place and robust planning on how future acquisitions will be funded, this method of growth can be extremely rewarding.

A successful integration also requires specific skills and experience in areas such as change management, risk management and operational metrics. For this reason, the appointment of a suitably experienced management team is essential.

The rewards of a buy and build strategy can be significant; many of the world’s leading companies have been created through buy and build acquisitions. Transactions of this nature can represent a win-win deal for both vendors and acquirers.

Appetite for buy-and-build activity continues to be extremely strong across the board, with large organisations continuing to target smaller companies to gain market share and additional revenue streams. Also, more and more private equity firms are focusing on enhancing their portfolio companies’ operating results to create value. With the right strategy in place at the right time, buy-and-build deals can be a proven method of achieving the desired results.