Why Buy-and-build Strategies Work

What Is Buy and Build?

When private equity acquires a well-positioned platform company to acquire additional smaller companies, using the developed expertise in a specialized area to grow and increase returns, it is considered a buy-and-build strategy. This strategy is common with private equity firms with shorter holding periods of about three to five years.

Why It Is An Effective Growth Strategy

If a buy-and-build strategy is executed correctly, a great deal of value can be created when smaller companies are combined under the control of a new company.

This type of acquisition saves time regarding the development of specialized skills or knowledge, allowing for growth and expansion to other markets more quickly and successfully with lower production costs.
Creating a larger, more attractive company offers a path to exploit the market’s inclination to assign larger companies higher valuations than smaller ones.
It provides a clear plan when deal multiples are at record levels and there is a need for less traditional strategies.
Buy-and-build deals generate an average internal rate of return of 31.6% from entry to exit, versus 23.1% for standalone deals.

Getting It Right

The buy-and-build acquisition is not simple to execute. The process demands meticulous planning and due diligence for the strategy to work. The best deals usually employ multiple paths to create value.

Synergy between the acquirer and the acquired is important to the outcome of the deal. Companies should target existing firms that will be a good fit as a team both tactically and culturally. The human element should always be considered.
The management team must be an appropriate fit and have experience with these types of transitions.
There should be a vision in place for where the company will be five years down the road.
The platform company must be stable enough to endure the process regarding operations, cash flow, and infrastructure (IT integration in particular).
Sector dynamics should also be considered. Avoid sectors that are dominated by low-cost rivals or mature, stable players. Focus on sectors with many active smaller suppliers and service providers. Consolidation should result in cost savings and improved service.
While no two deals are the same, there are patterns for getting it right. Those experienced with buy-and-build strategies are more likely to lead to a successful deal.
It can be difficult to identify private equity firms because of the nature of the way they do business. It helps to have an experienced M&A firm with extensive connections and a proven track record of negotiating successfully with buy-and-build-focused private equity firms.

These reasons are among several as to why it is a sensible decision to enlist the help of an experienced M&A firm such as Benchmark International for your vision for growth. Count on us to help you get your buy-and-build strategy done right.

Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com

Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com

Africa: Anthony McCardle at +2721 300 2055 / McCardle@BenchmarkIntl.com

ABOUT BENCHMARK INTERNATIONAL:

Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 12 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.

Website: http://www.benchmarkintl.com
Blog: http://blog.benchmarkcorporate.com/