BGF explains: Buy and build strategies

Companies that acquire a number of complementary or similar businesses are often said to pursue a ‘buy and build’ strategy. Many businesses backed by BGF have executed a successful buy-and-build strategy, including Miss Group, Kids Planet and GCI, among others. This approach can be an effective way to increase the size and profitability of your business fast, making your combined business stronger and more attractive to potential buyers. However, the strategy must be done well to be successful – there are many pitfalls to be avoided.

Defining ‘buy and build’ strategies

‘Buy and build’ is a term used in investing to describe buying a target company and then making a series of add-on acquisitions to create a larger, combined business. Essentially it is a merger and acquisition (M&A) strategy that seeks to bring together a number of similar or complementary businesses, hopefully increasing their overall value.

The rationale behind combining these companies is to create synergies, expand quickly and improve profitability for the platform business. Typically, build and build refers to strategies that aim to acquire a series of businesses – for instance, four or more – rather than just one or two.

Done well, a buy-and-build strategy can allow a business to expand much more rapidly than it would ordinarily expand if it were growing organically, that is, without acquisitions. This approach can be useful in sectors where it is difficult or costly to acquire new customers, for example.

The benefits of buy and build strategies

• Near-instant added value. Compared with organic growth strategies, buy and build can add value to a business rapidly. This can happen if the combined business can command a higher multiple than the component businesses – in other words, if it is worth more than the sum of its parts. This may be considered a form of multiple arbitrage.
• Speedy expansion. By buying a series of companies, your business can expand into new regions, sectors and product lines, and boost your customer base and headcount faster than it could otherwise.
• Greater profit margins. Through consolidation, businesses can benefit from economies of scale and reduced costs – for instance by removing overlapping functions, such as multiple finance teams. Larger businesses are also viewed as more stable, with a stronger market position, which has many positive knock-on effects in terms of profitability.
• Higher rates of returns. A successful buy-and-build strategy can raise the profile of the business and attract the attention of potential buyers, if an exit is desired.

Learn more about what makes a buy-and-build strategy successful.

Key considerations for buy-and-build strategies

While they can offer a multitude of benefits, buy-and-build strategies should be carefully considered before they are pursued. They are widely regarded as a powerful tool, but only when executed well. To succeed, consider these issues:

• Managerial considerations. Management of the platform company and the newly acquired business will need to work together to create synergies to benefit the overall business. A strong, high performing management team is critical to the success of a buy-and-build strategy. If there is a clash of management styles among the acquired businesses, this could cause the strategy to fail.
• Motivations of business owners. There can be many reasons why owners would consider selling their business as part of a buy-and-build strategy. It could be to work in a role with a bigger responsibility in a larger organisation, or as part of a planned exit. In either event, you should seek to understand the motivations of business owners in order to make the process as smooth as possible.
• Horizontal versus vertical integration. Many buy-and-build strategies involve acquiring companies that operate at a similar level in the value chain, achieving horizontal integration. But this is not the only option. Acquiring a company with upstream or downstream activities can have a big impact on the value and performance of the business.
• Is your industry right for buy and build? The barriers to entry and potential for disruption are two key considerations to make when considering the feasibility of a buy-and-build strategy.

BGF’s history of backing these strategies

Businesses seek growth funding from BGF for many reasons. One of the most popular is to finance acquisitions. In fact, over 75 of the more than 400 companies we have supported have used the money to grow by buying other businesses. These include:

Miss Group

With BGF as a minority partner, web hosting provider Miss Group acquired seven businesses, increasing its revenues from £8 million to £25 million. In 2020, BGF exited its investment when private equity firm Perwyn acquired the business.

Kids Planet

Thanks to a total investment of £26 million from BGF, nursery provider Kids Planet expanded its network to 52 sites across the North West and the Midlands. In 2020, its acquisition of nursery provider Kids Allowed turned it into the UK’s third largest nursery group.

GCI

With a £10 million investment from BGF to fund its buy-and-build strategy, Lincoln-based GCI acquired 12 companies, increasing its headcount from 150 to 500 people. GCI was acquired by Mayfair Private Equity in 2018.

TCL Group

A total investment by BGF of £16 million allowed landscaping services firm TCL Group to make seven acquisitions and triple its turnover to more than £70 million. TCL Group was acquired by landscaping and grounds maintenance provider idverde in 2019.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.