Buy and build strategies: How to get them right

Companies that acquire a number of complementary or similar businesses are often said to pursue a ‘buy and build’ strategy. 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.

It’s a relatively easy thesis for business leaders to get their head around: you raise funding from an investor, enabling you to acquire other companies, and together, you grow the business into a bigger, more valuable proposition. But while the concept of buy and build may be simple, it can be quite hard to do well.

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.

Carried out successfully, 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.

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.

What do investors look for in a buy and build strategy?

There are certain things our investors always look for, when considering backing a business with a buy and build growth plan:

1. Track record

The first thing we look for in a business with a buy and build strategy is a management team that has made successful acquisitions before. The key is to integrate acquired businesses into the parent company and achieve the expected sales and cost synergies that will support future growth. If you can’t do this, it will be very challenging to make your buy and build strategy work.

2. Cultural alignment

One of the main hurdles for strategic buyers is in the integration process: combining businesses with different cultures and making them work together as one. It’s important to win the hearts and minds of employees. Few people would wish to be caught up in big, impersonal takeovers or mergers; instead, employees should feel that they’re joining the core business. It’s an advantage if the parent company can articulate a clear vision. Good leadership, with strong communication, is crucial.

3. Size of market

Some markets, such as veterinary healthcare, have seen rapid consolidation in the UK over recent years, with large, well-established participants buying up smaller companies and sites. That can make it more difficult for newer businesses to grow by acquisition. A buy and build strategy will only succeed in a market where there’s space for consolidation.

4. Potential targets

It’s important to identify the right targets for a buy and build strategy, to avoid wasting time and potentially capital on unsuitable acquisitions. A clear idea of what a “good” target looks like for your business is key.

5. Ability to move quickly

It’s easy to underestimate the management bandwidth required to scale a business at pace. If you’re aiming to buy a business a month, for instance, you’d need a dedicated integration team, a seamless acquisition plan, and enough middle managers to handle each newly acquired site or business. Without these elements, senior management may become too distracted by acquisitions to continue running the business day to day. And this could mean integrations aren’t successful, synergies and efficiencies aren’t delivered, and, ultimately, earnings could go in the wrong direction.

6. Willingness to learn

The integration process provides a unique opportunity to pick up new skills and methods from an acquired company. Instead of imposing new operating procedures on day one, it may be a better idea to observe the way that potential targets run. What can be learned? A collaborative, thoughtful approach is an advantage at the acquisition stage too. A seller will want to feel they’re leaving their business in the right hands. And not every business owner is motivated purely by money and profitability; they may be equally concerned about their staff, their customers and their legacy.

Examples of successful buy and build strategies

A number of BGF portfolio companies that have achieved considerable success and value creation through buy and build strategies, including nursery chain Kids Planet and dental provider Scottish Dental Care Group.

Bayfields is also a great example of a company expanding through a buy and build strategy. When BGF first invested in Bayfields in 2020, the team had already completed 18 acquisitions of smaller businesses. By August 2022, this number had grown to 43.

Bayfields operates in a big market, has a clear strategy, knows how to integrate businesses well, and has delivered growth post-investment. Its CEO, Royston Bayfield, is an effective leader, who can articulate his vision for the business.

Royston Bayfields, Founder & CEO of Bayfields Opticians, commented: “When we first began discussions with BGF, I felt really reassured and trusted them. I speak to them now on a weekly basis and I genuinely enjoy those conversations. They act as a sounding board and an extension of our team.”

Parts of this article appeared in the Yorkshire Post in December 2022.

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.