Which businesses are the most suited to undertake a buy and build strategy?
Many companies in industries undergoing technological transformation, for example, are struggling to keep up with the pace of change. It can make sense to acquire a company that already has that digital capability. It can also be beneficial from an economies of scale perspective – with the investment in technology spread across a larger business it can pave the way to greater value creation.
Industries that present the opportunity to expand internationally are also prime buy and build targets, with cross-border acquisitions particularly appealing. But all effective buy-and-build strategies typically share these two important characteristics:
- An established platform company as a base
The success of a buy and build strategy relies heavily on the stability of the platform company. A core company should have an established market position, stable management and robust systems and infrastructure in place, making it a good base from which to scale and achieve synergies.
- A focus on sectors with room to grow
Buy and build strategies tend to be more effective in fragmented markets where there is less consolidation and therefore no clear dominant players. This means there are more potential targets for the buyer.
The IFA market is a good example – it is well-populated with players of different sizes. Business services is also prime buy and build territory. The sector covers such a broad market - from facilities management to outsourcing of occupational therapy - and has hundreds of thousands of mid-sized companies serving it in the UK so there are plenty of opportunities to consolidate, as our client Croft Communications has proven – Read more about how Croft Communications have embraced a hugely successful buy and build strategy.
For a consolidation play within a fragmented sector, it is really important to have good visibility of the potential long-term acquisition pipeline. With this style of buy and build strategy, you do not want to be one of five businesses in your size range thinking that you need to buy the other four irrespective of what they look like. The more choice you have, the better, because you can be more selective. It is not just about the profit number but finding the right overall fit, as we discuss in more detail below.
Does size matter?
Mid-cap companies are the most likely to adopt a buy and build approach. They can be big enough to take the financial and integration risk, yet nimble enough to maximise the opportunities. They could buy a series of smaller companies and bolt them on, for example, subsequently merging with a larger player once they have reached critical mass.
Big players rarely buy much smaller players due to the small deal size and limited impact. Instead, they would normally target more mid-sized players, which would deliver more meaningful results for the time and money spent.
