Four Things To Know About Buy-and-Build Strategies

So called “buy-and-build” strategies are popular right now. Let’s define that approach and why it is exciting to many in the Merger & Acquisitions world.

Generally speaking, a buy-and-build strategy refers to the buying of a platform company with a well-developed management team and infrastructure, and then using those assets to acquire multiple add on companies, with the goal of building out and growing the platform. Bain’s 2019 Global Private Equity Report gets a little more specific – defining buy-and-build as an “explicit strategy for building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies.” Buy-and-build has emerged as one of the leading tactics used by buy-side firms in recent years.

Here are four key takeaways about the buy-and-build strategy:

1. Its popularity continues to grow. This strategy not only continues in popularity, but those who use it are adding on more and more acquisitions. In 2003, just 21 percent of all add-on deals represented at least the fourth acquisition by a single platform company. That number is closer to 30 percent in recent years, and in 10 percent of the cases the add-on was at least the 10th sequential acquisition.

2. It enables buyers to spend more up front. A buy-and-build strategy allows a partner to justify the initial acquisition of a relatively expensive platform company by offering the opportunity to tuck in smaller add-ons that can be acquired for lower multiples later on.

3. Ultimately, it lowers overall spend. Even if more is spent on the platform company, so much is often saved on the subsequent acquisitions that it brings down the firm’s average cost of acquisition. All the while putting capital to work and building additional asset value through scale and scope.

4. It is not effective in every industry. The most effective buy-and-build strategies target sectors with predictable secular growth and a low risk of disruption, as well as fragmented industries with sufficient acquisition targets of the right size.

What does this mean for a Middle Market company thinking about selling? Depending on the industry, playing into a buy-and-build strategy is one way to look even more attractive to potential investors. Symmetrical assists Middle Market companies strategically assess their options and prepare for big transitions. If you are curious whether we may be a good fit for you, please contact us for a confidential discussion about how we can help.