Buy and build is not just M&A
In an earlier Insights article we wrote about how buy and build is a distinct strategy used by private equity companies to create businesses of a scale that is attractive to both trade and larger PE buyers. Often this strategy is predicated upon starting with a platform (a company of sufficient size to justify investment) and a management team (that may or may not be originally leading the platform) in a sector that has a number of factors that means consolidation is both rational and value accretive (through multiple arbitrage).
The CEO and Business Development Director (or CFO) will usually lead on all acquisitions but buying a bolt-on company is just the start. The next stage is the integration into the wider group. This often means changes in branding, IT (painful!), quality control management & improvement, financial reporting structures and a host of operating protocols. Managing these changes is a sensitive operation and generally a defined integration manager or team will have responsibility to win hearts and minds to deliver these changes before handing over day to day running to the operations team. In sectors where there is a dearth of talent then retention of staff is clearly a key factor in defining success. Employees can walk out the door if they feel they aren’t being looked after and an acquisition can quickly turn sour if this fundamental truth is forgotten. Management therefore need to be cognisant of organisational stretch in periods of rapid growth and plan for the required infrastructure to keep the business operating efficiently. It would be foolish to underestimate the pace at which executives right across the organisation need to work to deliver success and how talented these individuals are.
The finance team also has to be well invested to be ready for the rapidly increasing workload that comes with frequent new additions of operating companies that need to be consolidated into the group with group P&L and cash flow continuously evolving. For many buy and build strategies there will be a distinctive funding package to support the growth of the business with non-amortising debt to free capital up for acquisitions. In these cases management of cash flow is crucial so the CFO and their team need clear visibility in a fast-changing environment to ensure that the cash flow covers the, often higher, interest payments.
There is no doubt that there can be real value for investors from maximising synergies (e.g. in purchasing, IT, or in centralising & professionalising back-office functions such as finance) but this doesn’t apply to all sectors. The veterinary sector, which has a significant component of revenue derived through product sales, allows for substantial synergies as larger buyer have procurement teams that are able to negotiate better terms with suppliers. In contrast the dental sector has few purchasing synergies but benefits from better management of professionals’ time. It must not be forgotten that there is also real value from ensuring there is organic growth. If a buyer can see a consolidated integrated business that is also showing like-for-like sales and profit growth they will be prepared to pay to take that opportunity to the next level of scale.
All this is easier written than done of course and the success of a buy and build strategy relies on skillful execution of both M&A and acquisition integration. At August Equity we have grown seven companies from platforms with £1-2m EBITDA into companies with an Enterprise Value over £100m across a number of sectors including elderly care, funeral services, veterinary services and tech services. In doing this we have built a significant institutional understanding of what succeeds and where the stress points can arise. We see buy and build as a continued strategy for us for future funds and are always looking for opportunities to work with great management teams to put our experience to work.