Buy And Build Strategy

What Is Buy And Build Strategy?

The buy and build strategy involves purchasing a well-developed platform company with an established management team and then utilizing the assets to acquire different add-on companies. Private equity firms looking to expand operations utilize it to grow their returns and generate value.

Commonly, organizations that carry out operations in fragmented markets comprising various smaller operators use this strategy. The target acquisition organizations can provide different strategic advantages. For example, they may offer different services and products and a new customer base. Moreover, they might have an area of expertise not possessed by the primary business. Typically, such benefits are known as synergies.

• The buy and build strategy refers to the purchase of a platform company that operates in a lucrative sector and then uses its assets to take over more organizations within the same sector. It allows companies to generate value and expand at a rapid rate. 
• A key disadvantage of this strategy is that it can put stress on a company’s financials.
• Some factors to consider when using such a strategy are integration, financial capability, the industry, and customer welfare.
• A noteworthy advantage of the buy and build strategy is that it can boost revenue growth and positively impact efficiency savings.

How Does Buy And Build Strategy Work?

The buy and build strategy involves an organization that is aiming to expand operations in a specific direction, purchasing a well-established organization within that sector, and then growing the business via the acquisition of additional organizations in the same industry.

The aim of utilizing such a strategy is to increase an organization’s value through the benefits of scale. Moreover, The companies an organization decides to acquire may offer a wide range of benefits. For instance, they might be active in locations where the organization does not operate.

That said, one must remember that the platform company plays a crucial role in determining the success of the acquisitions, as this strategy may destroy value if not implemented properly. Also, this strategy’s effectiveness heavily relies on the acquired business’ performance. The businesses acquired must work well together as they become members of a larger team requiring the operations efficiencies to connect smoothly.

Commonly, private equity firms utilize this strategy with a timeframe of 3-5 years. The funds available for this duration can offer reasonably quick returns owing to this strategy. Besides, private equity firms, closely held businesses, publicly traded companies, and strategic buyers utilize this strategy. One must note that the buying organization must handle the buy and build deals’ structure and transitional phase with great care because of the various changes implemented into businesses that are being acquired. The purchasing company’s value can fall in case the transition phase doesn’t go smoothly.

How To Apply?

Companies can follow these steps to use this strategy:

1. Work out a business plan and identify the reason why to use this strategy besides determining how it can benefit.
2. Determine the market’s growth limitations.
3. Conduct thorough market research to identify potential target companies. Such a strategy must be able to achieve synergy.
4. Take into account what might go wrong, for example, a clash of corporate cultures or leadership styles.
5. Arrange the buy and build funding. Note that businesses may opt for external funding sources to expand operations via acquisitions.
6. Once the funds are in place and the target identification process is complete, negotiate a deal to purchase a business at the right valuation.

Factors

Let us look at the factors that a company must consider when utilizing the buy and build strategy:

#1 - Capability To Finance

Before making acquisitions to boost growth, companies must first evaluate their capacity to finance as well as manage small entities coming together via this strategy. While certain businesses can comfortably handle the takeover of such platforms, other businesses cannot. The approach adopted by a company must be suitable for its expansion and growth plans. Individuals must note that a wrong approach can negatively impact an organization and lead to a decline.

#2 - The Industry  

The industry is a vital factor that determines if such a strategy could work. A noteworthy feature for a few industries, mainly for investments that are short-term in nature, is insufficient profitability and maturity. A company’s management team must select a flourishing sector that ensures quick blending while saving money and time. When making alterations to the business, for example, introducing new small components via the buy and build strategy, organizations must inform the customers regarding such intentions beforehand.

#3 - Integration With Acquired Companies

The takeover, and after that, a platform company’s integration with different organizations, can be a challenging task in the absence of proper planning. Therefore, the process must strategically take all acquisitions singly with utmost care.

#4 - Customer Welfare

Customers bring in profits and sales. Hence, they are vital in any business. An organization must prioritize customer welfare, as without them, it cannot operate.

#5 - Value Addition

A key intention of this strategy is adding value to a business. When the merger of a small business into a larger organization occurs, the combination resulting from it must be an ideal match. The merged organizations need to complement one another and add value to the new combined entity.

Examples

Let us look at a few examples to understand the concept better.

Example #1

Suppose company ABC was the largest company with regard to market capitalization in the technology sector of a country. The sector was highly fragmented. It consisted of various small IT companies. ABC realized that it could expand its operations and rapidly grow if it used a buy and build strategy. Over a duration of two years, company ABC completed over 10 takeovers and became an even larger entity. These acquisitions provided several benefits. For example, they gave it access to markets in which it did not operate before. Moreover, they allowed the company to add more services to its portfolio of offerings.

Example #2

OneTwenty, a technology company engaging in lead generation, received growth funding worth 9.5 million GBP from ThinCats, allowing the former to continue using a buy and build strategy to grow in 2023. According to the company’s Founder and CEO, Chris Russel, the funding can enable the company to increase its market share in markets, including the UK. Moreover, it will allow the company to continue offering content products that are best-in-class.

Benefits

Some advantages of buy and build strategy are as follows:

• This strategy acts as a platform for a company to grow and expand via takeovers, adding value to the business.
• Businesses can grow quickly, which is not possible organically.
• It offers corporate synergy and enhances market knowledge.
• Companies can reap the benefits of higher valuations as larger businesses after the takeovers.
• This strategy allows businesses to add new skills, products, and services to their business.
• It can lead to an increase in efficiency savings and accelerate revenue growth.

Drawbacks

Let us look at some disadvantages of the buy and build strategy.

• It can put stress on a company’s capital.
• Organizations require a dedicated team to concentrate on complex areas like technology and process integration.
• The strategy may not offer flexibility. One must note that the larger an M&A transaction, the less flexibility an acquirer will get.

Frequently Asked Questions (FAQs)

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