6 Characteristics of a Successful Buy-and-Build Strategy for Private Equity Funds

Many private equity funds follow a buy-and-build roll-up strategy where they invest in one well-established portfolio company as the platform to add on additional, typically smaller, companies to grow revenue and improve EBITDA through economies of scale. In fact, over 70% of PE deals in recent years were add-on acquisitions in the US and UK, according to PitchBook.

In addition to economies of scale, multiple arbitrage is a key value-add from a buy-and-build strategy. Larger companies are typically traded at a higher multiple valuation than smaller companies. By buying smaller companies at a lower valuation and rolling them up into the platform company, the portfolio asset grows, and the overall asset increases in value through higher multiple valuation when selling it. This strategy is particularly attractive in down markets when traditional value drivers, such as GDP growth or falling interest rates, can drive returns.

Critical success factors for the buy-and-build approach include:

An industry that is fragmented and has many homogeneous players.
The platform company has a repeatable, efficient, and effective operating model across technology, processes, people, and governance.
A repeatable integration approach to ensure each add-on acquisition adds significant value.

Through our work with private equity funds and their portfolio companies, we have identified six enablers that increase the likelihood of successfully scaling a buy-and-build strategy.

Choose the right industry

The buy-and-build approach is typically more successful in a fragmented industry with many available targets and room for growth. The industry players should be homogenous in their operations, business model, and structure, such as offering the same products and services. The add-on target companies should be close to the core of the platform company, such as having similar channels, customers, capabilities, cost structures, and competitors.

Potential acquisition targets should be incentivized to participate in a platform organization. One main incentive is to centralize administrative functions and benefit from synergies when merging into one larger entity, such as when several branches or regions share one central administration, marketing, and sales unit so that they can focus their efforts on core value-added activities like increasing throughput.

Ensure technology systems are robust and scalable

Carefully evaluate the technological restrictions of the target company throughout due diligence and integration. Standardized but adaptive technology is important for scaling the platform company through several acquisitions. The IT landscape of the platform company should be robust and enable high productivity. Technology must be scalable, easy to implement, customize, and integrate into other systems. Out-of-the-box technology is often advantageous over customized or home-grown systems.

Establish efficient and effective processes early on

The platform company should establish efficient and effective processes that are well-documented, understood, and applied by all employees. Consider process improvement initiatives before scaling through acquisitions to ensure the highest possible productivity. Watch for high-effort, low-value processes that require much time but don’t add value to the company. Eliminate long-tail exceptions to avoid a productivity roadblock during the buy-and-build period. Additionally, key processes should be easily transferrable to the acquired companies to enable plug and-play processes during the post-merger integration (PMI).

Instill a well-defined governance structure

When acquiring and integrating additional companies, aligning performance measurement systems and ensuring that processes and technology support the target governance structure is essential. The governance structures should be clear and well-defined before scaling. Performance measurement systems must align with the overall strategy and encourage best practices at all levels of the organization. Establish reporting capabilities before scaling, including data availability, KPIs, and dashboards.

Hire and retain buy-and-build-experienced leadership and talent

Successfully bringing together multiple companies requires a different skillset than managing day-to-day business-as-usual operations. Successful founders and management teams often require outside support with specialized experience to ensure they successfully grow a company through the buy-and-build approach. Furthermore, identifying and retaining key talent of each acquired company can be a critical success factor in managing the cultural and operational changes inherent in a roll-up.

Define and execute a robust and repeatable integration approach

A repeatable integration approach is crucial for scaling the buy-and-build strategy. The post-merger integration team must extract all identified synergies and appropriately address risks. The approach should be comprehensive but flexible, as every integration has unique attributes to account for. Developing and refining a post-merger integration playbook can help guide the integration teams through multiple PMIs. This blueprint should enable fast decision-making for decisions that require speed while allowing time for decisions that require more thoughtful consideration. Furthermore, rigorous implementation and focus on the details are essential to ensure success in the long run.

Prepare for scaling the buy-and-build strategy

No two acquisitions are entirely alike, and each roll-up will have its own unique challenges. However, focusing on these six enablers can significantly improve the chances of success of a buy-and-build strategy.

Burnie Group has extensive experience helping private equity funds and their portfolio companies during commercial due diligence, value creation planning, post-merger integration, and ongoing operations and value realization. Contact us to learn more about how we can support you.