I’m often asked about a buy and build strategy for entrepreneurs as an alternative business growth strategy. When I mention the buy and build strategy, the question is always the same; what is a buy and build strategy? A ‘buy and build’ strategy is used by companies that acquire a number of complementary or similar businesses with the intention to grow faster or make more profit.
In other words, instead of building a number of individual businesses from scratch, companies who complement the owners original business are bought in order to scale the business quicker.
Many businesses backed by Caban Investments have successfully implemented buy-and-build strategies. This strategy can be an effective way to quickly increase the size and profitability of your company, making the newly formed business stronger and more appealing to potential buyers.
The buy and build strategy is used when a company wants to expand its operations by acquiring a platform company with developed expertise, which it can then build out.
When it comes to business growth and expansion, there are several options to consider. The company can build internal capabilities that will drive the expansion, or it can buy a company that already has expertise in that area of specialisation and expand it further.
The latter option is used in the buy and build strategy. Because the operations of several smaller firms combine to add value to the new firm, the effect can create significant value. However, the combination’s success is heavily dependent on the platform company, which may result in value destruction if the strategy is not properly executed.
However, for the strategy to be successful, it must be executed correctly – there are numerous pitfalls to avoid.
Defining Buy and Build Strategy for Entrepreneurs?
‘Buy and build’ is an investment term that refers to purchasing a target company and then making a series of add-on acquisitions to create a larger, combined business. It is essentially a merger and acquisition (M&A) strategy that aims to bring together a number of similar or complementary businesses in order to increase their overall value.
The rationale for combining these companies is to create synergies, quickly expand, and improve profitability for the platform business. Typically, build and build strategies aim to acquire a number of businesses – for example, four or more – rather than just one or two.
When executed properly, a buy-and-build strategy can allow a company to grow much faster than it would otherwise grow if it grew organically, that is, without acquisitions. This approach can be useful in industries where acquiring new customers is difficult or expensive, for example.
The Advantages of the Buy-and-Build Strategy for entrepreneurs
- Almost instantaneous added value. When compared to organic growth strategies, buy and build can quickly add value to a business. This is possible if the combined company can command a higher multiple than the component companies – in other words, if it is worth more than the sum of its parts.
- Rapid expansion. By purchasing a group of companies, your company can expand into new regions, sectors, and product lines, as well as increase its customer base and headcount faster than it could otherwise.
- Profit margins will increase. Businesses that consolidate can benefit from economies of scale and lower costs, for example, by eliminating overlapping functions such as multiple finance teams. Larger businesses are also perceived as more stable, with a stronger market position, which has many positive consequences for profitability.
- Greater rates of return. If an exit is desired, a successful buy-and-build strategy can raise the company’s profile and attract the attention of potential buyers.
Important factors to consider when deciding on a buy-and-build strategy for entrepreneurs
While they can provide numerous benefits, buy-and-build strategies should be carefully considered before pursuing them. They are widely regarded as a potent tool, but only when used correctly. Consider the following issues in order to succeed:
Considerations for management
The original company’s and newly acquired business’s management will need to collaborate to create synergies that benefit the overall business. The success of a buy-and-build strategy is dependent on a strong, high-performing management team. If there is a clash of management styles among the acquired companies, the strategy may fail.
Business owners’ motivations
There are numerous reasons why a business owner might consider selling their company as part of a buy-and-build strategy. It could be to work in a more senior role in a larger organisation, or as part of a planned exit. In either case, you should try to understand the motivations of business owners to make the process go as smoothly as possible.
Horizontal integration vs. vertical integration
Many buy-and-build strategies involve acquiring companies that operate at the same level of the value chain, resulting in horizontal integration. However, this is not the only option. Acquiring a company with upstream or downstream activities can have a significant impact on the business’s value and performance.
Is your industry a good candidate for buy and build? When weighing the feasibility of a buy-and-build strategy, two key factors to consider are entry barriers and the potential for disruption.
Caban Investments’ track record of supporting these strategies
Caban Investments provides business funding and corporate finance services to our clients for a variety of reasons. One of the most common is financing acquisitions.