Insights

What makes a ‘buy and build’ strategy successful?

Expanding your business by acquiring other businesses, otherwise known as ‘buy and build’, can be a great way to grow. Here’s how to get it right.

Work out your business plan

“Buy and build”, sometimes used interchangeably with M&A growth strategy, is where a business expands using acquisitions. But before you embark on this strategy, it’s worth thinking hard about why you’re doing it. What benefits do you hope to achieve with buy and build that you can’t achieve with organic growth, for example? Organic growth is where you use the resources you have already to reach more customers, improve efficiency, and become bigger.

Recognise the growth limitations of your market

One reason for pursuing a buy-and-build strategy is if your sector or market does not allow the possibility for organic growth at scale. Business analysts often talk about certain market sectors being mature or congested, meaning there is a very high level of competition for new customers. How congested is the sector in which you operate?

Understand what you hope to gain from buy and build

Every business wants to grow, but what type of growth do you seek? A buy-and-build strategy can achieve many things, including expanding your range of products and services; entry into new markets, including internationally; the acquisition of new patents, skills, equipment or technology; or the opportunity to benefit from industry consolidation. The type of growth you seek should determine your strategy.

Research the market carefully

Once you have an idea of what you want to achieve, it’s time to start scanning the market for potential targets. If your goal is to capture more customers for your existing offering, then you may be most interested in direct competitors. However, if you want your strategy to be transformative for your business, you will need to look further afield. This could include businesses in different sectors, markets and countries.

A successful buy-and-build strategy should achieve synergy

The outcome of a successful buy-and-build strategy is a combined business worth more than the sum of its parts. There are many ways to achieve this effect, which business analysts call synergy. Some common ways to achieve synergy include greater efficiency or scale, the benefits of combining talent, cross-selling opportunities and potential cost reduction. Think about the synergies you hope to achieve with your acquisitions.

Maximise your success with multiples

Operational improvements are not the only way in which a combined business can come to be worth more than the sum of its parts. For example, other things being equal, larger companies tend to command higher multiples than smaller ones because they have more scale and more resilience. A buy-and-build strategy can be a way to achieve multiple arbitrage, in which you boost your business value over and above the effects of any cost savings and operational gains.

But be aware of what can go wrong

However, a successful buy-and-build strategy isn’t only about putting two and two together to make five. You must also avoid combining two and two and making three. In other words, watch out for negative synergy, where two or more businesses are worth less in combination than they were separate. There are various reasons why a merger might fail in this way. A clash of leadership styles or incompatible corporate cultures are often blamed.

Arrange your buy-and-build funding

If your business is well-capitalised, you may be able to finance acquisitions using cash that’s already on your balance sheet, or undrawn finance facilities. However, often because of the size of the funding requirement or the uncertainty of immediate success, many businesses turn to external sources of funding to finance their buy-and-build strategies. BGF has provided funding for more than 75 businesses to grow by acquisition. Reflecting the longer term nature of this sort of investment strategy, this financing is typically provided as equity funding. BGF also offers expertise and support to help you in your journey.

Get a good deal and find the right partner

This one should be obvious. Once your funding is in place and you’ve identified your targets, make sure you negotiate a deal that properly reflects the valuation on every business you buy. Mergers and acquisitions can be complex so it pays to have a partner with experience to advise you.

 

Here are a few of the BGF portfolio companies that achieved a successful buy-and-build strategy with our support

Miss Group

With BGF as a minority partner, web hosting provider Miss Group acquired seven businesses, increasing its revenues from £8 million to £25 million. In 2020, BGF exited its investment when private equity firm Perwyn acquired the business.

 

Kids Planet

Thanks to a total investment of £26 million from BGF, nursery provider Kids Planet expanded its network to 52 sites across the North West and the Midlands. In 2020, its acquisition of nursery provider Kids Allowed turned it into the UK’s third largest nursery group.

 

GCI

With a £10 million investment from BGF to fund its buy-and-build strategy, Lincoln-based GCI acquired 12 companies, increasing its headcount from 150 to 500 people. GCI was acquired by Mayfair Private Equity in 2018.

 

TCL Group pursued a buy-and-build strategy with BGF backing

TCL Group

A total investment by BGF of £16 million allowed landscaping services firm TCL Group to make seven acquisitions and triple its turnover to more than £70 million. TCL Group was acquired by landscaping and grounds maintenance provider idverde in 2019.

 

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances. 

 

BGF Insights 03.01.2021
Share

How we can help

As the largest growth investor in the UK and Ireland, BGF has invested in about 400 small and medium-sized businesses, deploying a total of around £2.5 billion of investment.

Our teams are spread across the UK and Ireland in a network of regional offices.

We have broad sector expertise, investing in everything from high-growth online businesses to advanced manufacturing companies and start-ups developing life-saving medicines. If you’re interested in what we have to offer, please contact us today.

Get in touch