The key ingredients of a successful private equity buy-and-build strategy
Updated: Apr 22
“The whole is greater than the sum of its parts.”- Aristotle
Buy-and-build has been a powerful strategy for private equity. A successful playbook looks something like this:
1. Identify a cash flow rich fragmented industry;
2. Make an initial acquisition of reasonable size;
3. Aggressively hover-up smaller players into the platform;
4. Execute an integration plan to gain synergies;
5. At scale, sell or IPO at a better multiple than the cost of the parts.
There is good evidence supporting the superior returns generated with the strategy of making lots of small acquisitions. Private equity has built highly successful portfolios across diverse sectors using this approach: be it B2C (from dental and veterinary clinics to funeral services), B2B SaaS (from HR to health tech software), B2B services (from corporate services to commercial landscaping and laundry services), or real estate (be it student housing, logistics or data centres).
While this strategy is sound, execution is not easy. A number of challenges need to be navigated.
For example, the initial platform acquisition needs to be a good one. Often, the first acquisition may not be capable of executing on an aggressive buy-and-build model and work may be required in developing the platform’s M&A capability. New hires with M&A skill sets may be required.
It is also important to ensure that M&A is treated as a core capability at the platform level and not simply as occasional or ad hoc projects. This is achieved by putting in place systems and processes, along with dedicated resources, across the M&A life-cycle: deal sourcing, due diligence, deal execution and post-deal integration.
Building a systematic deal sourcing machine is a good place to start. A good example of how this can be done comes from this McKinsey article of how a technology company sources deals:
“It uses a customer-relationship-management-like tool to manage its M&A program. The tool is an online database of hundreds of companies that the technology company actively monitors as potential targets. Using a series of customizable dashboards, the corporate-development team updates the database and tracks statistics about acquired companies and which targets are in which phases of acquisition. (Business-unit leaders are also tasked with keeping this information up to date.) The corporate-development team generates reports, and the head of M&A analyses the data and tracks progress on deals. The tool enables accountability across all phases of M&A; it is even invoked during executives’ performance reviews.”
This is a good example of the usefulness of technology tools in helping create processes that can be tracked and monitored by all decision makers.
Most private equity investors embarking on a buy-and-build strategy know the importance of thorough due diligence across all areas (tax, finance, commercial). Where things often go wrong is in the implementation of the findings coming out of due diligence. There is no point putting in all the work if it is then locked away in reports. Successful investors embed due diligence findings into their post-deal integration plan and systematically track and monitor outcomes.
Sourcing and signing a deal is only part of the job; M&A comes with its own array of execution workstreams. Deal execution is an often overlooked area, and done haphazardly, can result in significant time, cost and inefficiencies. When pursuing an aggressive buy-and-build model, it is important to systematise deal execution. Otherwise problems can arise, not only at closing, but well into the future. Common pain-points range from: difficulty in on-boarding and integration (e.g. accounting, IT, HR), future audit findings, compliance failures, difficulty in cap table management etc.
Most buy-and-build strategies will have an integration plan. But the successful ones go beyond a mere plan to ensure execution. A good place to start is by clearly documenting actions across all areas (IT, HR, accounting, tax etc). Such an action plan must have defined responsibilities and timeframes. Key findings emanating from due diligence must to be part of this integration plan. A technology tool, like the one noted in the deal sourcing example above, can be a great way to track and monitor integrations in a systematic manner.
To summarise, a winning buy-and-build strategy pays careful attention to the entire M&A lifecycle - from deal sourcing, due diligence, deal execution to post-deal integration. A good plan poorly executed erodes value. After all, a whole can be greater than the sum of its parts in both positive and negative ways.
We at DealsPlus focus on building a technology platform to standardise and automate private equity M&A processes all the way from deal execution to exit. Our platform can help private equity investors better execute on their buy-to-build strategies.