Buy and build…need your thoughts

Had a hard time w my IC today trying to convince them w buy and build strategy. Bar is dfnly higher today….Company is sub 1bn EV (big list of buyer pool at exit) w ~15% margin, strong fcf conversion in a recession resilient sector. W interest rate around 10-12% range in this environment,,, they think 2-3% profits werent good enough… well i mean the entire industry has grown on buy and build.. and i understand how rising / elevated interest rate could be pressure,, but if you could justify the growth and the math works then i think it should still be a good strategy… what am i missing? Or how could ive pitched it differently? Thanks


What worked 5 years ago is simply not going to work today... saying the industry was built on this doesn't acknowledge that the industry has mostly grown in low to no interest rate environments and this market requires a different strategy. Maybe it's not buy and build at all.

Today you can get 5% by parking your money in cash, buy and build has significant risk and the reward is very low in your scenario. You need to show a differentiated return profile that is good enough to outperform cash/bonds enough to justify the risk you're taking on.

This is a pretty high bar in general hence low number of deals and low fundraising across the industry


Thanks for your thoughts…. True but in perspectives, if ur buying 1m mom/pop ebitda company at 7x and fully lever it w 10% interest rate assumption,,, that’s still 7m x10% = 700k interest which still makes the add on 300k ebitda accretive…so as long as your not breaking it too much… and have strong underlying business fundamentals,,, thought it could justify the risk…


I think they mean 10% interest payment on 7M is 700k, so 1M of EBITDA means you get 300k of incremental earnings.

Still seems like a very risky proposition, though, and a 7x multiple seems high for a 1M operation? Just my 2c 

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It's a bit hard to respond because the way you are typing these comments is like someone texting on a Razr, but I'll give it a shot.

It sounds like your thesis was to essentially buy a 15% gross margin business that has 2% - 3% net margin, and then use a max leverage roll-up strategy to make the returns work. My first question would be - what are the growth prospects for the business on a standalone basis? If 100% of the growth has to come from acquisitions, you're in a situation where you have massive pressure to deploy into the roll-up, which would presumably be true for every other scaled player in the space. It sounds like you're not the first person to have discovered this playbook, so you're putting yourself in a situation where there will be upward pressure on roll-up purchase multiples and don't have any first-mover advantage to get in early and cheap on those roll-ups. That's a pretty big knock right there, and to get comfortable with that risk in the first place, I'd have to feel comfortable that the purchase price I'm paying for the business up front is at a low enough multiple that my "no acquisitions" case still generates decent yield.

However, the next problem that your post seems to indicate goes back to this net margin point - if this thing is generating 2% - 3% net, you have literally no margin for error. The fundamentals of the business itself sound extremely weak, and if anything goes wrong, you're suddenly going to face a cash flow negative proposition. I understand that you're saying this is a recession resilient sector, but things can still go wrong even in resilient sectors. So now we're in a situation where in order to feel comfortable with the no-acquisition case, I have to pay an even lower multiple to get comfortable with my downside exposure (I'm not even sure I'd ever get comfortable on a 2% conversion business given how quickly things can go sideways).

Of course, then the problem you face is that if you can get the business at a low enough multiple to justify the low growth and the low margin for error, what are you gaining from the roll-up strategy? You're not going to get much if any multiple uplift because the business is inherently a low multiple profile to begin with, so you're basically just investing in growth through an inorganic strategy, which isn't inherently a "bad" thing but introduces integration and sourcing challenges that don't exist in quite the same way when you are investing in organic growth. And, to another poster's point, executing on a roll-up strategy requires significant resources that, if your firm doesn't already have experience doing, would be daunting.

Long story short, it seems like the fundamentals of the business simply aren't good and that is enough to want to kill the deal. The only way it would make sense to me is if you are able to acquire this business, and all the future ones, at a 20% unlevered cash flow yield, which seems unlikely given the competitive landscape you sort of described in your post.


You're probably right, the rest of the post still pretty much stands though. 15% EBITDA margins levered up to 2% cash flow margin still gives you no room for error, and no growth means that you're in essence trying to justify overpaying for a platform so that you can then compete to overpay for a bunch of roll-ups in a space where everyone else is employing the same strategy.


PE firms do a ton of heavy lifting in a buy and build strategy. If you don’t have the infrastructure and history of doing it as a firm, you may not do it well. Make sure what you pitch aligns with your firms history and resources. 


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