Buy and Build Strategy
A method companies use to expand and add value to their current organization
The buy and build strategy is a method companies use to expand and add value to their current organization.
This specific strategy is when a company buys a platform company and then proceeds to build upon it. If done correctly, this can cause the overall value of the company to increase significantly.
The company usually buys a platform company that is well established and builds on it further. It is common to buy many small firms to build upon as it adds even greater value to the overall company.
The success of the company heavily depends on the platform company that is chosen to buy and build upon. It can either be an excellent choice that boosts the company's value or a bad one that may destroy the value of the company.
It is essential to research and ensure the execution of this expansion strategy correctly.
Benefits and Perks
This expansion strategy can bring many benefits to an existing company. First, it will help expand and grow, which adds value to the business. Sometimes it is hard for a business to grow larger by itself, and using this external strategy can help.
A benefit of this strategy is that it expands your business, and you can sometimes access other markets more easily, allowing the company to grow.
However, the downside of this strategy is that more resources need to be used, whether it be equipment, buildings, or even people.
One aspect of the buy and build strategy is that the acquired business often determines how successful the merger will be.
It can be extremely beneficial if a business acquires a smaller company that does well and integrates into the business well. But, on the other hand, if the smaller company underperforms, it can have negative consequences.
When acquiring a smaller company, choosing one that can work together and benefit the existing company is important.
A company with bad chemistry and poor team-working skills will only hurt the existing company if they merge. Private equity firms often use this strategy to expand their business.
The integration of multiple companies is very sensitive but can have great outcomes. Therefore, the business needs to research possible companies to integrate with for a smooth transition.
Finding a well-developed and organized company that has similarities and is willing to work together is key for this strategy to be successful.
What to consider when using the Buy and Build a strategy
Taking on a certain strategy needs a lot of consideration, so here are some factors to look out for before using the Buy and Build Strategy:
1. Ensure the target company is well established and compatible
Finding the right company to acquire is crucial for expansion and growth. Some companies may not work well or have the same goals, so it is essential with this strategy to obtain companies that can work well and merge.
The company chosen to be acquired should be compatible with the current company's growth and expansion plan. Conversely, the selected wrong company can cause revenue and profits to decline instead of growing.
2. Integrate strategically
To integrate the companies successfully, it must be planned and executed correctly. Strategically planning the steps the two companies will take to merge is essential. This strategy can be rushed because often, a business is acquiring many smaller companies at once.
This can cause planning to be difficult or not well thought out. However, having a solid foundation plan to merge is a significant step toward obtaining success.
3. Analyze the Industry
The third step to consider is analyzing the industry. Different industries vary, so rolling out this buy-and-build strategy may be different. Some industries will be profitable for short-term investments, while others will be profitable for long-term investments.
Choosing the right investments for a specific industry is vital. The companies acquired should also be in line with the plans set out and be able to integrate into the industry well. This will save time and money with a higher chance of success.
4. Gain Value
One reason companies choose this strategy is to increase value. The acquired companies should be able to complement and support the current company. Therefore, merging should create greater value and be a fairly easy transition.
Combining companies should reduce costs and increase profits to gain value. Anything less would not be an ideal merge.
5. Care for Customers
No matter the industry, customers are the key to success. Any good business cares for its customers because they are the ones that make the company profit. No business would exist without its customers.
Caring for customers begins by informing them of any changes that may affect them. Notifying them is important for customer satisfaction and helps retain and gain new customers.
The businesses acquired should also aim to keep their customers and provide them with the same service level. This will bring new customers to the overall business, creating more value for the firm.
Ensuring customers understand that the merger was necessary and positive is a way to retain their business. In addition, offering things like loyalty discounts and sales could help reward these customers.
There are a few characteristics of well-executed buy and build strategies. Since this strategy is very sensitive, it is important to research and understand how to obtain a platform company successfully.
Things like having an open sector, finding a well-developed platform company, ensuring value will be gained, and having the right approach for merging. If any of these do not work, this tactic may not be the best option for a firm.
If any of these characteristics are not met, or a company realizes that the platform company is unsuitable, it is best to try another approach. Not having an open sector can be hurtful because there are not enough smaller companies able to be acquired.
It is also important to ensure that the smaller company can add value to the firm. It should be able to enhance the company and provide it with more things like resources, workers, ideas, and customers.
The sector a company is in when using this strategy has a big influence on how they plan and how they become successful. But, first, the sector must have enough smaller available companies to be acquired.
Some sectors may not have smaller companies or businesses to merge with, making this strategy hard to implement. Different sectors may have varied ranges of success in using this strategy.
Certain industries may have issues with free cash flow, which affects the ability to make deals with other companies. However, companies can flourish in other industries by merging and combining resources, cutting costs, and expanding their business.
How suppliers and customers react to the merger also plays a factor; in different industries, it may be harder to retain them.
Targeting predictable sectors with ample room for growth will help the strategy become effective. It is important to consider how many other companies can be acquired and what value they can bring.
A sector may have multiple small companies that can be acquired but would bring no real value. Therefore, looking at the quantity and quality of these smaller platform companies is key.
Solid Platform Company
A characteristic that makes this strategy effective is choosing the right platform companies.
The smaller platform must be able to handle what the firm will do with it and bring value to the firm. This starts from strong balance sheets, lots of resources with the ability to expand, and sales networks.
A platform company with a solid management structure and a good reputation is something to look for. In addition, a firm must assess how much work, resources, and time go into the platform company.
An ideal company would not need much work to get it going and align with the larger firm's goals. However, examining the upfront costs of integrating this smaller company into the larger firm is important to consider.
High up-front costs and a lot of work put into the platform company can delay the timing of value creation. As a result, the larger firm's management team must consider determining if the benefits will outweigh the costs in the future.
Platform Companies can add value.
For the management team to choose which platform company to pick, a key factor is to assess which ones can add value. What certain things will this company do to better the firm as a whole if a merger happens?
Finding related companies that can integrate more easily makes merging less difficult. A company that understands that they are better working as a team instead of an individual company.
A platform company should be related to the firm looking to acquire to get the benefits of scale. A good buy-and-build acquisition will integrate the two companies' resources, customers, and suppliers.
It will take advantage of new outlets of resources and build upon already existing networks and connections.
A firm must identify what sources of value can come from the merger and determine the platform company's strengths and weaknesses. Having synergies between the two companies is important for additional value.
Have the correct approach for merging
It may seem insignificant, but it is important to have the right approach when acquiring a new firm with this strategy. Taking the time to make a well-thought-out plan can ensure a good acquisition does not end up failing or falling through.
Understanding that a company's sector plays a major role in how an acquisition can take place. This ranges from the number of platform companies, what they can add, and how easy it is to merge in a specific industry.
A specific plan for executing the strategy will ensure a smooth acquisition. This goes for first obtaining the company and having a plan for what leadership roles the acquired company will have.
The people and the resources from both places will have to be combined.
The plan should also address things that the platform company is good at and enhance the current firm while addressing issues and areas of improvement.
Identifying the issues of the platform company and generating solutions will make the integration process much smoother.
Learning from past mistakes in acquisitions will only make moving forward easier. In addition, knowing areas that could have been improved will be helpful for the firm in the future.
This strategy is difficult to pull off and takes a lot of collaboration and planning for a management team to pull off. That being said, if done correctly, it can benefit both parties greatly.
Say a company is looking to expand and willing to take on this buy-and-build strategy. It is a larger firm and feels expanding would bring value to the firm. But, the firm should first understand its sector and see the quantity and quality of available companies willing to merge.
Strategizing and planning what the firm wants to do with a speculative platform company is imperative. In addition, the company acquired should have a strategic and important role in developing the larger firm, not just a monetary gain.
The next step is to look at what this platform company does well and evaluate how it can benefit from its resources and their connections and relationships. The platform entity should be in line with the other company's goals and be able to create greater value.
The firm would then acquire this smaller company and essentially build upon it. Finally, it would harness the synergies between them. This last step of building upon the platform company can vary due to costs and how suitable the smaller company is to be able to integrate.
Good execution of this strategy would recognize its own firm's goals and path to success and find a different entity to acquire that is also in line with these goals. The platform entity will help the firm reach its goal and bring value when they merge.
Everything You Need To Master M&A Modeling
To Help You Thrive in the Most Prestigious Jobs on Wall Street.
Researched and authored by Devon Tierney | LinkedIn
Edited by Céline Khattar | LinkedIn
To continue learning and advancing your career, check out these additional helpful WSO resources:
or Want to Sign up with your social account?