Growth through acquisition has long been a tried-and-tested strategy of larger companies. But in recent years, a growing number of SMEs have also tended to favour buy-and-build strategies. Acquisition expert Hans Minnaar of Florijnz Corporate Finance points out several reasons why this type of strategy is so popular in the SME sector right now.
The first reason, according to Minnaar, is the pace of digitalisation. Many SMEs are aware they can no longer afford to operate without an online environment, or are trying to come up with new online business models.
In these cases, it is often easier for a company to acquire the requisite knowledge through a corporate takeover than to develop the expertise itself – and accept the attendant risks.
The second reason cited by Minnaar for the growing interest in the buy-and-build approach is the current low interest rates, coupled with a rapid growth in the number of private-equity firms. The latter are increasingly being funded by successful entrepreneurs who, having sold their own businesses, are keen to invest their money in another company. Minnaar: ‘At the same time, we are seeing a fair number of entrepreneurs on the supply side who are looking to sell a portion of their company for cash now that business is looking up. Many tend to remain involved in the company as minority shareholders and proceed to develop a new buy-and-build strategy together with the investor. So the combination of a pre-exit and buy-and-build only makes sense.’
The third reason, Minnaar explains, is the fact that SMEs are being managed significantly more professionally than 10 to 20 years ago. There is more information available about corporate finance, even in smaller businesses, which has reduced some of the former anxiety about making acquisitions.
None of this is to say that buy-and-build strategies are successful without exception in the SME sector.
For example, a well-thought-out long-term vision can be lacking, or the internal organisation of the platform company could be ill-prepared for the often-rapid growth that follows in the wake of buy-and-build strategies.
Then there are traditional integration problems (including cultural differences and system integration), which affect businesses of all sizes.
There is also the fact that not all SMEs are equally suited to a buy-and-build strategy. Businesses operating in small niche sectors, for example, often scramble to find a sufficient number of eligible acquisition candidates.
Besides, the process of approaching and selecting suitable takeover candidates is not fundamentally different for buy-and-build strategies than for ‘regular’ acquisitions. Minnaar: ‘This is not just a routine transaction for a business. In fact, not all SMEs are fully aware that the whole process of approaching potential takeover candidates can vary by industry and even by region. If the company’s based in, say, Rotterdam, you can usually just pick up the phone, but if you’re looking to contact someone in Limburg, you’re better off writing a letter in which you gently enquire if you might pop round for a cup of coffee sometime.’
All this means that, while buy-and-build may be gaining popularity among SMEs, many businesses feel the step is too large – at least for the time being. However, Minnaar argues that there are numerous opportunities that many business owners may not be aware of, provided that a number of prerequisites are met. He sums these up as: a good preparation; a sufficient amount of equity capital (a ‘war chest’, as he calls it) and – above all – a clear strategy (rather than growth merely for the sake of growth).
According to NPM Capital Investment Director Rutger Ruigrok, private-equity firms certainly do help SMEs in implementing a successful buy-and-build strategy, provided that they apply a long-term strategy rather than going for a quick exit. He says: ‘You need to prevent a situation where the investor is concerned primarily with leverage, multiple arbitration proceedings and growth potential, while your main priority, as an SME owner, is growing your business. We therefore feel that the acquisition strategy should be supported by the contact at the platform company, rather than being imposed by an investor. On this basis, we have supported several portfolio companies operating in the SME sector, actively and by providing tactical advice, in making strategic acquisitions.’
Source: Brookz KnowledgeBase
Read more about NPM Capital’s vision of buy-and-build