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Ten tips for a successful buy & build-strategy

Buy & Build

1 December 2016

A previously published study conducted by BCG showed that more and more private equity firms are following a buy & build strategy. This strategy can, especially for companies with a scalable business model, provide an ideal means for expanding production quickly, enabling cross-selling or rolling out a technology on a larger scale. Here are ten things to remember when opting for buy & build.

1: Growth is great, but is it also a wise investment?

A buy & build strategy can be a real drain on a company’s equity. This is why it is vital to ensure that each acquisition not only leads to growth in volume, but also to improved financial performance.

2: Don’t bite off more than you can chew

Roll a buy & build strategy out step by step and avoid the pitfall of trying to finalise multiple acquisitions quickly one after another. Make sure the last acquisition is well-embedded into the organisation before you as a management team turn your focus to the next one.

3. Base your decision on a realistic financial analysis

Draw up a thorough historical market analysis and use it as the basis for assessing whether the right conditions are in place for a potentially successful buy & build strategy. Is there room for consolidation in the market and are the valuations of potential acquisition candidates realistic?

4. Choose the right sector

The potential success of a buy & build strategy depends in part on the sector. You should think twice if the sector is characterised by maturity and stable players without there being much scope for benefiting from new profitable technology.

5. Look for fragmentation

Market sectors that are already undergoing consolidation are less attractive. It is best to focus on sectors in which numerous smaller suppliers and service providers are active and in which consolidation can result in real cost-savings and higher levels of service.

6. Pay attention to the price level

Choose sectors in which there is still scope for adjusting pricing and avoid sectors that are dominated by low-cost rivals.

7. Ensure a coherent strategy

A buy & build strategy is primarily valuable if it is used to develop new business activities or to improve existing activities. It is less useful for supporting expansion as such.

8. Concentrate on the right companies

Be sure you have your eye on the right companies. Management teams can easily be blinded by companies that have strong brands or a good name in the sector or by companies that are growing rapidly. But what really matters is whether the company to be acquired will genuinely help improve the service and offering. 

9. Invest in the relationship with the management team

It is crucial to begin investing in the relationship with the current management team immediately after a company has been acquired. Do not simply assume that you have their trust; make sure you earn their trust. Be transparent, tell the team about all the plans and take their feedback into your considerations. Show that together you have the ambition and are able to enable the company to grow.

10. Keep customers in mind

Prevent at all times customers from having to pay the price for a buy & build strategy. Keep customers up to date on developments, ensure there is an actual improvement in the range of services on offer and live up to your promises. Otherwise the ambition to grow will ultimately end up destroying the company.

Source: Real Business