Buy & Build Strategies

Despite the last quarter dip in UK “growth” the market for mergers and acquisitions remains buoyant.

Prism have seen a real upturn in the number of owner-managed businesses seeking an exit, which is broadly matched by business seeking acquisition. We consider in this months newsletter the Buy & Build Strategy which is relevant to both.

For those unsure of what strategy to Adopt why not come along to one of our free seminars or one to one’s? Further details below.

Buy and Build Strategies

Market activity levels are continuing to rise and with it talk of “Buy and Build” Strategies.

Many owner managers find continual organic growth difficult and start to consider acquisition as an alternative strategy. So what is a buy and build strategy and how does it add value?

Buy and build in private equity terms normally involves the acquisition on a Platform company, of sufficient scale to allow the addition of complementary companies as “Bolt-on’s”. The Platform company should have strong management (with spare capacity) and good systems. The idea is to improve performance of the group as whole by taking advantage of operational synergies, economies of scale and access to a wider range of financing for capital investment. There may be a significant premium paid for the Platform company as this is the bedrock for further acquisitions.

There is a further advantage of a buy and build strategy – that of exit valuations. The multiple of profits (equivalent to P/E ratio) paid for businesses tends to increase with size and perceived lower risk to future earnings. In a buy and build strategy value can be created upon acquisition, ignoring any synergies, as the acquired company’s earnings will be more highly valued when incorporated into a larger business. If the premium is substantial it can allow the acquiring group to pay higher prices than some other buyers and lends itself to e.g. partial share exchange, allowing the acquired company shareholders to participate in the upside.

The success of this strategy however requires that the acquired businesses continue to flourish, and benefit from being part of the group. This same logic can underpin private company acquisitions and can be an excellent way to add value for an ultimate sale.

Sovereign Capital have adopted this approach in a few select sectors, such as support services and education & training.

By Peter Watson, Prism Corporate Broking