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Understanding the Private Equity Buy and Build Strategy

In the dynamic landscape of business growth and ownership transition, one strategy that has gained significant traction is the private equity (PE) ‘buy and build’ approach. This strategy is being deployed increasingly by private equity firms aiming to generate value in their portfolios. But what does it mean for you as a potential seller of a lower-middle-market business?

The Buy and Build Strategy

At its core, the ‘buy and build’ strategy involves a PE firm acquiring a company (known as the ‘platform’) and then enhancing its value by buying add-on companies. These additional businesses are integrated into the platform company, leading to increased scale, enhanced capabilities, and operational improvements. This approach can create larger, more diversified businesses that are well-positioned for substantial growth.

Platform vs Add-On: What’s the Difference?

Being proposed as a platform or add-on acquisition can significantly impact your experience with a PE firm. As a platform company, your business is the cornerstone of the PE firm’s buy-and-build strategy. The PE firm sees potential in your company’s existing management team, market position, and growth opportunities. They’ll invest in your business, adding value through strategic acquisitions and performance improvements.

On the other hand, as an add-on acquisition, your business is seen as a complementary piece to the platform company. Your company might be attractive due to its strategic location, unique product or service offering, or specific customer relationships that can enhance the platform company’s overall market position.

Comparing Buy and Build Offers from PE Firms and Strategic Buyers

When contemplating a sale, you may be considering offers from both PE firms and strategic buyers. Each can present unique opportunities and challenges.

A strategic buyer, such as a larger competitor or a company in a related industry, may be interested in your business to expand their market reach, diversify their product or service offerings, or realize cost synergies. Strategic buyers might pay a premium for your business if they see potential for synergies or if your business provides a strategic advantage.

A PE buyer, however, might offer different benefits. A PE firm can provide the necessary capital to accelerate growth, bring in experienced leadership or industry experts, and offer strategic guidance. Importantly, PE firms often provide an opportunity for the business owner to retain a stake in the business – allowing them to participate in the upside as the business grows.

Risks and Opportunities of Rolling Over Equity in a Buy and Build

Rolling over equity in a buy-and-build transaction can be an attractive proposition, as it allows you, as the seller, to participate in the future success of the business. However, it’s not without risks.

The opportunity lies in the potential for a ‘second bite of the apple.’ If the PE firm successfully executes its strategy, the value of your retained equity could increase significantly, leading to additional financial gain when the PE firm eventually exits the investment. Let’s illustrate this with a scenario: Imagine being presented two offers for your company. The first proposes $10 million with a 20% equity rollover. The second is a direct $11 million cash deal, no strings attached. On the surface, the $11 million seems more appealing due to its immediate payout. However, considering the rollover’s potential, if the business doubles in value under the PE firm’s guidance, that 20% equity you held onto could be worth an additional $8 million by the time of the next exit, bringing your total to $18 million. This exceeds the straightforward cash offer by $7 million. Of course, this potential gain requires patience and carries its own set of risks, as the company’s trajectory post-sale is never a guarantee. It’s a balance of immediate reward versus potential future gains.

However, the risk lies in the execution of the buy-and-build strategy. The integration of multiple businesses is a complex task requiring experienced management and careful planning. If the strategy isn’t executed well, the business’s performance and value could suffer, which would impact the value of your retained equity. Additionally, by retaining a stake, you continue to have exposure to the business’s financial performance.

The Role of Debt in a Buy and Build Strategy

One aspect of the buy-and-build strategy that often gets overlooked is the role of debt. PE firms frequently use leverage (debt) to finance acquisitions. While debt can enhance returns by reducing the amount of capital the PE firm has to invest, it can also increase risk. If the business’s performance deteriorates, it may struggle to service the debt.

Key Considerations for Sellers

Selling to a PE firm employing a buy-and-build strategy can be very different from a straightforward business sale. It’s important to consider several factors:

  1. Alignment of Vision: Do you and the PE firm share the same vision for the future of the business?
  2. Management Team Involvement: Will your management team be kept on, and what will their role be?
  3. Culture Fit: Will the culture of your business mesh well with the PE firm and the potential add-on acquisitions?
  4. Financial Considerations: Are you comfortable with the proposed deal structure, including any equity rollover?

A private equity buy-and-build strategy can offer significant opportunities for lower-middle-market businesses. Understanding how this approach can create value, and what it might mean for you as a seller, is essential to making an informed decision when considering a sale. As with any business decision, thorough due diligence and careful consideration are key to ensuring a successful outcome.

The Private Equity ‘Buy and Build’ strategy is vast and ever-evolving, with numerous facets to consider. Given its significance and depth, we’ll be diving deeper into specific areas of this topic in our upcoming posts. Whether you’re curious about real-world case studies, the intricacies of post-acquisition integration, or industry-specific insights, stay tuned for more comprehensive discussions. We value your feedback, so let us know if there are particular aspects you’d like us to explore further.

Are you looking to position your company as a prime candidate for a private equity-backed buy and build initiative?

If so, we can help. We are seasoned operators and transaction advisors with a wealth of experience in the buy and build space. We have successfully implemented buy and build strategies within our own businesses and facilitated industry consolidations for private equity firms in multiple industries.

We can provide you with comprehensive guidance throughout the process, from start to finish. We will ensure that you are well-prepared for the transaction and that you identify strategic add-on acquisitions that will enhance the value derived from the platform transaction. We will also excel in connecting you with suitable private equity sponsors and expertly managing the sell-side M&A auction process, all with the goal of maximizing your proceeds.

Contact us today to learn more about how we can help you position your company for success.

Here are some additional details that we can provide:

  • We have a deep understanding of the buy and build process, from identifying potential targets to negotiating and closing deals.
  • We have a strong network of private equity firms and other investors, which gives us access to a wide range of capital.
  • We have a proven track record of success in the buy and build space, having successfully completed multiple transactions.

If you are serious about positioning your company for a private equity-backed buy and build initiative, we encourage you to reach out to us today. We would be happy to discuss your specific situation and how we can help you achieve your goals.




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