Tom Matthews
At Pemba, we have built a reputation as a specialist Buy and Build growth investor, having completed completed over 130 Buy and Build investments over the past 20 years. We have successfully executed this Buy and Build growth strategy across software and IT services, healthcare, training and education and financial services to create some of the leading businesses in these sectors.
What is a Buy and Build growth strategy?
Buy and Build is an attractive and potentially lucrative growth strategy that, when used effectively, can significantly increase shareholder returns. Buy and Build typically involves acquiring an initial platform company with a well-developed infrastructure, stable underlying business and backable management team capable of running a much larger business. Through leveraging these existing capabilities, additional companies are acquired in the same and / or adjacent sectors to deliver value accretion and gain a competitive edge.
The businesses being acquired are often smaller organisations that may not have had sufficient investment in technology, marketing and operations to compete and maintain a competitive advantage standalone. As a result, owners frequently choose to sell to an acquirer which help can take the business to the next level.
Why Buy and Build?
A Buy and Build growth strategy can be used to build scale in existing and new markets, expand product or service range and facilitate cross-selling or even help with rolling out a new technology. The core investment principle is that the whole (the group) is greater than the sum of its parts (the individual businesses on a standalone basis).
The benefits of a Buy and Build growth strategy
There are many possible benefits to this strategy when compared to organic growth, including:
- Revenue growth can be accelerated from improved market positioning, enhanced geographic footprint, cross-selling opportunities across an enlarged client base and shared marketing techniques. As well as expansion into new geographic markets and an increased service offering. All of this can be achieved at a quicker rate than through organic growth
- Cost savings can typically be achieved through synergies, economies of scale and rationalisation of support functions
- New talent can be acquired through the acquisition and there is also the potential to share best practice between companies to lift the operating performance of the group as a whole.
That said, a Buy and Build growth strategy is easier said than done.
Management’s role
Whilst it’s often easy to identify the financial arguments for an acquisition, it’s crucial that the management team can set out clearly at the outset of the acquisition process what they are trying to achieve strategically. Whether this is an improved skill base in the workforce, a wider product range to cross-sell to existing customers, better client service or enhanced technical capability.
The role played by the management of the initial platform businesses is key. They must be a highly skilled team who are fully committed to the buy and build growth strategy and have sufficient bandwidth to complete appropriate due diligence, manage the subsequent integration and focus on delivering the full value potential for the enlarged business. At Pemba, we actively support management teams throughout this complex process.
Integrate to accelerate!
Completing an acquisition is the relatively easy part. The real challenge and skill in a successful Buy and Build is to integrate the acquisition, including key people, without adversely impacting existing operations. At Pemba, we have a rigorous and disciplined approach to acquisitions and subsequent integrations, supported by input from the members of our Accelerate team.
How to avoid the pitfalls
Because it brings about a great deal of change, a Buy and Build strategy must be executed properly in order to succeed. Otherwise, the resulting effects can actually be detrimental to shareholder value.
There are many potential challenges in any Buy and Build strategy and minimising the impact of such risks is a key focus for specialist buy and build investors like Pemba. These range from the distraction of management from the core platform business, to technical, operational and commercial issues.
Another key learning is the platform company needs to be large and stable enough to support the bolt on acquisitions. It is very difficult to Buy and Build on shaky foundations and often investment in growth costs is needed upfront.
Cultural integration is usually the most challenging aspect with any bolt-on acquisition. The more aligned the cultures of both businesses, the higher the probability of success. For integration to succeed post acquisition, it is important for the executive management to hold open and transparent meetings to present the vision and opportunities that consolidation will bring to the key teams within the target business and have a clear communication strategy for the target company’s key stakeholders (e.g. staff, clients, suppliers, etc.).
A detailed integration plan should be developed, documented and measured with a specific set of KPIs and performance milestones post deal. It is important to ensure that the acquired company is properly monitored post completion and that its specific business focus is not lost in the wider group.
Final thought
The most important thing to consider when pursuing a Buy and Build growth strategy is to assess the strategic fit of the bolt-on target. For it to add value to the platform company it needs to fit strategically. Where Buy and Builds often go wrong is where bolt-on acquisitions are added just for incremental revenue or profits. If the businesses don’t actually fit strategically, then the overall group’s valuation will likely reflect it upon exit.
Experience counts
If you are considering embarking on a Buy and Build growth strategy for your business, then partnering with a specialist and experienced Buy and Build investor like Pemba can help you navigate the pitfalls, ensure successful execution and drive value creation.
At Pemba, we are always looking for opportunities to partner with great management teams and put our Buy and Build experience to work. Please Inmail me if you would like to find out more.
Photo by Robert Anasch on Unsplash
