With large trade players where an initial cornerstone investment is made in a platform business from which growth is sought predominantly through additional acquisitions – the owners of the targets sell their companies into the enlarged group and, together with the buyer’s executive team, become part of the future journey.
In achieving the scale there are a number of different aspects to be considered, notably devising the strategic objectives and proposed timescales of the buy and build proposition, finding and investing in the ‘right’ platform business, the initial and ongoing funding and corporate structure, identifying and executing future acquisitions and ultimately planning an exit to realise the investment in the enlarged entity.
When appraising the initial cornerstone investment consideration should be given to the wider strategic plan as the conditions of the first investment will naturally set the tone for future acquisitions i.e; concerning the acquisition price/multiples paid, level of equity available to the owners of the target and their role in the enlarged group.
The initial investment also requires to be scalable in respect to its existing locations, services and administrative functions. In addition, it is fundamental that the culture of the target meets that of the Group, as this is often troublesome to implement later on with a much larger headcount.
With respect to funding buy and build platforms, investors will commit funding in advance of making future acquisitions provided there is enough visibility on targets being acquired, or may alternatively fund transactions on a deal-by-deal basis. To supplement this, debt funding is often sought to leverage the transactions together with working capital facilities.
Throughout the life cycle of the investment there should be an ongoing review of the requirements of the business with respect to achieving its growth in terms of strategic direction, acquisition targets, organic growth through utilising internal capabilities and maximising market conditions. As the group continues to grow the more scrutiny of the trading performance and anticipated forecasts are required in order to ensure that the Group and its individual companies, divisions or sites remain on track with growth plans & budgets/forecasts.
Further bolt-on targets require to bring additional dimensions to add value to the Group, for example vertical or horizontal integration into new markets, provision of niche service offerings or new technologies, geographical expansions and/or capabilities or new skill sets.
One key point is that all oppor tunities should be considered and appraised in the context of the overall Group strategy and whether the addition would create additional value for the Group.
One key theme of any buy and build strategy is the requirement to retain and incentivise the core management teams of the potential acquisition targets.
Mindful that it is often the case for vendors post-completion to form part of the Group’s future management team, it is important that they are provided with a level of autonomy to capitalise on opportunities and be given the ability to leverage from the Group capabilities. This is often a balancing act, however, the clearer the structure and communication channels the better the awareness of expectations.
Buy and build strategies tend to offer opportunities for vendors to de-risk their current position and realise some investment in their existing company together with acquiring a shareholding in the enlarged Group. Therefore, owning a smaller shareholding but of a bigger pie which is typically realised when the Group is sold.
Often owner-managed businesses are run very successfully by individuals who are passionate in the product or service they deliver. In being acquired this can be an opportunity to be recognised in part for what they have delivered to date but also focus on what has made them successful thus far whilst allowing the corporate administration to be undertaken by a centralised function.
Whilst the mind-set for any buy and build strategy requires to be on the medium to longer term, naturally as with every investment there is one eye on the potential future exit as the Group seeks to achieve its objectives in terms of growth and trading performance.
By having a clear strategy from the outset and maximising the potential of the platform business it is likely that the sum of all the acquired businesses combine to achieve a higher value for the Group.
To realise this value, an exit can take the shape of various guises as private equity firms often achieve an exit through selling their shareholding to larger private equity firms and so the cycle continues. Other routes are via a trade sale once the Group has achieved a scale that makes it attractive to larger businesses or a listing on a stock exchange. n
Douglas Martin is Head of Corporate Finance at Anderson Anderson & Brown LLP