Private Equity Buy and Build: A Combination that Brings Remarkable Value

Buy and build strategies are steering middle-market companies in the direction of value creation and growth.

The buy and build approach is nothing new, but private equity firms have grown more aggressive in their use of this model because of the tremendous opportunity that stems from buying a platform company with a strong leadership team and infrastructure, and then turning around and leveraging those same capabilities to acquire four or more add-on companies. This approach is especially attractive for private equity markets due to today’s shorter holding periods, which require a firm’s portfolio company to be bought and sold within 3-5 years.

Since most funds invest for their limited partners (LPs) and subsequently return this investment with appreciation, PE firms are increasingly seeking to increase revenue with a successful and efficient exit from the business. This is why the buy and build strategy is so appealing: it allows organizations to expand through acquisitions, rather than through organic growth, thus adding substantial value to their business at a faster rate. Because buy and build saves time and acquires businesses with developed skills and strong organizational settings, it ensures that organizations expand and add value with the required expertise to flourish.

Unsurprisingly, PE investors are increasingly looking to buy and build for rapid growth, and every buyout firm has its own strategy.

Take Audax Group, for example. This private equity leader partners with middle-market companies and pursues add-on investments at an unprecedented rate. According to Pitchbook, since 2012, 78% of Audax’s deals have consisted of add-ons to platform companies.

When considering the success of Audax Group, it’s important to highlight their ability to gradually build and expand add-ons. Namely, one of their most successful portfolio companies is Advanced Dermatology & Cosmetic Surgery (ADCS). Audax has backed ADCS since 2012, and it has since undergone 37 add-ons, ranking it as one of the 10 most active PE-backed acquirers. As a result, these deals have consolidated US dermatology businesses under the ADCS umbrella.

Similarly, Audax invested in Nivel, an aftermarket distributor of golf car parts and accessories, in 2007. In less than five years, Audax consolidated nine competitors in add-on deals, resultantly elevating the company’s market share by approximately 200%. In January 2012, Audax sold Nivel to Kelso & Company.

These notable exits demonstrate the extreme value of combining the operations of smaller firms with a new firm. However, the success of this combination relies entirely on the success of the company integration process, which requires thorough precision when assessing a company’s capabilities.

When engaging in a buy and build strategy, these factors are crucial to consider:

1. Clear Planning

First and foremost, it is critical that companies thoroughly assess the platform, ensuring that it is stable enough to support the acquisitions, especially focusing on the scalability and readiness of IT infrastructure, financials, and operational models. The objective is to assemble a powerful new business, and this is largely dependent on if the add-on candidate is complementary and accretive. Answering these questions will help you define the value of an add-on prior to acquisition, helping you build out those capabilities and create new, valuable opportunities for your buy and build thesis.

2. Deep Due Diligence

The most successful buy and build strategies get it right because they initiate deep due diligence. Efficient acquisitions are achieved when the buyer has the right foundational infrastructure and a strong existing management team. This is where disciplined due diligence comes in—gauge how much the platform company needs and how much time and investment it’s going to take to fix issues. The key is identifying the costs upfront so you can accurately forecast your ROI. If the platform company has robust IT systems, a strong balance sheet, repeatable financial and operational models, and assets like scalable distribution and sales networks, then the payoff will be drastically bigger than issues that require a lengthy reclamation process. Due diligence can vet the right targets for buy and build, ensuring that each acquisition adds value to the platform.

3. Strong Execution Playbook

When building a buy and build playbook, you must start with great diligence and follow a clear path to buying, integrating, and managing platform company leadership. It is crucial to build a leadership team that has the skills necessary to tackle bottlenecks and secure IT systems, integration, and other key components of an acquisition. When leaders leverage their experience and insights to make decisions, the potential for value creation grows much stronger.

At the end of the buy and build strategy, businesses should be making reasonable profits and adding value to their combined entity. By choosing platform companies that are best suited for the sector and leveraging leadership expertise, your organization can look forward to a very profitable future, saving time and money throughout the process.