The buy-and-build framework is one where a big platform company is acquired followed by a series of small add-on acquisitions in the same sector to build a larger company. The idea is to build a bigger firm whose value is higher than the sum of the parts of the platform and smaller add-on companies. This is quite prevalent in the private equity space where a well-established company in a particular sector is placed as an anchor company that has a stable business with a solid management team that can lead a bigger company. This strategy can be used to build scale in existing markets, diversify the company by expanding product or service capabilities, penetrate new markets/geographies, expand applicable end markets, reduce operating costs, and provide quick access to new technologies.

In an aggressive deal market, the buy-and-build strategy has been proven to be one of the most effective values enhancement tools. This is based on the basic premise that smaller companies, including start-ups are often valued at a much lower multiple compared to a larger firm within the same sector. Valuation discount attributed to smaller firms is generally driven by inherent risks of customer/ product concentration, regional focus, dependency on key employees, and lack of access to new technologies. The buy-and-build strategy helps combine the smaller companies, acquired at much lower multiples, to build scale and transform into a bigger firm that is much more diverse in terms of customers, product offerings, technological capabilities. As a result, one can exit this new larger firm at a much higher multiple, providing a compelling multiple arbitrage opportunity and attracting various means of investment.

In another perspective, this strategy helps to lower effective purchase multiple while deploying the capital to work quickly. It allows a GP (general partner) of the fund to justify the initial acquisition of the platform company at a rich multiple while having the provision of acquiring the smaller add-on companies at much lower multiples later. This brings down the fund’s average acquisition multiple while putting more capital to work and focus on transforming the platform company into a large competitive player in its industry. Early acquisition of the platform company gives enough time to the management to execute add-on acquisitions and realize targeted revenue and cost synergies before the exit timeline.

This holds especially true for players

Key factors for a successful execution

Selection of the right Industry: Industry dynamics of the platform company have a significant impact on the success of the buy-and-build strategy. The industry needs to be highly fragmented in terms of product and service offerings, diverse geographical penetration, and the presence of multiple players in the whole value chain. GPs need an ample supply of smaller targets to execute their strategy. The stable business environment of the target industry is also an important parameter. If the industry continues to offer buy-and-build opportunities in the medium term, it leaves an in-organic growth opportunity for the next buyer resulting in a higher exit multiple.

An exception to this, however, is apparent as we witness a rise in digital disruption, and the emergence of technology and digital start-ups in a heavily dynamic market.

Building on a solid platform: A fragmented industry operator with stable cash flows is a good candidate for this strategy. The recurring financial performance of the platform company is quite important to keep the GPs’ enthusiasm intact during the buy-and-build process. The availability of the platform company’s cash flows helps to quicken the acquisition of the smaller players as it reduces the dependency on additional funding from GPs and debt providers.

Management experience and available bandwidth: A well-developed platform company operated by experienced management with proven expertise in acquisitions and integration is a crucial factor. The top management is required to operate the platform company smoothly and at the same time, they must be committed to the buy-and-build strategy. They should have enough bandwidth to help in identifying the targets, complete due diligence, manage the integration, and focus on transforming the combined entities into a larger business operator. Managing the integration of key people from target companies, without adversely impacting existing operations is also an important milestone in this process.

Picking the right add-on: Identifying the suitable targets at appropriate multiple and which can be successfully integrated, is the most difficult aspect of this whole process. Although it is a time-consuming process to do detailed due diligence on the business model, management, financials, and operations, it helps to understand the business fit, the opportunities, and the inherent risks.

Integration tracking and Synergy realization: A detailed integration plan with clear deadlines must be developed and it should be monitored by an integration manager. The progress on integration with specific KPIs needs to be discussed with the management on a recurring basis. It is always advisable to involve the integration team during the estimation of the synergy expected from the add-on acquisition. The team should also identify the required operational steps to realize the estimated synergy and they should be held accountable for it.

Companies need to carefully evaluate the strategies and avenues they’d like to adopt, to enable consistent business growth. The rise of fintech– P2P platforms and as a result P2P lending, the influx of venture capitalists, and the growing investment banking space, make India one of the largest, most opportune financial markets, globally.

We, at Jupiter Capital, a leading Indian private equity firm, strongly believe in the buy-and-build framework. If you have a business plan which can be fit either as platform investment or as add-on acquisitions, please connect at vibhor.kumar@jupitercapital.in.

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