If your business does something better than most of its competitors, perhaps it is time to “Buy the Firm!” and implement a buy-side M&A strategy. When I was in business school, I had a professor that was fond of exclaiming “Buy the Firm!” In fact, his solution to many business problems or questions that arose in class was to enthusiastically shout “Buy the Firm!” His lesson in this exclamation was that there is no perfect business, and that unaddressed business problems detract from the overall value of a business. But business problems that had been identified and solved (or simply improved upon) created value. Thus, the most direct solution to solve any particular business challenge is to buy the firm, fix the problem and capture the ensuing increase in value.
Who Applies This Strategy?
For a man who had spent the vast majority of his adult life in academia, it was (and still is) an incredibly entrepreneurial response to corporate governance. It is also a response applied by many private equity firms and activist investors across the world to create billions of dollars in wealth. Carl Icahn built his fortune by using a buy-side M&A strategy by purchasing small positions in publicly traded companies and then threatening, cajoling and otherwise forcing boards and executive teams to solve the particular problem he identified, then selling his shares once the value had been realized. Warren Buffett, has effectively done the same, albeit with a much less adversarial approach than Carl Icahn. George Roberts and Henry Kravis of KKR also aggressively use a buy-side M&A strategy. The founders of 3G Capital, currently one of the most successful buyout firms on the planet, have also adopted this approach with amazing success.
The Investment Thesis
Across the automotive aftermarket, private equity groups continue to sense opportunity to build wealth using a buy-side M&A strategy by investing in companies and backable management teams. Part of the investment thesis is to build topline sales by acquiring multiple smaller companies in fragmented industries. Part of the investment thesis also involves building scale and improving the cost structure of the business. But part of the thesis is also about management and operations — identifying opportunities to do business differently and capture the value that results.
I have the great opportunity to interact with a wide spectrum of business owners, investors and executives. I find it fascinating that many of the challenges are similar regardless of company size or industry. Good business fundamentals are the same, whether you run a two person startup or a 100,000 person multi-billion dollar organization. Consistent repeatable business processes drive operational results which drive financial performance.
Set Yourself Apart
A client of mine recently remarked to me, “Most business owners in this industry are running blind and making money despite themselves. I don’t want to be like most.” The best strategy is worthless without solid execution. Warren Buffett, Carl Icahn, and Henry Kravis built multi-billion dollar empires based on this premise. Companies in the automotive aftermarket like Caliber Collision, FinishMaster, LKQ, Driven Brands and many, many others operate on this premise.
A buy-side M&A strategy, or simply buying companies as part of a business growth strategy, is quite literally the embodiment of the sage advice of my professor to “Buy the Firm!” Companies that build successful buy-side M&A campaigns are often those that have identified a way to solve a business challenge, and wish to leverage that success across multiple business through acquisitions. Perhaps management has simply identified a way to execute in a more predictable and efficient way. Often these solutions depend on building scale to create a competitive advantage, but not always.
If your business does something better than most of its competitors, perhaps it is time to “Buy the Firm!” The competitive advantage you have developed does not necessarily need to be revolutionary to successfully implement a successful buy-side M&A strategy, although that can certainly help. Rather, a focus on repeatable business execution is often enough to successfully position your firm to launch a buy-side M&A strategy. Look no further than Warren Buffett, Carl Icahn and 3G Capital for role models.