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Buy and Build Strategy

By: LB&A Certified Public Accountants | Reviewed by John CarvalhoCheckmark | Last updated: June 7, 2021

What Does Buy and Build Strategy Mean?

A buy and build strategy is one where a company that is attempting to expand its operations in a given direction buys a well-developed company in that sector that has an established platform of management and developed expertise in the areas in which the buying company is interested.

Usually, a buy and build strategy works well in industries where the private equity firm has significant experience, and where there are good management teams available that can transition their company into a platform. This transition is not easy and requires a unique skill set as sometimes competitors are acquired in order to vertically integrate the supply chain. The buy and build approach entails significant change and, therefore, management teams capable of building cohesive teams and further developing a scalable structure are a must.

When a business reaches the point where it must expand in order to grow, there are a few different routes that it can take to accomplish this. It can either work to develop its own internal capabilities in this direction, or it can buy a company that has already developed its own platform of expertise in this area and then grow it out further.

This approach can greatly increase the overall value of the platform company as smaller companies with the desired expertise and experience in the areas that the buying company desires are added. But it should be noted that the overall success of this strategy is heavily dependent on the ability of the management team for the platform company to adapt to this new paradigm.

Buy and build strategies are most often used by private equity companies that endeavor to expand their operations and boost their overall returns while adding value. Furthermore, they are most commonly employed during periods of slow economic growth, as this strategy allows private equity firms to leverage their expansion when organic growth is insufficient to do so.

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Divestopedia Explains Buy and Build Strategy

There are many benefits that can be reaped from the buy and build strategy. In addition to providing a ready-made platform for a company to expand and grow, it allows companies to expand by acquiring other firms that add value to the buying company’s business. It takes time for the employees of a company to develop the proper skills to do their jobs competently, but acquiring companies that are already proficient in the needed areas of growth can greatly accelerate the learning curve. This is the primary appeal of the buy and build strategy, because it allows companies to quickly acquire the needed expertise to expand the business in the direction that it desires.

Needless to say, the success of the buy and build strategy depends heavily upon how successfully and efficiently the acquired businesses can perform. The companies that are bought should be able to work well with each other as they become part of a larger team that needs their operational efficiencies to mesh smoothly.

This is why buy and build strategies are commonly employed by private equity firms with a time frame of three to five years. Funds that are available for this time frame can expect to see a reasonably fast return on capital because of this strategy.

Private equity firms generally use this strategy more often than anyone else, but it is also used by strategic buyers, publicly traded companies and closely held businesses. Buy and build deals can generate returns of over 30% from start to finish, while standalone deals usually only generate returns of about 23%. Because of the myriad of changes that are implemented into the companies being bought out, the structure and transitional phase of a buy and build deal must be handled with great care by the buying firm. If the transition phase does not go smoothly, then the value of the buying firm may decline.

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