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.