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Buy and Build

Definition - What does Buy and Build mean?

Buy and build is a growth strategy where one organization buys a platform company with an excellent management structure, and uses the skills and capabilities of this company to add on more businesses. The idea behind this strategy is to increase the profitability of the group as a whole by leveraging the capabilities and synergies of each of these companies.

Divestopedia explains Buy and Build

Buy and build strategy comes with many advantages. Firstly, this strategy helps to create value through acquisitions. When a buyer wants to grow and expand, there are two options. One is to create capabilities within the organization to expand to different markets and segments, and the second is to acquire companies that have already built expertise in that area. In buy and build, the latter approach is used, and this creates greater value because the synergies and operations of many smaller firms are combined. However, the key for success depends to a large extent on the platform company, and for this reason, a premium may be paid to it. Also, success depends to some extent on the ability of different acquired businesses to flourish together and benefit from being a part of a larger group. For this reason, it is important to acquire companies that can work together.

Private equity players tend to use this buy and build strategy extensively because the holding time is short - typically from three to five years. This works for private equity players because most of them handle investments for a short period of time, and at the end of this predetermined period they have to return the investment along with a reasonable return on capital. Private equity firms also tend to accelerate their revenues and profitability to exit from the business as quickly as possible, and this buy and build strategy helps facilitate that objective.

Nevertheless, these strategies can be challenging to implement because the right acquisition of companies and their integration is essential. It also requires the selection of an appropriate CEO and an experienced management team to run the entire portfolio of companies.

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Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.