What is a Buy and Build Strategy?

By Generational Equity


Historically, private equity firms have gotten a bit of a bad rap for the “financial engineering” strategies many employed in the 80s and 90s.

The definition of financial engineering varies from source to source but essentially it was the strategy of acquiring companies not necessarily for strategic growth reasons but for “engineering” the financials of the acquired companies to pare down expenses to the bare bones.  This often meant dismantling well run companies and divesting pieces via sales in order to generate capital for growth of the remaining business units.   So the goal was not necessarily business unit expansion but enhancement of profit margins.

Since then, most equity firms, especially those that specialize in acquiring middle market companies, have used a completely different strategy, one designed to improve operations (and hence profits) while growing the business units strategically. This method, called a “buy and build” strategy, has proven to be quite effective in generating growth and returns for equity firm limited partners.

And that really is the key: If this strategy was not working, limited partners would not continue to pour funds into equity firms as they have the last few years. The “Private Equity Report – 2019” published recently by Bain contains several really good examples of buy and build strategies in action. One example is found here:

“When Investcorp acquired Chicago’s Berlin Packaging for around $410 million in 2007, it was already a strong player in the container business. Yet seven years and four strategic acquisitions later, Investcorp sold out to Oak Hill Capital Partners for $1.43 billion, creating a better than three times return.

“Since then, Oak Hill and Andrew Berlin, the company’s well-regarded CEO, have doubled down on the buy-and-build strategy with four more major acquisitions and a scattering of smaller ones. In November 2018, they attracted $500 million in new capital from the Canada Pension Plan Investment Board. The objective: more acquisitions in North America and Europe.”

Understanding Buy and Build Strategies

The paragraph above highlights two themes common to buy and build focused PE firms:

  • The significant growth available by buying and combining synergistic business units AND by providing capital and professional management to aid in the expansion of acquired businesses
  • The fact that limited partners like the CPPIB are attracted to this strategy and are encouraged to invest in future acquisition activities by the firm

According to the Bain report, the reason for the popularity of buy and build is simple:

“Buy-and-build can offer a clear path to value at a time when deal multiples are at record levels and GPs are under heavy pressure to find strategies that don’t rely on traditional tailwinds like falling interest rates and stable GDP growth.”

Bain makes a great point above. For all practical purposes a buy and build strategy, if executed correctly, can actually insulate the PE firm from vagaries that are outside of its control because the focus is on improving operational efficiencies and not financial engineering that is dependent on the hope that interest rates continue to fall and GDP expands indefinitely.

“Pursuing a buy-and-build strategy and employing add-on acquisitions is a solid way to achieve above market growth and shareholder value in a 3% GDP environment,” says Gretchen Perkins, a partner with Huron Capital, which added its eighth add-on acquisition to Ronnoco Coffee, a manufacturer and distributor of coffee and tea, in 2018.

Buy and build focused PE firms are a segment of the add-on strategies we have examined in the past. In fact in a recent post we analyzed Huron Capital’s add-on of Ronnoco Coffee and the strategy being employed to greatly expand the existing platform.

Why This Matters to You

The key point to business owners in all of this is: When you approach the market with your investment opportunity, be sure to expand your net to include any PE firms that are pursuing a buy and build program in your industry.

However, since many of these firms fly well under the radar (for a variety of reasons), your biggest challenge will be identifying them and then reaching them with documentation that attracts them.

This is a real challenge unless you happen to know a retired investment banker who will do this for you because of his/her ample free time. For those without this benefit, the solution is hiring an experienced investment banking firm that has a proven track record in negotiating and closing deals with buy and build focused PE firms.

Generational Equity was founded to bring Wall Street methodologies to Main Street businesses. Over the years we have been quite successful in doing so. Why? For a number of reasons, but these three in particular:

If you are at a point where you are ready to begin your exit journey (and it really is a journey of 9-12 months minimum from the moment you decide to start), I would suggest that you reach out to us to learn more about how our services might help you and your family solidify your financial future. Use the following links to learn more about us:

As buy and build strategies gain even more traction, we expect more and more equity firms will head downstream, focusing on ever-smaller targets to augment their holdings. Thanks to Bain and Axial for highlighting this strategy and its growing popularity.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC All Rights Reserved