This classic strategy is often criticised for leading to excessive behaviour.

The concept of buy and build has taken off in recent years, but is not always used to good effect. It involves a financial player, usually a private equity fund (1), buying an initial target in a sector of activity in order to acquire a successful business model and managerial skills, and then making further complementary acquisitions (add-ons) in the same field.

Strong value creation

By making a succession of acquisitions in the same sector, the buy and build strategy creates value on several levels.

1. By becoming part of a group, the sold company benefits from greater critical mass and reaches a new level. The synergies generated (better purchasing conditions, cross-product sales, etc.) help to improve profitability.
2. Thanks to the repayment of the acquisition debt (LBO, Leveraged Buy Out or buying by using leverage), the return on investment is improved.
3. Acquisitions are made at lower valuations. In this way, the simple fact of size (resulting in a higher valuation) enables the acquirer to realise an unrealised capital gain from the moment of acquisition.

This threefold creation of value results in a higher ROI (return on investment) than the market. So we should not be surprised to see funds embarking on a buy and build strategy.

While remaining at the helm of the acquisition process, these investors ensure the involvement of a team of managers, by offering them very substantial variable remuneration in the event of success. Thanks to certain financial mechanisms (such as preference shares, for example), active shareholders obtain a leverage effect if financial targets are met at the time of exit(2).

But there are also certain risks

For the shareholder-manager, reinvesting in such a project certainly presents a risk, especially as control of decision-making is lost, but this risk is spread over a larger group.

Another pitfall to avoid concerns valuation, both on entry and on exit. If the reinvestment is made at an already high value, the potential for capital gains will of course be more limited. The same is true if the exit is not made under the right conditions, since it should not be forgotten that the former manager no longer controls the process or the timing, which is often already fixed in advance.

So it’s important to understand all the ins and outs of the project, which can sometimes be complex, before taking the plunge.

An overly negative image

The buy and build strategy sometimes gets a bad press when it portrays an excessive financialisation of company management. However, this mechanism, which is fairly standard, is used by major players such as listed holding companies. These companies do not necessarily have a planned exit strategy. Other, more modest players, such as family offices, are also venturing into this niche, while taking care to retain a human spirit and a long-term strategic vision.

And when the shareholder base is fragmented (as is the case in many family businesses), going through a private equity fund is an excellent way of consolidating the shareholder base, enabling the effective manager to gradually buy out the shares of non-active shareholders.

In conclusion, the buy and build strategy is a powerful engine for growth and development. It is not the strategy itself that is open to criticism, but the way in which it is applied. Excessive financial targets and over-aggressive leverage can lead to abuses. The adage “moderatio in omnibus” (moderation in all things) therefore applies perfectly to the subject of company acquisitions.

(1) Private equity funds invest in unlisted companies.

(2) Exit refers to the moment when shareholders leave the company, usually by selling to new investors. A new project is then launched, often with a new exit pre-programmed.