In its simplest form, a “buy and build” growth strategy is like Lego – take a few building blocks, put them together, and before you know it you have something which is worth more than the sum of its parts.
Like Lego, growing a business through acquisition only works when the opposing parts fit together and complement one another. But, in a short space of time, you can achieve scale through careful and strategic additions.
Proven or not, we cannot escape the fact that the economic landscape has changed beyond recognition over the course of the last six months. However, among the job losses and business closures lie opportunities for growth – for those companies which have seen an overnight increase in demand and need to respond, and those that have a proposition ripe for growth, regionally, nationally and even globally. For some, in congested market sectors buy and build may be the most realistic way to grow; for others, the strategy is an effective way to bolster market position against overseas rivals and elevate a brand, while allowing you to command a better multiple for the business upon exit.
As certain markets present rare consolidation opportunities right now, either through an increased number of distressed companies, or those who are using the global pandemic as a reason to exit the business, there may be a temptation to seize the moment in pursuit of acquisitive growth. But, if you want to put two and two together and make five, you have to make the right buying decisions, at the right price, and work hard to integrate what you’ve bought.
‘You cannot underestimate the importance of putting those first building blocks in place’
So, what do business owners need to consider when going down the route of buy and build as part of an overall expansion strategy?
There are a number of key elements to buy and build that will translate into growth through acquisition. Let’s start at the beginning: planning and strategy.
Planning and strategy
Having an appetite for growth and one eye on the prize is one thing, but unless you create a road map and bring the future into the present, then your desire to accelerate growth is likely to fail. The person who once said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe” wasn’t wrong. You cannot underestimate the importance of putting those first building blocks in place to create a foundation – a plan. Be very clear what your objectives are from the beginning and what’s important to you as an individual and for the company. Emphasis should also be placed on establishing a value proposition, carrying out analysis of your competitors, while focusing on your own key strengths, core customer base and revenue streams.
Once your strategy is in place and you have a clear direction of travel, you need to consider the issue of raising finance. Under normal circumstances this throws up a number of questions and consideration:
- Knowing when the time is right – is your business at that ‘step-change’ moment; has it achieved sufficient scale and is trading in such a way that it provides enough width and depth to allow a management team to accelerate growth? If you get your timings wrong, there’s a danger that you won’t have the right team or processes in place to achieve your aims. The timings of any deal have to be right, because if you go too soon, then the valuation just won’t be there
- How to present your case for growth – you need to be able place your business in a positive Be very clear about what makes you stand out from the crowd and what defines your strategy and structure. Many companies struggle to articulate what their business’s USP is and how they will scale to the next level. Easy access to management information and business data is also vital in proving the case for funding, as is the ability to refine your business and set KPIs that will help to drive business growth. Being able to extract this information is crucial to the deal process and creates the best foundation for future growth. Often, the people behind a business are of at least equal importance to its proposition. The combination of a proven team, model and the size of market opportunity makes investment a compelling one.
- Finding the most suitable investor who fits with the culture and strategic aims of the business – in a remote world sparked by Covid-19, this process has perhaps become more complex. At the core of raising finance is building a relationship with your potential investor. Make sure they understand your culture and want to safeguard it. At the same time, consider their approach and if that fits with yours – whether that’s hands off, when needed, but equally having a supportive nature, or one that’s more entrenched in your business. Trust is key
With an investor in place, you now have the job of executing a buy and build strategy. Although it sounds straightforward, buy and build isn’t an easy investment thesis to get right, as each business you buy has a different culture and geographical spread to try and overcome.
As a management team, you need to identify which markets present greater opportunities in the current climate; you need to carry out thorough due diligence to ensure there are no unexpected problems or unforeseen liabilities, including full disclosure on all financial and operational aspects of the business. In addition, you need to ensure you are geared up to manage high growth – both from a personnel, process and financial perspective. To take people on the growth journey towards your vision, you also need to be able to win hearts and minds – of the vendors, your team and theirs, and all customers.
One company that successfully achieved this is IT services provider GCI, which we backed in 2012 and successfully exited in 2018. The company was looking for funding to support its acquisitions strategy, and to transition from an entrepreneur-led business to becoming a corporate. The business made 12 acquisitions on the back of a £10m growth capital investment from BGF to become the UK’s largest privately-owned ICT service provider, with customers including Lush Cosmetics and the Heritage Lottery Fund. As a result, revenues doubled to over £100m, with the team growing from 150 to 500 people, including the appointment of four C-suite hires before attracting private equity investment to support the next phase of growth from 2018.
Buy and build is a proven concept. If done correctly, it has the potential to enable a business to infiltrate new markets, create a recognisable brand within the sector, and achieve expansion at an enhanced rate, while retaining the integrity of the business.
Gurinder Sunner is head of BGF in the Midlands