In the world of mergers and acquisitions (M&A), there is a particular strategy that a business may use to grow and build value known as “buy and build”. Most typically it is a strategy that businesses can adopt to consolidate their market position by using a platform to make repeat acquisitions of small companies or businesses, usually in a high-growth sector with a highly fragmented market.
The aim of such strategies tends to be either to grow a corporate group by acquisition with long-term value in mind or to build value over the medium term aiming towards a targeted exit horizon, with the outcome being that the combined entity will attract a higher deal multiple than the multiples paid for the smaller acquisitions and there is an opportunity to create efficiencies and reduce costs.
Buy and build continues to be an attractive growth strategy across many sectors. As such, an owner of an independent business looking for an exit should be aware of such strategies in case an opportunity to sell to a repeat acquirer materialises.
What makes a repeat acquirer?
Repeat acquirers tend to be highly experienced and skilled in executing M&A transactions. Such acquirers are often looking to complete a large volume of deals, and so the pace at which they carry out these deals can be high.
They typically follow a standard process – from identifying a target and carrying out due diligence to executing the deal and integrating the target business. They will typically use standardised documentation, which will have evolved over the course of multiple acquisitions and will have a sense of market-specific risk areas regularly encountered, and will feed into warranties and indemnities that will be required by the sellers.
All the usual key areas such as finance, tax, and legal will be analysed. The due diligence process tends to be thorough but can be focussed and, in some areas, accelerated based on an acquirer’s experience in the sector, their appetite for risk and their ability to execute a large number of acquisitions. Buyers will usually insist that sellers use a reputable data room provider, or the buyer’s own data room, to ensure the process runs as smoothly as possible.
What does the process involve?
The buyer will have typically made an offer and formulated a price for a company based on an assumption of earnings before interest, tax, depreciation and amortisation (EBITDA) and what value the acquisition can add to the combined group, including assessing the efficiencies that can be implemented once the business is acquired. In particular, and arguably the most important element in the process, it will be critical for any seller to demonstrate that the financials of the business stand up when scrutinised. The seller’s management team should therefore ensure that they have good quality management information available.
In terms of legal due diligence, it is likely buyers will audit all areas of the business, including share capital, contracts, real estate, IT, intellectual property and employees. The seller should therefore ensure that all relevant information is organised and accessible to facilitate the due diligence process so that any due diligence issues are discoverable early in the process. ESG credentials may also need to be demonstrated depending on the sector.
Repeat acquirers typically (though not all) use completion accounts for ascertaining the purchase price and usually this allows for adjustment of the base price against a debt-free/cash-free normalised working capital adjustment. It is important, therefore, that any company drives down debt where possible and understands its average normalised working capital position generally over a 12-month period. There may also be excess cash in the business and the seller will need to consider the best way to extract or otherwise factor in such cash.
Thinking ahead
The seller should also understand what any future role for them following a sale might look like, if any. This will have been considered within the strategy of the repeat acquirer, depending on the model used. Some buy-and-build models do not require the seller to have any role at all and indeed this may suit some sellers who are looking to exit the company completely or retire.
If a seller or their management team are to have a future role this may be to ensure a smooth handover of the acquired business (perhaps on a formal consultancy basis) or could be a more substantial role to continue running the business and/or to facilitate future growth by, for example, assisting with further acquisitions in a market which they know well and have contacts in. A continuing role may mean the seller has an opportunity to participate in the upside of any growth in value attributable to them.
Any sellers looking to sell to a buy-and-build buyer should ensure they obtain legal advice from an M&A advisor experienced in M&A deals of this kind. This is critical in ensuring that they can keep up with the requirements and demands of the process and ensure it runs as smoothly as possible.
This article was first published in Business Leader and can be accessed here.
Francesca Messina