Over the last ten years, we have built up a wealth of experience in various sectors, but there are some which naturally attract greater M&A activity.

As part of their acquisition strategies, we see businesses, investors, and individuals looking to transact multiple times in the same (or similar) industry vertical – this is commonly referred to as a “buy and build” or corporate roll-up strategy.

These two terms are similar strategies. A corporate roll-up involves acquiring multiple smaller companies in the same industry with the aim of merging these to quickly achieve scale and create efficiencies. However, a buy and build focuses more on the acquisition of business that provide new products or service lines to enhance the go-to-market offering of the combined entities. Both private equity firms and serial trade acquirers utilise these strategies to drive value in their investments and build out their trading platforms. The common aim in acquiring multiple smaller companies within a fragmented industry is connecting them to creating a larger, more efficient, and competitive business.

Both strategies are commonplace within industries that share certain characteristics, such as high fragmentation, clear growth potential, paths to scalability, and opportunities for cost synergies. We’re releasing a series of articles, delving into the industry verticals that experience higher M&A levels, and exploring what drives this increased activity.

The benefits of a “buy and build” strategy

The benefits of a buy and build strategy are typically:

• Economies of scale: Larger entities can drive margin improvements through cost controls, and back office/administrative costs savings can be implemented. For example, two standalone entities will need HR, finance departments, etc., but following a merger these back-office functions can be merged and savings made. In addition, once sufficient scale is reached, the organisation will also have increased bargaining power to negotiate lower costs from suppliers.

• Increased market share: Larger businesses have the scale to service more of the market in terms of capabilities and geographic location (where relevant to service delivery). Acquiring businesses in new geographies gives immediate exposure to that region, and the business is able to utilise the acquired company’s brand in the region. Where a service line or product has been acquired there is also an opportunity for cross-selling.

• Operational efficiency and talent acquisition: A large number of the businesses involved in these acquisition strategies are reliant on highly skilled workers. The ability to attract and retain this talent can be easier for larger businesses who have a wider geographic spread, and a bigger, more impactful employer brand.

• Stronger valuation and market perception: Multiple arbitrage occurs as companies become larger, which is driven by the above points. The ability to achieve economies of scale, easier access to capital, and greater stability from a more diverse client base mean these businesses are less risky and as such, deemed more valuable.

• Process-driven acquisition: Acquirers can streamline an acquisition process and therefore not only drive improved chances of getting a deal done, but also reduce the costs of executing these deals.

Highlighting the main pitfalls

With all M&A there is an element of risk, and this can take many forms. The more common themes that can inhibit the success of a multi-acquisition strategy are listed below:

Some key steps in a successful multi-acquisition strategy

There are numerous decisions to be made during an acquisition process and no two are the same. However, we have outlined some of the key steps buyers should take to help plan successful strategy.

• Identifying target companies: Having a strict set of criteria allows you to narrow the search and be far more targeted in your approach. This includes setting out key drivers for each new transaction; which may range from geographic expansion and new service line acquisition to the absorption of rival businesses.

• Valuation and due diligence: Ensure that suitable levels of diligence are performed on the target to mitigate risk and verify the value drivers of the transaction. Identify the different types of diligence required, including technical, commercial, HR, legal, regulatory, operational, environmental/ESG, financial and tax.

• Tax structuring: Ensure that the structure of the group, and how each transaction is expected to be funded, is well planned out. There are different routes to be taken on structuring, creating tax efficiencies and cost savings during ownership and on eventual exit. Any amounts spent on tax structuring fees will generate savings and tax efficiencies several times the cost of structuring.

• Funding: As part of the successful execution of the tax structuring plan, the form of funding will also need to be understood . Funding can come in many different forms beyond existing cash, and debt comes in many different forms which will attract different interest costs. If there are plans for seller financing in the form of a roll, earnout, or deferred consideration, this also needs to be considered.

• Integration planning: As mentioned, integration is key to a successful transaction, Developing an integration strategy, which incorporates everything from back- and front-office is essential. Ensuring that this plan is adhered to following the transaction ensures a smoother transition.

• Post-acquisition performance monitoring: There is usually a need to upgrade/improve the financial reporting of targets, particularly those coming from owner management. New owners will have less understanding of the business and so improved reporting structures help bridge the knowledge gap. It is important that any reporting deficiencies in are picked up as part of diligence and the costs to correct these are considered.

Next in the series

The above looks to set out from a high-level the benefits of multi-acquisition strategies. The following articles will look to delve into more detail on the more active industries we see transactions taking place in.

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