Over the last 20 plus years I've been an active participant in the buy and build market and given the high multiples being seen for some M&A, buy and build can present an alternative strategy to building market share. We've seen roll-ups happen very successfully in the consolidation of certain sectors - veterinary, dental, physio, IT services, law firms(!), fuel stations, motor retailers etc.
An aggressive buy and build strategy will typically be fuelled by an exit for the investor and therefore a finite timetable.
Below I share my key tops to successful buy and build strategies over the next few days and where to watch for the pitfalls.
Invest in a strong leadership team and a dedicated acquisitions team with commonality between the two for reporting/accountability.
The acquisitions team needs to:
- Identify prospective targets – are there enough targets or is there already ample consolidation in the sector? A fragmented sector such as dental, has kept me busy for 22 years on buy and build
- Get the messaging right on why bolt-ons should join the platform – supporting clinical excellence through training/CPD opportunities can tilt the balance when dental sellers are judging one corporate acquirer against competing platforms
- Have a spread of specialist subjects to identify key issues quickly: finance/legal/people/negotiation skills
- Have professional advisers ready to mobilise as soon as heads are ready to sign on a bolt-on
The leadership team must ensure that the right internal infrastructure is ready to deal with acquisitions/integration.
Set your strategy for your buy and build methodology.
Ensure that you:
- Set your goals – how will you generate value through your bolt-on acquisitions – multiple arbitrage; economies of scale; synergies – how will the bolt-ons reduce cost - eg, one back office for all sites rather than one per site; how will you gain leverage with customers/suppliers - in dental you can eg, consolidate lab providers used by your dentists
- Do your homework on the sector you are targeting – the sector needs “room to run” and if your exit is likely to be a secondary buy-out you need more than one more cycle left to run for the new owner otherwise you may be left with no exit or may diminish value
- Formulate your strategy – this needs to be explicit - how will you build value collectively
- Implement your strategy against the timeline to exit/sale
- Monitor and measure your output against roadmap milestones – the monitoring phase is the one which is often forgotten about but is critically important
Intrusive Due Diligence
- Your DD needs to be done in the context of the WHOLE buy and build opportunity and not just the bolt-on
- Focus on the key risks in the sector – eg, if target receives funding from NHS contracts, the duration of those contracts, when is next tender, is government policy changing?
- Set a materiality threshold – so many times I see DD issues flagged with negligible value. Consider insuring against risk
- Ensure you have advisers ready to run with your different DD work streams – financial; tax; political; IT; clinical; legal (inc regulatory). They should all understand where you want focus and all work to the timeline as DD. Outcomes may go to price, risk tolerance and contractual protections in legal documents
- If you are taking out Warranty and Indemnity insurance, ensure your DD remit takes this into account; you cannot take short-cuts on DD and get insurers comfortable
- Ensure that if you are buying in a regulated sector, your DD is intrusive and tests the foundation of the business. We’ve seen deals fold where regulatory DD unearths infrastructure fractures
Using a lawyer
Use a lawyer who is au fait with bolt ons:
- If you are embarking on a buy and build strategy, getting precedent documents drawn up will ensure you are buying on a consistent basis; that sellers know what to expect with the legal documents; and that you can move quickly to maximise an exclusivity period
- Ensure your suite of acquisition documents is reasonably balanced to save time/cost in negotiating; remain credible in the sector and to prove attractive to sellers. Agree a list of pre-agreed amendments with your lawyer
- Ensure that your corporate governance requirements are covered off; upwards reporting to your investor; drawdown consent; DD reporting to stakeholders. Plan ahead.
- Ensure DD red flags are covered off with contractual protections/retention/price chip/earn-outs. Ensure red flags from non-legal DD specialists are fed through to the legal documents where contractual protection is required.
- Explore Warranty & Indemnity insurance early on. We are seeing a massive take-up of W&I insurance by both sellers & buyers.
Integration focus
Have an established integration team or bring in external support where you don’t have internal capability at the OUTSET of the buy and build:
- The integration team should work with the acquisitions team to make sure there is a smooth transition at completion and sellers who are staying on, continue to feel loved
- If you are buying a people business, making those people feel part of the bigger business and its purpose upon completion (and before) is critical – I’ve seen millions spent on people businesses and goodwill being lost at completion when the integration piece doesn’t work well
- Check any fractures in your internal infrastructure – do you have enough back office support for an enlarged business; technology for the enlarged group; robust managers; financial reporting?
- Engage your integration team from the outset of DD so any post-completion steps can be diarised from the start and not missed
- Look at merging systems/processes, retaining talent, embedding culture
- What it will take to retain the top people in Targets?
What's going well and what's not - how to go forward strategically?
- It is critical to assess your buy and build methodology as you acquire - seek feedback from sellers/staff/consultants/advisers so that you can finesse the process and avoid repeat mistakes or repeat the successes
- Learn from what went wrong and how this could have been dealt with better/covered off in DD/contractual protections/price adjustment etc
- Update your legal documents to ensure risk/problem areas that have arisen before are covered off – keep ahead of the game to de-risk your investments
- Look at what’s happening in the world in the way stockbrokers watch the news and second guess potential impacts
- Do continual research on your sector and adjust your strategy accordingly; if there is forthcoming risk, mitigate; if there's a global shockwave like a pandemic, diversify
- International opportunities – what comes next – always look forward in your pipeline and if there is likely to be UK saturation, look at Europe and wider