The Buy and Build Strategy
For almost all businesses, creating value requires growth. Growth in sales, customer numbers and most importantly profits. Growing a business under its own steam, organically, is often a tough incremental process where progress is made customer by customer, order by order, in the face of fierce opposition from competitors.
Given the painstaking graft required to deliver organic growth it’s easy to see why growing by acquisition is an appealing alternative.
A successful acquisition can bring multiple benefits to a business. Starting with the obvious increase in sales and profitability, there’s also the potential to acquire new skills and customers, enter new geographies or product areas, enhance market perceptions and get new people and ideas into the business; not to mention the opportunity to take advantage of synergies and economies of scale to reduce costs.
Our experience at KCP is that the right bolt on acquisition can have a game changing impact on a business. This doesn’t mean it’s something every business should do. Finding the right acquisition is not easy. Executing the acquisition will inevitably be stressful and once all that is complete the vitally important task of integration starts immediately. The investment in time and effort, on top of hard cash, required to make an acquisition strategy work is significant; and getting it wrong can be very painful.
At KCP we have supported a number of our portfolio companies to make bolt on acquisitions in areas as diverse as blue-collar staffing, school catering, kitchen installation and publishing.
Case study: Alliance in Partnership
One of the most successful bolt-on acquisitions KCP has been involved in was the purchase of a small school dinners company in the South East by our larger platform company, AIP, which was located in the Midlands. This deal was identified by KCP’s research team and executed by KCP staff working alongside AIP’s management team. Integration was delivered seamlessly by a senior manager from the West Midlands transferring down to Kent to lead the newly acquired business. Financially the deal was a success too. The enhanced purchasing power delivered by the larger group resulted in significantly reduced food costs in the acquired company; significantly boosting profits. The location of the acquisition enabled the larger business to credibly claim a national footprint; leading to a high value exit to an overseas acquirer less than a year later.
Let’s break this down into what made it successful:
Working the synergies - Almost all acquisitions are based on the assumption that bringing the two businesses together will result in synergies, making the combined entity greater than the whole (or making 2+2=5). Delivering these synergies is critical to value creation and delivering a return on the cash and hard work expended to make the acquisition. Here, AIP had significantly greater buying power with their suppliers and were able to access cheaper produce than the business they were acquiring. Therefore, immediately after the acquisition, the contracts they had just acquired as part of the deal became more profitable purely on the basis that the income generated would remain the same but the cost of fulfilling the contracts were less.
Cultural fit - Bringing two businesses together involves combining or changing cultures. The most successful integrations typically work on the basis of taking “best of both” from target and acquiror. At KCP we’ve found that this works best if a senior and trusted manager from the acquiror is based at the new acquisition from day one. This helps set the tone immediately and helps the team at the acquired business prepare for the future under new ownership. AIP led the integration by transferring key senior staff down to the acquired site immediately post-acquisition to help ease the transition for the newly acquired team and really get under the skin of the operations there.
Size matters – Being a larger business has its benefits; better buying power, better skills/knowledge pool in its staff base, better brand awareness, and in AIP’s case, buying smaller competitors in strategic locations enabled the company to demonstrate it had a national presence. AIP’s scale in comparison to other smaller competitors was one reason it stood out in a saturated market to an overseas acquiror and attracted a higher multiple on exit.
Multiple arbitrage - As a business grows, its pool of potential buyers expands, more financing options are available, economies of scale open up and market penetration is generally greater. For these reasons, it is typical for larger businesses to attract a higher profit multiple simply because they are bigger. So, if a company with an EBITDA of say £10m has a value of 5x profit, and a company with an EBITDA of £100m has a value of 7x profit, the larger company can acquire the smaller company and immediately the value of the smaller company would increase by 2x upon acquisition. AIP used this methodology perfectly in a number of acquisitive moves in recent years. They acquired smaller companies at a lower multiple and once the businesses were integrated, the value of the combined business was greater than the sum of the parts.
The final word… If you are considering a ‘buy and build’ strategy, rigorous planning is vital to ensure the overall strategy is adhered to. This starts with having a clear acquisition plan ie where do we want to be / what do we want to look like after the acquisitions, and on a micro level, does this specific target help us achieve our objectives? Areas to focus on are financial performance, workforce, customers management, customers and product. Sticking to these criteria is important, as doing a deal “for the sake of it” rarely ends well.
Hunting out the right acquisition candidate needs to be approached methodically. Industry contacts and gossip will be useful sources of data but will need to be supplemented with research on the internet and Companies House. It is important to maintain discipline and walk away from deals that don’t fit your objectives – doing a bad deal is far worse that doing no deal.
Key Capital Partners has made 11 bolt-on acquisitions within four different portfolio companies in recent years, aided by our internal Origination team who have tools available to help you identify potential target businesses. We know that bolt-on acquisitions, properly executed, can significantly accelerate value creation. If you’re looking for an equity partner to assist you in growing your business by acquisition, then please get in touch.