In this ten-part blog series, we explore the lifecycle of a business. Which legal structure should you choose? What is required to incorporate a company? How does a company come to an end? Who are the key stakeholders, and how should you deal with a business partner who decides to leave? In this sixth instalment, we discuss the reasons why companies are acquired, with a particular focus on the buy-and-build strategy.
There are many reasons why a business may choose to acquire another company. Common motivations include eliminating competition, acquiring specialist knowledge or expertise, or gaining control over part of the supply chain. Acquisitions may also form part of a broader strategic growth plan, such as a buy-and-build strategy.
A buy-and-build strategy is a growth strategy that begins with the establishment or acquisition of a so-called platform company. This company serves as the foundation for future growth and for strengthening the organisation's market position. The platform company must be financially sound and profitable so that it can support future acquisitions.
Rather than pursuing acquisitions at random, the strategy focuses on carefully selected businesses that contribute to the further development of the platform company. These may include competitors, companies operating in new markets, or businesses with specialist knowledge, technology or services that enhance the platform company's existing market position.
The key difference between a buy-and-build strategy and a one-off acquisition is that the former is based on a continuous acquisition programme aimed at accelerating the growth of the platform company. This growth can strengthen the company's market position, increase its scale and ultimately enhance its value.
A buy-and-build strategy generally consists of four phases:
The Platform Phase
The first step is to identify a company that is sufficiently strong to serve as the foundation for future growth. This could be a regional market leader, a company with a strong customer base, or a business with scalable operations. Once acquired, this platform company becomes the starting point of the growth strategy.
Research and Preparation
After acquiring the platform company, it is important to further develop the growth strategy and prepare a financial plan. Potential acquisition targets should be identified, and market research should be carried out to support future expansion.
The Build Phase
The platform company then acquires carefully selected businesses. These may include complementary service providers, companies operating in new geographical regions, competitors, or businesses with specialised technical knowledge or expertise. The objective is always to strengthen the platform company's market position.
Integration
Following the acquisitions, the acquired businesses must be successfully integrated into the existing organisation. This phase determines whether the anticipated economies of scale and operational synergies can actually be achieved.
A buy-and-build strategy can offer several advantages.
Accelerated Growth
Instead of relying solely on organic growth, acquisitions allow a business to expand more rapidly. This can be particularly attractive for companies seeking to strengthen their market position within a relatively short period.
Stronger Market Position
The strategy can also help a company establish a stronger or even dominant position within its market. In addition, acquisitions may provide access to new geographical markets or customer segments.
Economies of Scale and Synergies
Combining multiple businesses can create economies of scale, resulting in lower costs and more efficient operations. Synergies are another important benefit. Bringing organisations together can improve operational efficiency, facilitate knowledge sharing, optimise the use of resources and enhance overall business performance.
Value Creation
For private equity firms and other investors, successfully executing a buy-and-build strategy can significantly increase the value of the platform company. A larger, more integrated business is often more attractive to potential buyers, resulting in a higher return upon exit.
Despite these advantages, integrating multiple businesses is often costly, time-consuming and complex. Even after thorough due diligence, there is always a risk that an acquisition may not deliver the expected results due to changing market conditions, operational challenges or cultural differences between organisations. As a result, the anticipated benefits may prove more limited than initially expected.
In short, while a buy-and-build strategy offers considerable growth opportunities, it also involves significant risks and challenges. It is therefore essential to identify these risks at an early stage and implement appropriate measures to mitigate them. In practice, companies often benefit from assembling a multidisciplinary team of experienced advisers to guide the process.
A buy-and-build strategy is not reserved exclusively for large corporations or private equity firms. Medium-sized and smaller businesses can also achieve significant growth through this approach, provided they have a clear strategic vision and are adequately prepared for the challenges associated with acquisitions and post-merger integration.
There are many reasons why a business may choose to pursue an acquisition, depending on its strategic objectives. In this article, we have focused specifically on the buy-and-build strategy as an effective approach to accelerating growth and creating long-term value.
Do you have any questions about the buy-and-build strategy or would you like legal advice on corporate law? Please feel free to contact Manon Hoekstra or Jarno de Graaf, lawyers specialising in Corporate Law.
This article is part of our blog series "The Business Lifecycle":
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