Buy and build in M&A

Francesca Messina at Stevens & Bolton LLP outlines what to consider if you are thinking of selling to a buy and build acquirer

 

An increasingly common strategy used to grow and add value to businesses is one called a “buy and build” strategy. In essence this is an attractive growth strategy across many sectors.

 

Owner-managed businesses, whether they are looking to exit or not, should be aware of the considerations should such an opportunity to sell to a repeat acquirer arise. 

 

Buy and build strategies tend to be employed by those in the field of mergers and acquisitions (M&A). Strategies of this nature are typically used to consolidate the market position of a business, making multiple acquisitions of small or high growth targets to complement the incumbent business, resulting in the creation of a portfolio of businesses under one umbrella. 

 

Typically, a buy and build strategy is looking to maximise value over the medium term with a timeline towards eventual business exit, with the larger businesses often achieving a higher price than the initial business, pre-acquisition and yielding better efficiency and lower cost.

 

Alternatively, a strategy could be longer term, growing a business into a large corporate group over time without exit in mind. 

 

What does buy and build entail?

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 its potential value to the combined group, including assessing the efficiencies that can be implemented once the business is acquired.

 

As such, it is crucial for sellers to demonstrate the financial standing of the business. The seller’s management team should therefore ensure that they have high quality management information, to provide at the due diligence stage of the transaction.  

 

Legal due diligence will be necessary on the buyer’s side, to 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. 

 

Who falls under the ‘repeat acquirer’ umbrella? 

When we speak about repeat acquirers, we refer to an experienced entity skilled in executing M&A transactions. Typically, these acquirers carry out deals at a high pace, given they usually look to complete a large volume of deals in alignment with the buyer’s investment strategy. 

 

They typically follow a standard procedure - from identifying a target and carrying out due diligence, through 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, which 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.

 

Anticipating the future 

Dependent on an owner’s future plans, they should 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 include a future role for a seller, which may be ideal for those owners looking to retire or exit the business. If a seller or their management team are expected to have a future role within the business, this could either be as a substantial role to continue running the business or contribute to future growth by using existing market knowledge and contacts or alternatively, to ensure a smooth handover with the new business, for example on a consultancy basis.

 

A continuing role may mean the seller has an opportunity to participate in the upside of any growth in value attributable to them. 

 

When contemplating selling a business to a buy and build acquirer, a good first step for sellers is to obtain legal advice from an advisor well-versed in handling such transactions. This guarantees the ability to navigate the process efficiently, meeting all the necessary requirements and ensuring a seamless and successful sale.

 

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Francesca Messina is Managing Associate at Stevens & Bolton LLP and a Buy and Build specialist  

 

Main image courtesy of iStockPhoto.com