Buy and Build strategies have sometimes been viewed with concern as some investors were only successful with acquiring the initial, “platform asset” and then not able to execute on the additional investment plan of acquisitions. However, over the past several years, this strategy is back in vogue and stands out as a powerful method for value creation. However, with the recent surge in interest rates, the landscape has shifted, making it essential to focus on generating organic growth and improving margins as well. At the heart of this strategy is the need for a visionary CEO to create differentiated alpha.
Buy and Builds are an increasingly popular value creation strategy for PE firms.
The CEO’s Role in a Buy-and-Build Strategy
The buy-and-build strategy involves acquiring a platform company and making successive add-on acquisitions to build a larger, more valuable entity. This approach can yield significant returns if managed effectively, with the CEO playing a pivotal role in its success. Here’s how a CEO can influence the outcome:
- Strategic Vision and Execution: The CEO must have a clear vision for integrating acquisitions and creating a cohesive entity. This involves identifying synergies, streamlining operations, and driving efficiencies across the combined businesses. One of the goals of this strategy is to lower your overall, average purchase price multiple as the tuck-in acquisitions are often acquired at a lower multiple than the intial platform asset.
- Operational Excellence and Integration: Enhancing operational performance is critical. The CEO must optimize processes, improve cost structures, and leverage economies of scale to boost profitability.
- Cultural Integration: Merging different companies often brings cultural challenges. A CEO who can foster a unified culture and align the workforce towards common goals can significantly impact the success of the integration.
- Market Expansion: Identifying and capitalizing on growth opportunities, such as new customer segments, geographies, or product lines, is essential. The CEO should be able to drive market expansion and increase the overall market presence of the combined entity.
Key Attributes of an Ideal CEO for Buy-and-Build
Finding the right CEO for a buy-and-build strategy requires careful consideration of several attributes:
- Proven Track Record: A CEO with a history of successful M&A integrations and operational turnarounds can be invaluable. Their experience can help navigate the complexities of multiple acquisitions and integrations.
- Strategic Thinker: The CEO should be able to develop and execute a strategic plan that leverages the strengths of the acquired companies and addresses potential challenges.
- Strong Leadership: Effective communication and leadership skills are crucial. The CEO must inspire and lead a diverse team, ensuring everyone is aligned with the strategic vision.
- Financial Acumen: Understanding the financial implications of acquisitions, including debt management and cost synergies, is vital. The CEO must make data-driven decisions that enhance financial performance.
- Industry Expertise: Familiarity with the industry can provide a competitive edge. The CEO should understand market dynamics, customer needs, and competitive pressures.
World class CEOs are required to create Differentiated Alpha for PE Firms by developing angles before the close.
Case Study: Lancor’s Strategic Leadership Placement
Lancor’s recent involvement in the fire and life safety industry provides a compelling example of how the right leadership can drive a successful buy-and-build strategy. Lancor leveraged years of experience and deep industry connections to identify a unique opportunity within the fire and life safety space. By engaging with top executives, Lancor crafted a proprietary investment thesis, highlighting the sector’s potential for consolidation and growth.
Recognizing a private equity firm as ideally positioned to capitalize on this opportunity, Lancor facilitated the formation of a company designed to consolidate smaller entities and drive industry growth. In just the first year, the newly formed company executed several acquisitions, scaling the business significantly and demonstrating the power of a well-orchestrated buy-and-build strategy under strong leadership.
As the company expanded and planned for larger acquisitions, Lancor was engaged to find a Chief Financial Officer (”CFO”) who could manage the financial intricacies of a fast-growing enterprise. Lancor reviewed over 500 candidates and conducted in-depth interviews with more than 30, refining its criteria based on client needs. Within 60 days, Lancor successfully placed a highly qualified CFO. This strategic placement was critical in supporting the company’s continued growth and larger acquisition plans.
Lancor’s experience in placing ~120 C-suite executives annually, with a focus on private equity, highlights its expertise in driving differentiated alpha through exceptional leadership. By leveraging their extensive network and industry knowledge, Lancor consistently identifies and places executives who can execute complex strategies and create substantial value.
Conclusion
In today’s challenging market environment, the success of a buy-and-build strategy hinges on finding the right CEO. An ideal CEO possesses a combination of strategic vision, operational expertise, leadership skills, financial acumen, and industry knowledge. By carefully selecting a CEO with these attributes, private equity firms can drive organic growth, improve margins, and create substantial value through their buy-and-build investments. As the landscape evolves, the importance of strong, strategic leadership in navigating these complexities cannot be overstated.
Bain & Company. “Building a Stronger Buy and Build: Global Private Equity Report 2024.” Bain & Company. Accessed July 30, 2024. URL: https://www.bain.com/insights/building-a-stronger-buy-and-build-global-private-equity-report-2024/.
Moonfare. “Buy and Build Strategy.” Moonfare. Accessed July 30, 2024. URL: https://www.moonfare.com/glossary/buy-and-build-strategy.
