With clear starting points and a good interpretation of the preconditions, a ‘buy and build‘ strategy, value can be created. It is therefore also a frequently used strategy by private equity funds to realize returns.

Value creation, translated into higher valuation, comes about through the sum of a number of factors that reinforce each other. These factors include:

• Lower risk profile: Smaller companies theoretically have a higher risk profile (small risk premium) than larger companies. For example, because of a higher dependence on an entrepreneur, or because of a smaller spread in customer portfolio. By ‘buy and build’ with the right strategic focus, you can improve the size, quality and professionalism of a company, making buyers willing to pay a higher price (multiple). After all, the buyer no longer has to make these growth investments himself. A lower risk profile arises mainly because the company:
  • Has a stronger management team
  • Has a wider spread of activities
  • Depends less on specific customers.
• Higher EBITDA: The EBITDA of the “buy and build” will be higher after a successful integration than the average EBITDA of its constituent companies. The higher EBITDA comes from realizing the synergy and economies of scale mentioned earlier.
• Better position in the acquisition market: The company resulting from the “buy and build” tends to be more interesting to a broader spectrum of potential buyers. Financial investors tend to focus on companies with an enterprise value from € 10 – € 15 million. At an enterprise value of > € 100 million, the pool of potential investors is further enlarged with international investors and strategic buyers.

Due to the above factors, the sales multiple of the ‘buy and build’ is often higher than the purchase multiples of the individual companies. This benefits from ‘multiple-arbitrage’.