Historically, private equity firms have gotten a bit of a bad rap for the “financial engineering” strategies many employed in the 80s and 90s.
The definition of financial engineering varies from source to source but essentially it was the strategy of acquiring companies not necessarily for strategic growth reasons but for “engineering” the financials of the acquired companies to pare down expenses to the bare bones. This often meant dismantling well run companies and divesting pieces via sales in order to generate capital for growth of the remaining business units. So the goal was not necessarily business unit expansion but enhancement of profit margins.
Since then, most equity firms, especially those that specialize in acquiring middle market companies, have used a completely different strategy, one designed to improve operations (and hence profits) while growing the business units strategically. This method, called a “buy and build” strategy, has proven to be quite effective in generating growth and returns for equity firm limited partners.
And that really is the key: If this strategy was not working, limited partners would not continue to pour funds into equity firms as they have the last few years. The “Private Equity Report – 2019” published recently by Bain contains several really good examples of buy and build strategies in action. One example is found here:
“When Investcorp acquired Chicago’s Berlin Packaging for around $410 million in 2007, it was already a strong player in the container business. Yet seven years and four strategic acquisitions later, Investcorp sold out to Oak Hill Capital Partners for $1.43 billion, creating a better than three times return.
“Since then, Oak Hill and Andrew Berlin, the company’s well-regarded CEO, have doubled down on the buy-and-build strategy with four more major acquisitions and a scattering of smaller ones. In November 2018, they attracted $500 million in new capital from the Canada Pension Plan Investment Board. The objective: more acquisitions in North America and Europe.”
The paragraph above highlights two themes common to buy and build focused PE firms:
According to the Bain report, the reason for the popularity of buy and build is simple:
“Buy-and-build can offer a clear path to value at a time when deal multiples are at record levels and GPs are under heavy pressure to find strategies that don’t rely on traditional tailwinds like falling interest rates and stable GDP growth.”
Bain makes a great point above. For all practical purposes a buy and build strategy, if executed correctly, can actually insulate the PE firm from vagaries that are outside of its control because the focus is on improving operational efficiencies and not financial engineering that is dependent on the hope that interest rates continue to fall and GDP expands indefinitely.
“Pursuing a buy-and-build strategy and employing add-on acquisitions is a solid way to achieve above market growth and shareholder value in a 3% GDP environment,” says Gretchen Perkins, a partner with Huron Capital, which added its eighth add-on acquisition to Ronnoco Coffee, a manufacturer and distributor of coffee and tea, in 2018.
Buy and build focused PE firms are a segment of the add-on strategies we have examined in the past. In fact in a recent post we analyzed Huron Capital’s add-on of Ronnoco Coffee and the strategy being employed to greatly expand the existing platform.
The key point to business owners in all of this is: When you approach the market with your investment opportunity, be sure to expand your net to include any PE firms that are pursuing a buy and build program in your industry.
However, since many of these firms fly well under the radar (for a variety of reasons), your biggest challenge will be identifying them and then reaching them with documentation that attracts them.
This is a real challenge unless you happen to know a retired investment banker who will do this for you because of his/her ample free time. For those without this benefit, the solution is hiring an experienced investment banking firm that has a proven track record in negotiating and closing deals with buy and build focused PE firms.
Generational Equity was founded to bring Wall Street methodologies to Main Street businesses. Over the years we have been quite successful in doing so. Why? For a number of reasons, but these three in particular:
If you are at a point where you are ready to begin your exit journey (and it really is a journey of 9-12 months minimum from the moment you decide to start), I would suggest that you reach out to us to learn more about how our services might help you and your family solidify your financial future. Use the following links to learn more about us:
As buy and build strategies gain even more traction, we expect more and more equity firms will head downstream, focusing on ever-smaller targets to augment their holdings. Thanks to Bain and Axial for highlighting this strategy and its growing popularity.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!Tom Currier, Former President & CEO, Rackmount Solutions
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.Caroline Connelly, CEO, OptoTest
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
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