The concept of buy and build has gained significant momentum in recent years, though it is not always used appropriately. It refers to a financial actor—typically a private equity fund (1)—acquiring a first platform company in a specific sector to secure a successful business model and managerial expertise, and subsequently executing complementary follow-on acquisitions (add-ons) within the same field.
Strong value creation
By executing a series of acquisitions within the same industry, a buy and build strategy creates value across multiple levels:
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Critical mass and synergies: By joining a broader group, the acquired company reaches critical scale and steps up to the next level. Unlocked synergies (better purchasing terms, cross-selling of products, etc.) enhance overall profitability.
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Leveraged returns: Through the paydown of acquisition debt (via a Leveraged Buyout, or LBO), the return on investment is boosted.
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Multiple arbitrage: Add-on acquisitions are typically completed at lower valuation multiples than the platform company. Simply attaining larger scale (which naturally commands a higher market multiple) allows the acquirer to capture an instant unrealized capital gain upon acquisition.
This triple value creation driver delivers above-market returns on investment (ROI). It is therefore no surprise that private equity funds frequently pursue buy and build strategies.
While remaining in the driver's seat for the acquisition process, these investors secure the full commitment of the management team by offering substantial variable compensation tied to success. Through specific financial mechanisms (such as preferred shares), active management partners gain additional leverage if financial targets are met at the time of the exit (2).
Associated risks
For the owner-manager, reinvesting in such a project carries real risks—especially given the loss of decision-making control—even though that risk is spread across a larger entity.
Another pitfall to avoid concerns valuation, both at entry and exit. If the rollover investment is made at an already inflated valuation, the potential for future capital gains will naturally be limited. The same applies if the ultimate exit occurs under unfavorable conditions, keeping in mind that the former owner no longer controls the process or the timing, which is often set in advance.
Before jumping in, it is therefore crucial to thoroughly understand all the ins and outs of what can be a complex structure.
An unduly negative image
The buy and build strategy sometimes suffers from bad press when portrayed as an excessive financialization of corporate management. Yet this approach, which is fundamentally quite traditional, is routinely used by leading market players, including publicly listed holding companies that do not necessarily operate on a fixed exit timeline. Smaller players, such as family offices, are also active in this space while maintaining a human-centric culture and a long-term strategic vision.
Furthermore, when shareholding is fragmented (as is often the case in family businesses), partnering with a private equity firm is an excellent way to consolidate equity, enabling the active CEO to progressively buy out non-active shareholders.
Conclusion
In conclusion, the buy and build strategy is a powerful engine for growth and development. It is not the strategy itself that is open to criticism, but rather how it can be executed. When financial targets are overly ambitious or leverage is applied too aggressively, it can lead to missteps. The Latin adage "moderatio in omnibus" (moderation in all things) applies perfectly to corporate acquisitions.
(1) Private equity funds invest in unlisted companies.
(2) Exit refers to the moment shareholders sell their stake, typically to new investors. A new chapter then begins, often with another pre-scheduled exit down the road.
