Private equity plays a massive role in the M&A industry, whether as a buyer or a seller. But unlike strategic buyers, they do not intend to keep the acquired business for a long time. A typical PE firm will have a 5-year hold period on acquired assets before they eventually cash in and exit the business.
In other words, they need to grow the business as quickly as possible within the hold period. Adam Coffey, CEO at CoolSys, Refrigeration and HVAC Systems, is an expert on growing these companies using a buy and build strategy. This article will share what it is, how it works, and how to create sustainable success.
"In a service business, culture is king. Your product is people, and you need to be able to talk to people and to have a message that resonates with people in the trenches" - Adam Coffey
A buy and build strategy is essentially PE firms acquiring other businesses in the same industry as their platform company and integrating them all together. The firms could buy in other industries, but it is a strategic way to add new capabilities to their existing platform and make it scalable.
The key is to buy solid businesses. You need to apply good filters and sound strategies to pick appropriate companies. Avoid buying broken companies just because you can get them cheap.
Make sure that you are buying the best companies that fit your strategy.
Due to PE firms' short-term hold period, they usually look for 3x multiple of their invested capital. Before they can achieve this, a company needs to be growing 25% to 30% compounded annually.
On average, Adam usually sees only a 6% to 8% growth rate in their very mature market. This kind of growth will not work from a PE perspective. That's where inorganic growth and a buy and build strategy comes into play. If you are in a highly fragmented industry, you can employ this strategy and scale.
Adam has spent the last 20 years doing a buy and build strategy for three different PE firms, and every time, he had to create his M&A team. According to Adam, if you plan on doing this for a long period of time, you need to do it in-house. It is best to have dedicated people who will continuously learn from past processes and retain their knowledge and information about the strategy.
When he assembles his new team, it is usually a combination of existing talent in the company augmented with new positions where the company doesn’t have the talent. Starting from the top, he likes to hire the leader of his group and build a team around that leader.
"One bad acquisition can take your entire leadership's energy and strength and could cause a distraction that could last years." - Adam Coffey
It's no surprise that culture is a massive part of a buy and build strategy. Like any acquisition, you need to find a good cultural fit between you and the target company. Adam strongly believes that the secret to making top-line growth in a services business is to focus on people and culture. If you are a service company, then your product is people. If you have a good culture, you will get an engaged workforce that will take care of your customers and then revenue will follow.