Whether the pandemic has been good or bad for your business, just about every business leader has been shaken out of their status quo.
Among those emerging from the economic shock of 2020 unscathed or resurgent, many have begun 2021 with greater confidence and a desire for more ambitious growth.
This confidence is generating more heat in an M&A market which has already returned to levels we haven’t seen for a number of years. But one element that is more noticeable this time around is the prevalence of the buy & build strategy. Entrepreneurs, rather than selling, are feeling bold and doubling down on their businesses in anticipation of greater gains in the future. Acquiring and absorbing businesses which extend their service offer or geographic footprint – or which simply add scale and cost synergies to drive revenue and margin growth.
Of course, to buy & build is not new. In fact, it is a core Private Equity strategy for efficiently deploying funds via businesses they already control. But what is remarkable is the sheer number of new players in this field among agencies and consultancies. In large part, this is being driven by an influx of PE funds who see huge opportunities amid the ongoing digital disruption in sectors they used to regard as “arts & crafts”. But entirely independent agencies and consultancies with strong balance sheets or access to bank debt are now also embarking on buy & build, snapping up smaller businesses that tend to be overlooked by more established buyers.
So let’s take a closer look at what’s driving this trend.
The objective.
Sustaining growth. The Holy Grail of M&A. In the early years, talent-based businesses can grow almost exponentially, finding their groove and leveraging their contact book. But this is hard to sustain once you get to between 75 and 100 people, necessitating an evolution of strategy. This is often the point at which founders decide to sell, but with access to funding, often allowing shareholders to de-risk in the process, buy & build is a credible alternative.
The logic.
Many successful agencies have grown through specialism, becoming famous for what they are good at. They develop very strong client relationships but eventually become constrained by their specialism. Technology is leading to ever-closer integration of business processes. Offering a more unified and seamless service offer by adding and integrating new capabilities or technology can deepen those client relationships and the agency’s share of wallet.
This has been Accenture’s M&A strategy for many years, becoming an inspiration for maturing entrepreneurs.
And for those business with an established capability set, an increasingly connected world presents opportunities to service client needs on a more global basis by replicating their offer in new geographies.
The resourcesA quirk of the pandemic has been to strengthen margins for many through lower overheads as we all work from home. In turn, this has strengthened their balance sheets, which have also been supported by access to capital from government backed loans / equity, traditional bank debt and emerging venture debt providers who are getting more comfortable in this space.
A desire to go faster has also seen the use of share capital, either as a constituent part of acquisition funds or to raise cash through investment. Private Equity continue their push into the tech-enabled talent businesses as they see strong margins, quality of earnings and active secondary markets fuelled by digital disruption.
The targets
The targets that these businesses are buying often see the logic of hitching their wagon to a faster train. An agency at £1m - £3m revenue, traditionally too small for acquisition, is presented with the opportunity to realise some value today, accelerate their growth and join a dynamic independent business without the stigma of having ‘sold out to a network’. In many cases part of their consideration will be in shares, providing the opportunity for greater value from a future sale – at substantially higher multiples.
Of course, not all of these buy & build ventures will succeed. Some will pick the wrong targets, or fail to integrate them successfully, quickly eroding their value as key people and clients depart. Others will have simply got their go-to-market strategy wrong, or found themselves in an over-crowded segment or with superior competition.
But others will undoubtedly succeed, perhaps changing the acquirer landscape for good and challenging the current line-up of holding companies and consultancies in the new world order.
Joe Hine is Partner at SI Partners, a growth consultant and corporate finance advisor in the creative, technology and consulting arena.
