Built Environment: compliance services ripe for buy-and-build
Over the past couple of years, buy-and-build has been a successful strategy for mid-market investors in the fire sector. Similar compliance services in areas like water / hygiene testing, asbestos management, energy management appear ripe for a similar approach. These will typically be services where there is robust regulatory / stakeholder scrutiny and a (potential) technology enablement wrapper for reporting.
At Armstrong, we have supported several successful buy-and-build acquisitions. In a buy-and-build play, more capital can be put to work through the hold period by making bolt-ons and driving down the average multiple. A successful buy-and-build strategy will optimise the ‘sum of the parts’ by adding new geographies, services, cross-selling, and creating efficiencies to reduce costs; all of which contribute to the bottom line.
The right company
A platform company needs to have the maturity (i.e. IT, sales, operations, finance) to support bolt-on acquisitions and a management team with both the ambition and ability to execute the buy-and-build strategy and ideally a pipeline of bolt-on opportunities. These factors are far more important than platform scale alone.
A platform company that meets those criteria is not easy to find. Investors need to know how much work is needed on the platform company to get it ready for the buy-and-build. It’s a simple equation; the longer it takes, the slower the buy-and-build. It takes several years to execute a transaction, integrate it and realise synergies; action in the first few years of the hold period is critical.
Suitable acquisitions
A successful buy-and-build needs to target companies that are small enough to integrate and be bought at a low enough multiple for arbitrage to work. They also need to be big enough to justify the cost and workload of making a deal happen and add value to the platform and drive the strategy. Carefully consider:
- What is the availability of target companies?
- How many other strategic buyers/ PE backed consolidators are there?
- How competitive is the market for acquisitions and is that affecting prices?
- Can value be retained post-acquisition (e.g. retaining key staff, key clients)?
- What is the exit strategy? Who will want to buy it?
Questions for investors
What are you buying?
Scale? Product/service offering? People? Access to technology, customer segments or geographies? Is there a strategic fit between the platform and the target companies? Quantifying the extent of potential synergies and the risk entailed in realising them is critical to understand where to target origination efforts and what you can pay.
Does the management team have the expertise and bandwidth to integrate businesses ?
Integrating businesses is tough, management teams will need time and support from the investment team and their advisors.
Is the platform company ready to support a buy-and-build strategy?
Unresolved issues, including immature technology and operating models at the platform company will hinder the target company’s integration.
Do you have the right people on board?
Who has done it before? Is there an explicit strategy to integrate? Without leadership and an explicit strategy to generate savings across the target companies, integration is very hard. A commitment to a common platform, technology and moving customers to common processes will all aid integration.
Who is involved?
Do the research. In some sectors personalities matter and everyone knows everyone!
Buy-and-build can be a hard strategy to execute, but done well brings significant returns. Speak to a member of the team about opportunities in the built environment.
Brandon Matthews
bmatthews@armstrong-ts.com
+44 7850 564 693