Buy and build: how to grow your business through acquisition

The digital economy is booming. Whether it’s employment figures (1.7 million people), contribution to the UK economy (£142.5 billion), or growth (66.6%), there is only one way the figures are headed – on an upward trajectory.

The digital market is the very meaning of fast growth, with businesses vying to be bigger, bolder, and braver in a world that demands forward thinking, and ever quickening technological innovation. It’s hardly surprising then that in a highly competitive environment, digital and technology businesses are using strategic acquisitions to achieve growth, bolster market position, and elevate a brand. This is where ‘buy and build’ strategies come into play.

Having invested in more than 70 tech companies, investing over £400 million into the sector, at BGF we have also seen first-hand what a highly effective method buy and build is for ambitious, entrepreneurial businesses looking to scale up quickly.

Like building blocks, growing a business through acquisition works best when the parts fit together – creating something that is worth more than the sum of its parts.

For buy and build to be successful, it should also complement an organic growth strategy. The most successful management teams, especially in a growing market, will be expected to deliver strong organic growth to demand the best valuations. Acquisitions should be incremental to this, as well as also accelerating broader strategic objectives, such as adding talent, service lines, sector strength, or expanding a company’s geographical footprint.

In a congested marketplace, you have to make the right buying decisions, at the right price, and work hard to integrate what you’ve bought. So, what do digital and technology businesses need to consider when going down the route of buy and build as part of an overall expansion strategy?

Let’s start at the beginning: planning and strategy. Having an appetite for growth is one thing, but unless you create a road map and bring the future into the present, then your desire to accelerate growth is likely to fail. You cannot underestimate the importance of putting those first building blocks in place to create a foundation – as well as painting a reasonably clear picture of what you want the business to look like at the end – noting this may move from time to time. Be very clear what your objectives are from the beginning and

what’s important to you as an individual and for the company. Emphasis should be placed on establishing a value proposition, understanding how defensible you are in the wider market, and the key opportunities and risk facing the business.

Once your strategy is in place and you have a clear direction of travel, you need to consider the issue of raising finance to fund the delivery of your vision – particularly if that’s to be done, at least in part, through acquisition. Under normal circumstances this throws up a number of questions and considerations, but in the current climate, the answers to those questions are more difficult to find. So what are they?

● Finding the most suitable investor who fits with the culture and strategic aims of the business is complex. At the core of raising finance is building a relationship with your investor. Make sure they understand your culture and want to safeguard it. At the same time, consider their approach and if that fits with yours – whether that’s hands off, when needed, one that’s supportive in nature, or one that’s more entrenched in your business. Trust is key.

● As a management team, you need to identify which opportunities present the greatest upside. When sourcing potential acquisition targets, it’s essential to carry out thorough due diligence to ensure there are no unexpected problems or unforeseen liabilities down the track, making sure you request full disclosure on all financial and operational aspects of the business you are looking to acquire. Valuations are high in the sector, therefore the tolerance to overpaying is extremely low – you need to know exactly what you are getting.

● You need to ensure you are geared up to manage high growth – both from a personnel, process and financial perspective. To take people on the growth journey towards your vision, you also need to be able to win the hearts and minds of the vendors, your team and theirs, and all customers.

● Knowing when the time is right is crucial. Is your business at that ‘step-change’ moment; has it achieved sufficient scale and is trading in such a way that it provides enough width and depth to allow a management team to accelerate growth, whether that’s organic, through acquisition, or a combination of both. If you get your timings wrong, there’s a danger that you won’t have the right team or processes in place to achieve your aims. The timings of any fundraise also have to be right, because if you go too soon, then the valuation just won’t be there.

● You need to be able place your business in a positive light. Be very clear about what makes you stand out from the crowd and what defines your strategy and structure. Many companies struggle to articulate what their business’ USP is and how they will scale to the next level. Easy access to management information and business data is also vital in proving the case for funding, as is the ability to refine your business and set KPIs that will help to drive business growth. Being able to extract this information is crucial to the deal process and creates the best foundation for future growth, while

demonstrating to investors that you are operating at the required level of control and insight.

With an investor in place, you now have the job of executing a buy and build strategy. Although it sounds straightforward, it isn’t an easy investment thesis to get right, as each business you buy has a different culture, geographical spread, and many other differences to try and overcome. Forward thinking about integration, and how the bigger business fits together is critical – as is excellent, laser like execution.

However, if done correctly, it has the potential to enable a business to infiltrate new markets, create a larger, more recognisable brand within the sector, and achieve expansion and ambition at an enhanced rate, while retaining the integrity of the business. It’s that dynamic that businesses and investors should be aiming for throughout the growth journey – however long it may be.

Buy and build has always been an effective method for ambitious, entrepreneurial businesses looking to scale up – and scale up quickly. What’s more, the last two years have done little to dampen that intent. As such, there’s very little sign that the buy and build intentions of certain high-growth sectors, such as digital and technology, are waning.

While we cannot escape the fact that the economic landscape has changed beyond recognition over the course of the last three years, with businesses continuing to face domestic and global uncertainty, there are key sectors that are withstanding those challenges. Why? Because innovative businesses that take a more risk-welcoming approach, choosing to embrace growth in the face of adversity, are the ones that have and will continue to flourish. Remaining faithful to this approach, and having the confidence that you have a proposition ripe for growth – both regionally, nationally and even globally – will only stand you in good stead and help to maintain momentum on your growth journey. It’s for that reason why buy and build presents such an appetising opportunity.