Last week, Forbes published my article on “The ‘Buy and Build’ Strategy – Spotlight On A Modern Day Private Equity Trend.”
Generally speaking, private equity investors need to be able to scale investments quickly in order to make a Buy and Build strategy work. Consequently, the platform company needs to have management and infrastructure in place that is capable of being leveraged to quickly and efficiently absorb the add-on investments. In particular, the platform needs to have sufficient systems (financial and otherwise) to implement an acquisition of its own.
Realistically, for investments to make sense as the basis for a Buy and Build plan, the company needs to have EBITDA of at least $3 – 5 million/year. Below this level, companies generally don’t have enough infrastructure to be able to digest smaller additions, and usually don’t have the management strength to be able to digest an acquisition in the time frame necessary to satisfy the growth plans of the new private equity owner.
Below $3 – 5 million per year in annual EBITDA, companies are more likely candidates to be added on than to be doing acquisitions of their own.