Executing a buy & build strategy all by yourself is possible, but also difficult. That's why most entrepreneurs partner with an investor.
If you make many small acquisitions, it can be sustained longer in terms of financing, but with larger acquisitions you quickly reach your ceiling. There is also the question: how much risk are you willing to run? It explains why many entrepreneurs who do buy & build go into business with an investment company.
For a strategic buyer, it is often not feasible to take over an equivalent business with traditional financing (bank, equity, vendor loan). Not to mention the risks involved in such a deal. By bringing an investor on board, the purchase price can still be financed, in exchange for shares of course. An entrepreneur with a buy-and-build strategy may also choose to partner with an investor.
Pre-exit
Whatever the underlying reason, the modus operandi is basically always the same. The entrepreneur has business A, the target is business B. Investors will never agree to the entrepreneur keeping business A and each participating in business B for a part. Because then where does the entrepreneur's loyalty lie, with business A or B? Especially when things get worse, this inevitably leads to discussions.
What happens is the following. The entrepreneur and investor together establish a new limited liability company: the purchase holding company or "newco. The businesses A and B come under this purchase holding company. For example, the investor is 70% shareholder in newco, the entrepreneur 30%. Both parties now have the same interests. The business you start with, in this case company A, is also called the portfolio company. If you visualize it, this business hangs under the buying holding company, with target B to its right, later possibly followed by acquisitions C, D, E, and so on.
So this set-up means that as an entrepreneur you sell a part of your own business A to enable the cooperation with the investor. This is called a pre-exit. The advantage is that you bring some of the value of your business to dry land, while still being able to stay in business. Some investment companies always want a majority stake, but it is certainly possible for you to sell a minority of 20 or 30% and remain a majority shareholder yourself.
Added value
The added value of a private equity firm is not only in the money they bring in. Especially for a DGA without a sounding board, it is nice to be able to spar about your business's strategy, future and succession. Often a board of directors is set up, which includes experienced entrepreneurs or advisers who can help you move forward.
If you want to grow through acquisitions, the investor can help find targets and conduct negotiations. This leaves your hands free to deal primarily with the day-to-day business. The investor also prefers not to see you spend all day with mergers and acquisitions and business suffer.
Investment size
Private equity firms come into play from a required investment of 1 million euros. Some are a bit higher in the market and have a threshold of 2 or 10 million. This has mainly to do with efficiency: rather 10 investments of 5 million, than 50 of 1 million. Managing those investments all takes time, and small businesses with a DGA often need even more attention than large businesses with a professional management team.
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