Buy-and-Build

What is buy-and-build?

Buy-and-build (German Kaufen und Ausbauen) refers to a growth strategy in which an investor acquires an established company and expands it by acquiring smaller companies in the same or an adjacent industry. The company bought first is called the platform (platform company); the acquisitions are called add-ons; in German, one usually speaks of a Buy-and-Build-Strategie. The group created in this way is meant to be worth more on a later sale than the sum of its parts. An everyday image: individual volumes of a book series are cheap at flea markets, but the complete series fetches a higher price per volume from collectors.

The strategy is pursued above all by private equity investors. These are financial investors who invest money from backers such as insurers and pension funds in unlisted companies in order to sell the stake at a profit after a few years (exit). They buy for the return, not for operational reasons. Each acquisition is governed by its own purchase agreement, the loans by a loan agreement, and the participation of management and sellers by a shareholders' agreement.

Structure: platform and add-ons

At the start stands the platform investment. The platform needs a resilient management, working bookkeeping and a reporting system to which the add-ons can be connected. For the platform, the investor usually pays the highest valuation multiple of the strategy. This means the factor by which EBITDA (earnings before interest, taxes, depreciation and amortisation) is converted into enterprise value (EBITDA multiple).

The platform, or a holding company above it, that is, a company that only holds shareholdings, then acquires smaller companies (add-on acquisitions). These are often owner-managed businesses without a successor. Over the holding period of a financial investor, in practice often four to seven years, several acquisitions thus come together. How they are integrated is planned before closing, that is, before the day on which the add-on passes to the platform (integration planning).

Value levers of the buy-and-build strategy

The most important lever is considered to be multiple arbitrage, that is, exploiting a price difference. Small companies trade at lower multiples than large ones because they depend more on individual people and customers and find fewer buyers. The larger group achieves a higher exit multiple on sale, that is, a higher multiple at exit, and this then also applies to the cheaply bought earnings of the add-ons. If at the same time the platform's multiple rises above its entry price, this is called multiple expansion. Both effects are the least certain levers: they work only if buyers see the group as an integrated unit and the market environment supports high valuations.

Synergies form the second lever: savings and additional revenue that arise only through the combination, for example through joint purchasing, joint bookkeeping and additional sales to the customers of other businesses (cross-selling). The third lever is professionalisation. Planning, controlling and a second management level improve earnings and reduce risk from the perspective of a later buyer.

Financing and contract structuring of the acquisitions

Financing is partly through debt capital, that is, bank loans. Alongside the loan for the platform there is often an acquisition facility, a committed credit line only for future acquisitions. It can be drawn, for example, on condition that debt afterwards stays within an agreed limit. This is measured by the dynamic debt ratio (leverage): financial debt less liquid funds (net financial debt), divided by EBITDA. Loan covenants set an upper limit on it. The loan share acts as a debt leverage: because the debt is fixed, every change in value feeds through to equity in amplified form, upwards and downwards.

Each acquisition is to be structured as a share deal (purchase of the shares) or as an asset deal (purchase of individual assets). In a share deal, contracts and legacy risks remain in the company. In an asset deal, employment relationships pass to the buyer under Section 613a of the German Civil Code (BGB). For tax purposes, the buyer can amortise goodwill, the part of the purchase price above the value of the individual assets, over 15 years. Sellers usually prefer the share deal because gains from the sale of shares in a GmbH (German limited liability company) are tax-privileged.

The purchase price is often split. An earn-out is a portion paid later and only if agreed targets are met. After integration, the contract must specify how the result of the add-on is still measured. In a reinvestment (rollover), the seller invests part of the proceeds in shares in the holding company and thus takes part in the later sale of the group. The shareholders' agreement links it with rules on early departure (leaver provisions) and an obligation to sell along at exit.

Risks and legal framework

• Integration. If acquisitions follow one another faster than bookkeeping and information technology can absorb them, duplicate structures arise that generate costs instead of savings.
• Culture. Owner-managed businesses meet the reporting duties of a financial investor. If key people or core customers leave, part of the value paid is lost.
• Overpayment. If several platforms bid for the same target companies, entry multiples rise and the gap to the exit multiple shrinks.
• Debt. If earnings fall short of plan or interest rates rise, covenants come under pressure and further acquisitions can no longer be financed.
• Competition law. Above certain revenue thresholds, mergers must be notified to the Federal Cartel Office (Bundeskartellamt) before closing; the revenues of all companies that the investor controls are counted. Small acquisitions are individually often below them. After a sector inquiry, a review of an industry sector, the authority can nevertheless oblige individual companies to notify every merger there for three years (Section 32f(2) of the Act against Restraints of Competition, GWB). The prerequisite is indications that further mergers could significantly impede competition. The duty applies only if, in the last financial year, the acquirer generated more than EUR 50 million and the target company more than EUR 1 million in revenue in Germany (as at 2026). It can be extended up to three times by three years each.

The seller's perspective for a smaller company

For the owner of a smaller company, the sale to a platform is a trade sale, that is, a sale to an operating company that integrates the business. As such, the platform can build synergies into the price like a buyer from the industry. Because a financial investor stands behind it, however, it follows that investor's timetable up to the resale. Opportunities are a price that can be above that of a standalone sale, the continued existence of the business and, through the reinvestment, a share in the increase in value.

Against this stand risks: the loss of independence and often of the company's own brand, and an earn-out that depends on other people's decisions. In addition there is a reinvestment that can hardly be sold before the sale of the group. In ranking, it stands behind the bank loans and often behind shareholder loans from the investor, that is, loans that the investor gives to the holding company in addition to equity. A weaker exit therefore hits it disproportionately.

Worked example: buy-and-build strategy with multiple arbitrage

A financial investor buys a platform with EUR 5 million EBITDA at 8 times and then three smaller companies at 5 times. Later the group is sold at 9 times. All multiples are assumptions for this example, not market values. For simplicity, the following also applies: each purchase is financed half by debt, the debt remains unchanged until the sale, and interest, taxes, transaction costs and organic growth are left out of account.

• Platform: EUR 5 million EBITDA × 8 = EUR 40 million enterprise value
• Add-ons with EUR 1, 1 and 2 million EBITDA: together EUR 4 million × 5 = EUR 20 million
• Total purchase price: EUR 60 million for EUR 9 million EBITDA, on average around 6.7 times
• Financing: EUR 30 million debt and EUR 30 million equity; dynamic debt ratio 30 : 9 = around 3.3
• Synergies after integration: EUR 1 million, group EBITDA thus EUR 10 million
• Sale at 9 times: 10 × 9 = EUR 90 million enterprise value; equity value 90 minus EUR 30 million debt = EUR 60 million, twice the EUR 30 million invested
• Increase in value: 90 minus 60 = EUR 30 million
• Breakdown by valuation: multiple expansion of the platform 5 × (9 minus 8) = EUR 5 million, arbitrage on the add-ons 4 × (9 minus 5) = EUR 16 million
• Breakdown by business: synergies 1 × 9 = EUR 9 million
• Sale at only 7 times: 10 × 7 = EUR 70 million, equity value 70 minus 30 = EUR 40 million, 1.33 times the amount invested
• Reinvestment by a seller: EUR 2 million of the EUR 30 million equity, on the same terms as the investor's capital
• Value of the reinvestment: at 9 times 60 × 2 : 30 = EUR 4 million, at 7 times 40 × 2 : 30 = around EUR 2.67 million

The result means: 70% of the increase in value (5 plus 16 = 21 of EUR 30 million) arises because the same earnings are valued higher on sale, not through a better business. Two points less on the exit multiple reduce enterprise value by a good fifth, from EUR 90 to EUR 70 million, but equity value by a third, because the debt remains. This is the debt leverage in the opposite direction.

Distinction: buy-and-build, management buy-in and private equity

• Management buy-in: the acquisition of a company by external managers. The term describes who buys and runs, not how the group grows; the two can be combined.
• Private equity: the umbrella term for equity capital from financial investors. Buy-and-build is one of its strategies; in a single buy-out, by contrast, one company is developed further and sold without add-ons.

Common mistakes

• Arbitrage as the only plan. If the increase in value hangs almost entirely on the higher exit multiple, the market environment at the time of sale alone decides success.
• Earn-out without an integration rule. If there is no rule on how the result is measured after customers and costs are shifted, a dispute over payment is foreseeable.
• Shortened review of small acquisitions. If due diligence, the review of the target company before purchase, is kept brief, tax legacy issues or missing contracts show up only after closing.
• Pro forma earnings without evidence. Buyers of the group recognise earnings that include all add-ons for the full year and expected synergies only with supporting evidence.
• Reinvestment without regard to ranking. Anyone who sees only the percentage overlooks shareholder loans and preferential rights that are served first at exit.

Frequently asked questions

What is the difference between buy-and-build and a roll-up?

The difference lies in the starting point. Buy-and-build begins with a sound company, the platform, to which a financial investor attaches add-ons one after another. A roll-up combines many small, often similar businesses into one group, sometimes without a platform and in one step. In everyday usage, the two terms are often used interchangeably.

How many add-ons does a buy-and-build strategy comprise?

There is no fixed number. Some platforms acquire a few larger companies, others many small businesses; this depends on the market and the platform's capacity.

Can growth companies without a financial investor grow in this way?

Yes. Technology companies also make acquisitions, financed from a funding round, from loans or with their own shares as consideration. Investors then examine whether the team can manage the integration.

How long is a reinvestment locked in?

As a rule until the sale of the group. An early sale of the shares is usually excluded or subject to the investor's consent. If the seller leaves earlier, the leaver provisions determine the price for handing the shares back.

Is the whole company always taken over in an acquisition?

Not always. With majority stakes, the owner initially keeps a portion. Call and put options then regulate when, and under which valuation formula agreed in advance, the remainder passes over.

The Roemer Capital view

We encounter buy-and-build mainly on the seller side. Owners of technology companies who are preparing a sale or their succession receive offers from platforms with a financial investor behind them. In a sale process, which at our firm typically takes 6 to 12 months, we set them alongside the offers of strategic buyers and compare the shares of cash payment, earn-out and reinvestment.

For the reinvestment, we calculate what debt of the group ranks ahead of it and what it is still worth in a weaker exit. Contractual and tax implementation lies with the client's law firm and tax adviser; we supply the figures and take part in the negotiations.