Does Buy & Build Actually Outperform?
Buy & Build strategies can outperform despite higher platform prices, with returns driven by growth, integration and multiple expansion - but execution is key.
Does Buy & Build Actually Outperform?
Buy & Build is probably one of the most widely used value creation strategies in private equity. The basic logic is easy to understand: acquire a platform company, add a number of smaller businesses, integrate them, improve the combined group and eventually sell a much larger company.
It also looks very attractive in an investment case. You start with a fragmented market, identify dozens or hundreds of potential targets, assume some multiple arbitrage, add procurement or overhead synergies, improve the organisation and then exit a larger business at a higher valuation.
The question is whether this actually works in practice.
There is surprisingly little academic research that looks specifically at the performance of PE-backed Buy & Build strategies. One of the more interesting studies is Hammer, Marcotty-Dehm, Schweizer and Schwetzler (2022), Pricing and value creation in private equity-backed buy-and-build strategies, published in the Journal of Corporate Finance.
The authors analyse 3,399 private equity buyouts between 1997 and 2020 and supplement the transaction data with proprietary performance information. They also interviewed 32 private equity managers to better understand how investors think about platform selection, pricing and value creation.
The main conclusion is quite clear: Buy & Build investments appear to generate above-average equity returns, even though PE investors pay more for the initial platform companies.
For me, this is the most interesting part of the paper.
The right platform is usually not cheap
One common perception of Buy & Build is that the strategy starts with buying an attractive platform cheaply and then adding smaller companies at lower multiples.
In my experience, the first part is often wrong.
The companies that make good platforms are usually good businesses in their own right. They tend to have stronger management teams, better systems, good market positions and enough organisational maturity to absorb acquisitions. They are also often larger and more professional than the typical companies around them.
Other buyers can see the same qualities, so there is normally competition for these assets.
Hammer et al. find exactly that. PE firms pay significant premiums for companies that become Buy & Build platforms, and the valuations are comparable to what strategic buyers pay for similar businesses.
That makes sense to me.
When evaluating a platform, you are not only buying the current EBITDA. You are also buying the infrastructure through which you expect to deploy additional capital over the following years.
A good platform should be able to source acquisitions, finance them, integrate them, retain management teams and eventually operate a business several times larger than the company you initially acquired.
That capability has value.
I would therefore not automatically reject a platform because it trades at a premium. The more important question is whether the premium is justified by what the business allows you to do afterwards.
The danger is paying a platform multiple for a company that is not actually a platform.
That happens when the investment case assumes an aggressive acquisition programme, but the company does not have the management bandwidth, systems or organisational structure to execute it. You then end up paying for future optionality that never materialises.
Despite the higher entry price, Buy & Build still outperforms
This is where the paper becomes particularly interesting.
If Buy & Build platforms were bought cheaply, higher returns would not tell us very much. You could simply be observing the effect of a lower entry multiple.
Hammer et al. find the opposite.
B&B platforms are relatively expensive at entry, but the investments still generate above-average equity returns. This means that something happens during the holding period that more than compensates for the higher initial valuation.
The authors identify two particularly important factors: higher top-line growth and greater multiple expansion.
Both findings are consistent with what I have seen in practice.
Once the platform has been acquired, the economics can change quite materially. Smaller add-ons often come from a different part of the market. They may be founder-owned businesses, companies facing succession issues, local players with limited management capacity or simply businesses that are too small to attract the same universe of buyers as the platform.
That does not mean every add-on is cheap. Competitive auction processes exist in the small-cap market as well. But there can be a structural valuation difference between a small standalone company and a larger institutional platform.
The ability to repeatedly acquire companies on sensible terms is therefore a very important part of the strategy.
At some point, the platform stops behaving like a normal portfolio company and starts behaving like an acquirer.
That is when Buy & Build gets interesting.
It is not only about buying EBITDA
Another useful finding in the paper is that B&B investments show stronger revenue growth.
This matters because it is easy to describe Buy & Build as little more than a financial arbitrage.
The simplistic version looks like this: buy the platform at 10x EBITDA, buy smaller companies at 6x, combine everything and eventually sell the whole group at 10x or 11x.
There is clearly an important return mechanism there. I will come back to multiple arbitrage in the next article.
However, a good Buy & Build should do more than simply aggregate EBITDA.
If a €50 million revenue company buys a €10 million revenue company, the fact that the combined group now has €60 million of revenue is obviously not value creation. The €10 million was purchased.
The more interesting question is what happens afterwards.
Does the acquired company grow faster as part of the platform? Can the group cross-sell products? Can a central sales organisation improve commercial performance? Can the business enter new regions or customer groups? Can it win larger contracts because it now has greater scale and a broader offering?
That is where the strategy starts creating real operating value.
I have seen this work particularly well where the platform can provide capabilities that the smaller companies would never have built on their own. This can include professional finance functions, procurement, IT, sales management, regulatory capabilities or simply stronger management.
The add-on gets access to infrastructure that would have been uneconomical at its previous size.
At the same time, the platform gets access to the add-on's customers, products, employees or geographic footprint.
When this works, the combined business becomes more valuable than the sum of the companies that went into it.
Scale changes the asset
The second important driver identified by Hammer et al. is multiple expansion.
This is sometimes treated almost as an embarrassing side effect of Buy & Build, but I think that misses an important point.
Private markets do not value every euro of EBITDA equally.
A €2 million EBITDA company is usually a very different asset from a €20 million EBITDA company, even if both operate in the same sector.
The smaller company may depend heavily on its founder. It may operate in one region, have relatively basic reporting, limited management depth and a concentrated customer base.
The larger group may have a professional management team, multiple locations, institutional reporting, broader customer exposure and a much larger universe of potential buyers.
It would be surprising if the two companies traded at the same valuation.
This is why I do not think all multiple expansion in Buy & Build should automatically be labelled financial engineering. Part of the re-rating may simply reflect that the asset has fundamentally changed.
Of course, there is also a pure arbitrage effect.
If you acquire €2 million of EBITDA at 6x and the market immediately values that EBITDA at the platform's 10x multiple once it becomes part of the group, value has been created before any operational improvement has taken place.
That mechanism is real, and later research suggests that it explains a meaningful part of historical Buy & Build outperformance.
But the distinction matters.
There is a difference between simply moving acquired EBITDA from a lower valuation bucket into a higher one and building a genuinely better, more diversified and more institutional business that deserves a higher valuation.
In successful strategies, both effects often happen at the same time.
A simple example
Assume a platform generates €10 million of EBITDA and is acquired at 10x, giving an enterprise value of €100 million.
It then acquires a company with €2 million of EBITDA at 6x, or €12 million of enterprise value.
The investor has now paid €112 million for €12 million of combined EBITDA.
If the entire group is valued at the platform's 10x multiple, the theoretical enterprise value is €120 million.
There is already €8 million of additional value before assuming any synergy or organic growth.
Now assume that, after integration, the combined EBITDA grows to €14 million and the larger business is valued at 11x because it is more diversified, better managed and relevant to a broader buyer universe.
The enterprise value becomes €154 million.
This is why the Buy & Build model can produce very attractive returns. Several value creation levers can work at the same time.
You acquire EBITDA. You potentially acquire it at a lower multiple. You improve the business. You grow the platform. You repay debt. You create a larger and better asset. You may then sell that asset at a higher multiple.
The problem is that all of these assumptions can also move in the opposite direction.
If add-ons become expensive, the arbitrage disappears. If integration fails, margins can deteriorate. If management spends all of its time on acquisitions and neglects the underlying business, organic growth can slow. If the exit market assigns a lower multiple than expected, a significant part of the investment case can disappear very quickly.
Buy & Build therefore gives you more potential value creation levers, but it also gives you more ways to get things wrong.
What I recognise from my own experience
Three conclusions from Hammer et al. particularly resonate with me.
The first is that platform quality matters enough to justify paying for it.
I would generally prefer to pay a reasonable premium for a business that can genuinely execute a consolidation strategy than save one turn of EBITDA on a company that cannot absorb acquisitions.
A weak platform can make every subsequent deal harder.
Management gets overloaded. Reporting becomes inconsistent. Integration takes longer. Synergies are delayed. Different businesses continue operating independently and the organisation becomes increasingly difficult to manage.
At that point you may have completed ten acquisitions without actually building one company.
The second point is that the economics can improve significantly after the platform acquisition.
The initial platform is usually the largest cheque and often the most competitive transaction. Subsequent acquisitions can be smaller, more bilateral and sometimes strategically more valuable to the platform than to another buyer.
Once a company has a credible acquisition track record, the process can also become self-reinforcing. Sellers know the platform. Advisors bring opportunities directly. Management gets better at evaluating businesses. Integration becomes more repeatable.
The acquisition capability itself starts becoming an asset.
The third point is that scale only creates value if the underlying organisation improves with it.
It is easy to build a larger group on paper. It is much harder to build a better company.
If each acquired business retains separate systems, processes, management structures and commercial approaches, the group may become larger without becoming materially more valuable.
This is why I think integration is often underestimated in B&B underwriting.
The acquisition itself is visible and exciting. Integration is much less visible. But over a five-year holding period, the quality of integration can determine whether you end up with one institutional platform or simply a collection of companies under the same holding structure.
A platform is not just a company through which acquisitions are made
The term "platform" is used quite loosely in private equity.
For me, a company only becomes a real Buy & Build platform when it has an infrastructure that allows it to execute M&A repeatedly.
That means management bandwidth, good financial control, reliable reporting, financing capacity, a clear operating model and people who can actually integrate acquired companies.
It also needs a credible proposition for sellers.
Many smaller business owners are not simply looking for the highest price. They care what happens to the company afterwards, particularly where they reinvest, remain involved or have long-standing employees and customers.
A platform that develops a reputation as a sensible buyer can therefore gain an important sourcing advantage over time.
This is another reason why the first acquisition matters so much.
You are not just buying a business. You are choosing the vehicle through which every subsequent acquisition will be made.
There are limits to what the study can tell us
As with most empirical PE research, the findings should not be interpreted as "doing acquisitions causes higher returns".
There are obvious selection effects.
Better PE firms may be more likely to pursue B&B. Better companies may be selected as platforms. Attractive sectors may support both stronger growth and more acquisition opportunities.
In other words, the fact that B&B investments outperform on average does not mean that simply increasing the number of acquisitions will improve an investment.
That sounds obvious, but in practice acquisition count sometimes becomes a KPI in itself.
I do not think it should be.
The objective is not to complete as many transactions as possible. The objective is to make each acquisition improve the quality and value of the platform.
There is also a 2026 question
The Hammer et al. dataset covers transactions between 1997 and 2020.
That is a long and useful period, but it also means that much of the evidence comes from a financing environment that was more supportive than the one we have seen since 2022.
This matters because Buy & Build returns are very sensitive to spreads.
A strategy where the platform is acquired at 10x and add-ons at 6x looks very different from one where the platform costs 14x and add-ons cost 10x.
If leverage is also more expensive and the exit multiple cannot be assumed to expand, a much larger proportion of the return needs to come from actual operating performance.
I actually think this makes Buy & Build more interesting to analyse today, not less.
In a low-rate, rising-multiple environment, several weaknesses in a strategy can be hidden by favourable market conditions.
In a more normal financing environment, the quality of the platform, the acquisition discipline and the operating model matter much more.
It also means that I would want to see a Buy & Build investment case decomposed very clearly.
How much of the return comes from organic growth?
How much comes from acquired EBITDA?
How much comes from synergies?
How much comes from deleveraging?
How much comes from buying add-ons at lower multiples?
How much comes from assumed exit multiple expansion?
And what happens to the return if you remove the last one entirely?
That last question is particularly important.
My conclusion
The main takeaway from Hammer et al. is not simply that Buy & Build works.
The more interesting conclusion is that Buy & Build investments historically generated above-average equity returns despite PE investors paying higher prices for the initial platforms.
That tells us that the value is created during the ownership period.
The paper points particularly to stronger growth and multiple expansion, and both findings are consistent with what I have seen in practice.
A good platform allows capital to be deployed repeatedly.
The right add-ons can improve the growth, product offering and market position of the group.
Successful integration can create a stronger organisation.
And scale can transform the asset into something that is relevant to a completely different group of buyers at exit.
But none of this happens automatically.
A platform premium only makes sense if the company can actually function as a platform. Acquisitions only create value if they improve the business. And a higher exit multiple should be the result of building a better asset, not the assumption required to make the model work.
That is why I called this series Buy & Build, Deconstructed.
The strategy itself is simple to explain. The individual return drivers underneath it are much more complicated.
In the next article, I will look at one of the most important of them:
How much of Buy & Build outperformance is actually multiple arbitrage?
That is where the numbers become particularly interesting.
Source
Hammer, B., Marcotty-Dehm, N., Schweizer, D. & Schwetzler, B. (2022), Pricing and value creation in private equity-backed buy-and-build strategies, Journal of Corporate Finance, Vol. 77, 102285.