The Unique Opportunity for Buy-and-Build

For many middle market firms, there is a significant opportunity in running a buy-and-build strategy, in which you purchase a “platform” company as the initial investment into an industry to then add on to the platform via the acquisition of smaller firms that are synergistic to the core business’s operations. The purchase of smaller, “add-on” companies is typically made at lower valuations (the premium is paid on the platform purchase). It provides the added benefit of multiple arbitrages, or the ability to purchase at a lower multiple (valuation) and realize the benefit of multiple expansion via both scale and operating efficiencies.

Looking forward

The current market environment is creating opportunities to scale platforms, especially in a fragmented industry, with private market valuations recalibrating due to the dip in public markets. Many of these add-on acquisitions are founder-led businesses, and with a tough economic outlook limiting future growth potential, founders are looking to cash out. 

Additionally, as the recalibration has extended to venture-backed startups, private equity firms can target software companies held in venture portfolios that may be unable to raise additional capital. Venture capital firms are typically paid on total fund returns (not just on a deal-by-deal basis). They will likely market these businesses for sale to realize some return rather than let them fail (anything is better than zero).

Technology is key for growth

This creates a unique opportunity as the traditional playbook focusing on operating efficiencies, i.e., product-pricing strategies, input cost controls, data-driven sales and marketing, and streamlined back-offices, can now be enhanced by acquiring vertically-focused software that can transform a traditional operating business into a high-growth, high-margin, tech-enabled platform.