4 Keys to Getting Capital Providers to Buy in to your Buy and Build Thesis

By Drew Brantley

Whether it was the Rockefellers, General Electric, or KKR, buy and builds (or roll ups), have been a core part of a successful playbook for over decades. It is still a core part of many Independent Sponsor, Private Equity or Family Offices theses. At Frisch Capital, approximately 80% of our Independent Sponsor deals have acquisitions as a core part of their thesis. While it takes a lot of work to buy and integrate multiple businesses, it can help you achieve scale faster than organic growth. When done right, buy and builds can create incredible returns at exit.  

If buy and builds are so popular, then why can it be difficult to get capital providers to buy into your thesis? How can you stand out from the many other Independent Sponsors pitching their own buy and build thesis? Through the years, Frisch Capital has helped raise well over $1.5 billion dollars of capital for Independent Sponsor deals and many of those were buy and builds. We have distilled down four key things that you need to have in place (or be the process of doing) to give yourself the greatest chance of success getting capital providers to buy in early on.  

First, a platform.  

While you can start with a small or big company out of the gate, capital providers often like to be able to call one of the companies a platform. Often, this company has some size or scale compared to other companies your pipeline. It might have great leadership in place or bench strength that can be used to grow. Maybe it has better systems or processes, or a better “mouse trap” than the competition. But at the end of the day there is often a company that stands out from the others. It is important to note, it does not have to be perfect platform with everything in place. Most lower middle market companies are not perfect. Therein lies the opportunity for Independent Sponsors and their capital partners. But the key is to have some of the things listed above in place that help make one company you are acquiring better than the others.  

Today, if a company is of scale ($4 million of EBITDA or higher) they are often bombarded by potential investment bankers or advisors telling them what their company is worth and that they will be happy to help sell it for them and get top dollar. The challenge for Independent Sponsors is sometimes competing in these more robust processes. Therefore many seek to move down market where there is less competition. It becomes a fine balance trying to find a company that has the makings of a platform, without getting too small. We have done deals where the platform company was as small as $1.5-3 million of EBITDA. The key is not the size necessarily, but the potential that is found within the company as discussed above. The proverbial “diamond in the rough”. While many people do not think that a company that is between $1.5-3 million of EBITDA is a perfect platform, many great buy and builds start with a platform around this size.  

This leads us to the second key, the acquisition pipeline. 

While this might seem logical, many Independent Sponsors put off building an active pipeline of acquisitions with the idea that once they get the first deal done, then they will focus on other acquisitions. While you can do this, there are two main issues with this when trying to get capital providers to buy into your deal.  

The first issue is that if your platform is subscale (less than $4 million of EBITDA) then you can have a hard time getting capital providers to engage based on size alone. While many capital providers have $2-10 million of EBITDA listed on their website as their investment range, many prefer to start closer to $5 million of EBITDA out of the gate.  This means if your platform is $2.5 million of EBITDA, you will likely need another company or two under LOI, or very close to LOI, at the same time to get capital providers interested in the deal. While this can be difficult and take a lot of time, we see it done often very successfully. We recently worked on a deal where a capital provider told us, “The Independent Sponsor showed us this deal a few months ago and we passed on size alone. We liked them and the thesis, but it was too small”. We, Frisch Capital, worked with the Independent Sponsor to get a second company under LOI and that same capital provider later proposed and was ready to be their capital partner for the deal. Without the second company under LOI, they would not even consider the deal or thesis. In another Independent Sponsor deal, something was uncovered during due diligence related to the platform company resulting in the Independent Sponsor and the capital provider dropping the platform company from the deal. Because they had an active acquisition pipeline we were able to pivot to another company and replace the platform. 

The second issue with not having an active pipeline is getting capital providers to believe that you are capable of a buy and build. Having an active pipeline with more than one company under LOI and multiple active conversations with other companies easily solves this concern and takes it off the table.  

It goes without saying that a highly fragmented industry is preferrable and building an active pipeline takes time and patience. We have seen an active acquisition pipeline alone save deals that would have otherwise never gotten closed.  

Third, the CEO.  

Many sellers want to sell because they are ready to transition out of the business. While many say they are willing to stay on for a “transition period of 12-18 months”, we have often seen where the second the deal closes a seller mentally checks out and is no longer mentally engaged in operating the business. A company without a committed and focused CEO creates a ton of risk for an Independent Sponsor and their capital partners. Who the day-to-day CEO is going to be post close is arguably one of, if not, the most important things in a deal. For this reason alone, if the original seller is not going to be dedicated to being the CEO for the next 3+ years, most capital providers want to know who the new leader will be before closing. Many Independent Sponsors want to rely on the seller to be the CEO at close and then suggest finding a replacement during the 12-month transition period post close. While you can do this, most capital providers view this as risky.  

Independent Sponsors often partner with someone who will step in as the CEO, hire a recruiting firm to find a CEO, or work with their capital partner to find one together. Regardless, we have found this to be a very critical, if not the most critical aspect of getting capital providers to buy into an Independent Sponsors buy and build thesis.  

Fourth, post-close integration plan. 

We all know that getting the deal closed is step one, but your plan and actions post-closing is what will produce the returns you want. Having a plan to integrate companies can involve many parts including, system, processes, geography, equipment, and not least of all… the people. There are many stories of buy and builds that did not work because there was not a thoughtful plan to integrate and execute post-closing. You can and should expect your plan to evolve, but having a good detailed plan is step one.  

Importantly, you need more than just an outline of a plan. You must be able to talk capital providers through your understanding of “what we have in place at close”, what is missing, and how are you thinking about filling in the missing personnel and infrastructure of the business. You do not have to have it totally figured out and capital providers often bring additional experience, perspective and value to enhance your thesis, but it should be you starting the conversation having put pen to paper on the topic.  

While these four areas are by no means exhaustive of everything it takes to get capital providers to buy into your thesis and deal, focusing on these four areas ahead of time will put you ahead of your competition. It will demonstrate to capital providers the value-add you are bringing to the deal.