The case for buy-and-build as a route to growth
Colin Bennett, investment director at private equity house LDC in Scotland, says Scottish firms can expand beyond their backyard with this kind of approach
Over the last few years, Scotland has maintained its reputation as a breeding ground for business success despite challenging conditions. We’ve been ranked one of the UK’S most popular destinations for foreign direct investment. Scottish firms, true to form, continue to demonstrate determination, a flare for innovation and great ambition in the face of an uneven political and economic climate. For firms keen to build on that momentum that have outgrown their local market, looking for opportunities in other regions of Scotland, or further afield, is the natural next step.
But this sort of expansion can seem like a leap in the dark. Moving into new markets, even if they are relatively close in geographical terms, can present unforeseen on-the-ground challenges to management teams. This is why a buy-and-build approach is often an effective way for companies to grow. A carefully mapped out buy-and-build strategy, which acquires complementary businesses incrementally, can deliver a sustainable programme of growth that limits risk and maximises opportunity.
A great example of a business that has done this well is Aberdeen’s Duncan & Todd Group. We invested £15 million in the optical provider last year to support chief executive Frances Rus and the wider management team’s ambition to grow the business beyond the North-east. Since then, it has increased its retail footprint across Scotland, bringing five complementary firms into the group – adding two new sites
in Edinburgh, two in Dundee and locations in Peebles, Coatbridge and Glasgow.
This approach has extended Duncan & Todd’s reach and let it take advantage of the local market knowledge and strong customer relationships of the firms it acquired. In the majority of instances, this is a much safer and more cost-effective strategy than setting up a wholly-owned subsidiary in an unfamiliar market. Buyand-build is a fully scalable model of growth. Businesses that have had great success in the Highlands and Islands that want to move south, for example, can test the water before committing to one specific region of Scotland – markets that are all in their own way entirely unique.
This makes buy-and-build the perfect fit for global expansion too. It can help firms looking to put down roots overseas overcome cultural sensitivities, language differences and unfamiliar trading practices, all while avoiding the operational headache of establishing a foothold in another country – potentially thousands of miles and several time zones away. A good example is Zyrofisher, an Ldc-backed cycling parts and accessories distributor based in Yorkshire. LDC supported Zyrofisher’s management team to acquire Royal Velo France, a complementary business that was already trading successfully in the European country. The move effectively delivered Zyrofisher’s first milestone of its international expansion plans and enabled the team to accelerate the growth of the combined group across Europe.
Once a business has got a buy-and-build strategy off the ground, there are benefits that go beyond sustainable geographical expansion. Businesses in Scotland are at the forefront of innovation. To stay ahead, they need keep up with the rapid pace of technology and develop new products and services that meet rising customer expectations. Acquiring a company with a supplementary portfolio of services and products that will immediately extend its offering is a great way to do this. It can increase a firm’s technological capability and keep research and development spend low.
A firm’s supply chain performance is another area that can benefit from buyand-build. Vertical integration (acquiring a supplier) can help a business gain greater control of its operations and costs. This is particularly true for companies in sectors with clearly defined operational channels that can be merged together easily, such as retail and manufacturing.
Now, getting a buy-and-build strategy moving can seem daunting, and there are obvious funding implications. In our experience, it’s a strategy perfectly suited to the backing of a private equity investor. It requires ambition and an effective management team with a long-term vision, everything LDC – part of Lloyds Banking Group – is looking for in a partner. It’s part of the reason a third of our Uk-wide portfolio is currently using buy-andbuild as a route to growth. Last year we supported 25 acquisitions.
At the moment it’s hard to predict when Scotland and the rest of the UK will come through this period of uncertainty. If management teams want to maintain momentum, a buy-and-build strategy can deliver a measured, sustainable approach to growth. We’re committed to backing Scottish business and in January we pledged to invest £1.2 billion in ambitious management teams across the UK over the next three years.