Buy and Build Strategy: How a Platform Company Grows Through Add-On Acquisitions

What is a buy and build strategy?

It builds a larger company by buying one strong base company and adding smaller ones.

The idea is simple. One company alone may be too small to win big contracts, hire senior leaders or invest in systems. Five or ten companies together can. Each piece brings customers, people or skills. The base company ties them together.

Moonfare, citing a Bain & Company report, notes that “add-ons made up 72% of all North American buyouts in 2022 by deal count.”

Capstreet uses this approach. Its Capvalue Framework® lists “Execute buy and build strategy” as one step in “Drive Business Transformation.” The firm also publishes two counts on its our firm page: “50+ Platform Acquisitions” and “200+ Add-on Acquisitions.”

This guide explains the strategy in plain terms for owners. It covers how it works, why it suits some industries, and what it means if you are asked to sell your company as an add-on.

What is a platform company, and what is an add-on?

A platform company is the first acquisition in a sector, built to be the base for the others. An add-on acquisition is any later purchase merged into that platform. The platform sets the standard. The add-on plugs into it.

BD Emerson puts it this way: “A platform is the first acquisition in a sector, sized and staffed to be the base for the others. An add-on is any later acquisition merged into the platform.”

Think of the platform as a trunk and the add-ons as branches. The trunk needs to be strong enough to carry the weight. A platform usually has these traits:

• A capable leadership team that can run a larger company
• Clean, reliable financial reporting
• Systems that can scale, such as ERP and CRM tools
• A clear place in its market
• Room to grow, either by itself or through acquisitions

An add-on usually has a narrower profile. It may bring a new region, a new customer group, a new product line or a skilled team. It may not have the leadership depth or systems to stand alone at a larger size. That is part of why it joins the platform.

A company can be an add-on to one platform and a platform for another buyer. It depends on the buyer’s plan.

Why are fragmented industries a good fit for buy and build?

A fragmented industry has many small firms and no clear leader. That makes it a natural fit. A platform can combine several firms, gain purchasing power, cover more territory and spread costs across a larger base.

Capstreet’s Distribution International case study shows the idea. It carries this headline: “Consolidated the Highly Fragmented Insulation Distribution Industry via a Buy and Build Strategy.”

Fragmented markets share common signs:

• Hundreds of local or regional firms, each with a small share
• Owners who are near retirement and have no successor
• Customers who want one supplier across many sites
• Suppliers who give better terms to larger buyers
• Little investment in modern systems, because each firm is too small to afford it

In such a market, a combined company can offer something no single firm can. A national distributor can serve a customer in ten states. A regional services group can bid on contracts that a single shop cannot. A larger firm can also hire a finance leader, a sales leader and a technology leader.

Not every industry fits. Buy and build works best where customers value reach, service quality or breadth, and where combining firms creates real gains. It works less well where each firm depends on one personal relationship, or where the cultures clash.

Capstreet’s Capvalue Framework® starts with the line “Perform deep research to identify markets.” That step comes before any buying.

What does a buy and build look like in practice? A Capstreet example

Distribution International shows the full arc: leadership hires, a merger with a major competitor, then more acquisitions. This section describes what the company did, using Capstreet’s own case study.

The case study states: “Capstreet originally invested in Thorpe Holdings (“Thorpe”), which consisted of an insulation distribution business and a refractory services business. We successfully spun out the refractory business from the insulation distribution business to maximize operating efficiency, and then merged Thorpe’s insulation distribution business with major competitor, Distribution International. The result was the company became a distributor of insulation, related specialty fabricated products, and accessory supplies in North America.”

Capstreet lists the steps under “Path to Value Creation”:

1. Recruited CEO, VP Operations, HR Director and Controller
2. Recruited outside directors
3. Completed merger with major U.S. competitor
4. Completed two major Canadian acquisitions
5. Completed seven additional acquisitions under Capstreet ownership
6. Scale created significant buying power
7. Improved sourcing and implemented strategic pricing, driving significant margin expansion

Read the list as a pattern, not a recipe. Leadership came first. A hiring list sits at the top. The merger and the acquisitions came next. Only then did the company use its scale to buy better and price smarter.

The company was sold in 2014 to a financial sponsor. Read the full account on the Distribution International case study. Capstreet’s other case studies, such as EADS and GHX, also describe add-on work. See all of them on the case studies page.

This case study is for information only. It is not a recommendation of any investment, and it does not predict what any other company will do.

How does an add-on seller benefit?

If you own a smaller company, a platform can offer a way to sell, keep a role and join a bigger team. You may get liquidity now and a chance to share in later growth.

The benefits depend on the deal. These are the common ones:

1. Liquidity. You turn part or all of your ownership into cash.
2. A larger stage. Your customers and team gain access to a bigger company, more products and more locations.
3. Shared resources. Finance, HR, technology and purchasing support may come from the platform.
4. A role, if you want one. Some founders lead a division or region. Others hand off after a transition.
5. A chance to share in later growth. Some add-on deals include equity in the combined company. First Citizens Wealth writes that “Many owners choose to retain a minority equity stake in the company, giving them a chance to participate in the equity upside when the PE firm eventually exits the business.” That is the second bite of the apple.

There are trade-offs. You give up some control. Your company’s name, systems and reporting may change. You may report to a platform leader instead of a board of your own. Ask about each point before you sign.

If you are considering this path, read about rollover equity, earnouts and the letter of intent. They explain the deal terms you are likely to see.

How does integration work after an add-on?

Integration combines the add-on’s people, customers, systems and reporting with the platform. It works best when planning starts before closing, each task has an owner, and leaders talk to employees and customers early and often.

Here is a typical order of work. Details change from deal to deal.

Capstreet’s team page shows how seriously the firm treats this work. Anja Timmerman, SVP, Integration & Program Management, Operating Executive Group, “works with the investment team and portfolio companies on add-on acquisition planning and integration.” Capstreet’s Capvalue Framework® also includes a step to “Define M&A roadmap” during the first six months of ownership.

What goes wrong? Three things, most often.

• Culture clash. People feel the new owner does not respect how they work.
• Customer loss. Customers hear nothing or hear mixed messages.
• Rushed systems. Teams force a new system on top of old habits without training.

Good integration avoids all three. It treats the add-on’s team as people to keep, not costs to cut.

What does Capstreet look for in a platform?

Capstreet looks for “Entrepreneur-owned businesses services companies” with “$3 to $15 million of EBITDA.” It describes “Primarily majority investments” and says “Entrepreneurs reinvest alongside Capstreet.” It also lists “Ability to apply the Capvalue Framework®” as a criterion.

Here is the full list from the firm’s what we do page:

• Entrepreneur-owned businesses services companies
• $3 to $15 million of EBITDA
• Primarily majority investments
• Entrepreneurs reinvest alongside Capstreet
• Ability to apply the Capvalue Framework®

The firm also describes the owners it wants to meet: “a tenured team of owners or managers seeking a majority capital partner, with solid financials, a defensive business model, untapped growth potential, and competitive advantages within their market niche.”

Capstreet lists “M&A opportunities” among growth traits it looks for in its investment parameters. For a platform, that means room to add more companies in its market. EBITDA is a measure of operating earnings. Read our deal criteria page for the full detail, and the guide to lower middle market private equity for context.

Should I sell to a platform or hold out for a bigger buyer?

It depends on what you want. A platform may offer a role, rollover equity and a team that knows your market. A larger buyer may offer more cash up front but fewer ties.

Questions to ask yourself:

• What do I want after closing? If you want to keep working, a platform may suit you.
• Who will run my company? If your team matters to you, ask how the platform treats add-on staff.
• How do I want to be paid? Cash at closing, a note, an earnout and rollover equity each carry different risks. See how private equity values a business.
• How much time do I have? Waiting for a bigger buyer may pay off, or it may not. A company that depends on you loses value as you age.
• Do I know the buyer? Talk to other founders the buyer has worked with.

Also compare buyer types. A strategic buyer may pay for synergies and absorb your firm. A financial buyer with a platform may do the same with a different plan. Read private equity vs strategic buyer to see the difference.

If you plan to sell in the next few years, read the broader guide on business succession and exit options. It compares family, management, employee and outside sales side by side.

What should I do if a platform company wants to buy my business?

Slow down and prepare. Get your financials in order, hire a lawyer and a tax adviser, and ask for references from owners the buyer has bought from. Do not sign anything that blocks other talks until you understand the terms.

Use this short checklist:

1. Know your goals. Cash, role, team, legacy. Write them down.
2. Clean your numbers. A quality of earnings review can show buyers what your earnings really are.
3. Ask for references. Talk to owners who sold to this buyer before.
4. Read the letter of intent with care. See the letter of intent guide and the exclusivity period glossary entry.
5. Plan for due diligence. Expect detailed questions about customers, contracts, people and finances.
6. Plan your team’s story. Decide what you will tell employees, and when.
7. Use advisers. Read how to work with an investment banker or adviser.

If you want to understand private equity buyers more fully, start with how to sell your business to private equity.

Next step

Read the deal criteria to see if your company fits, or learn how the firm builds companies on the Capvalue Framework® page. To talk it through in confidence, call 713-332-2700, email connect@capstreet.com or use the contact page.