Buy and build strategies: a guide for IT services owner-managers

For IT managed service providers (MSPs), a buy and build strategy offers a powerful pathway to rapid growth and increasing shareholder value through increased profits and multiple arbitrage. However, success requires careful planning, effective integration and sound financial management.

What is a buy and build strategy?

A buy and build strategy is where a core platform company accelerates its growth through a series of acquisitions of smaller companies, often called bolt-ons, in the same or complementary sectors. By strategically acquiring and integrating smaller IT businesses, MSPs can expand their service offerings, cross sell additional services to client base, achieve economies of scale and strengthen their market position.

A buy and build strategy is commonly associated with the portfolio companies of private equity firms, who use it to scale rapidly during their investment hold period before exiting. However, a buy and build strategy may also be suitable for owner-managers looking to accelerate their growth either ahead of their own exit or as part of a long-term growth objective.

Why is this strategy suitable for IT businesses?

Capability and geographic expansion

In the highly competitive IT landscape, clients expect MSPs to offer a wide range of services—from cyber security to cloud management and beyond. By acquiring specialised firms, MSPs quickly expand their service offering without the time and resource investment required to develop these capabilities in-house. This enables them to meet client demands more effectively and attract new business.

The buy and build strategy can also significantly strengthen an MSP’s market position by increasing its client base and geographic reach. By acquiring smaller firms, an MSP quickly expands into new regions or verticals, creating a more diversified and resilient business. This broader market presence enables the resulting group to be less vulnerable to challenges to a particular industry vertical and alleviates client concentration risks.

Cross-selling

When one company acquires another with a complementary service offering, it may be able to cross-sell existing services to the acquired entity’s clients or offer new services to existing group clients. As well as increasing revenue, this has the additional benefit of increasing retention, as the additional service lines improve client stickiness.

Multiple arbitrage

One advantage of a buy and build strategy in the lead-up to an exit or taking on private equity investment is that the company may be able to increase their investment returns through multiple arbitrage. Recent transactions in the sector show that even if a smaller MSP performs well across the usual valuation metrics, the more premium valuation multiples are reserved for businesses above a certain size. Therefore, by acquiring smaller businesses at lower valuation multiples and integrating them successfully, it is possible to create a combined group above the required threshold to attract significantly higher valuation multiples.

Synergies

When acquiring another company, it is possible to reduce some of the costs previously incurred through economies of scale. These include consolidating back-office functions, standardising service delivery processes, and leveraging shared tools and platforms.

These efficiencies can improve profit margins and allow businesses to offer competitive pricing while maintaining service quality. While cost synergies are a possible benefit, there needs to be more to an acquisition than just synergies (such as improved technical expertise or service expansion) to maximise the potential of this strategy in the IT sector. Putting too much emphasis on cost synergies can lead to acquisitions failing to meet expectations, as they can be hard to realise in the short term.

Key considerations and pitfalls

Identifying targets

For a buy and build strategy to succeed, acquisition candidates must be carefully targeted. It’s essential to identify IT firms that complement existing services, fill gaps in technical expertise or provide access to new markets. If the buy and build approach is part of a growth journey ahead of exit, it can be helpful to first review the existing business. Identify current strengths and weaknesses and assess where acquisitions could help improve current weaknesses.

For example, if the acquired business has a high percentage of project-based revenue, this may reduce valuation multiples on exit, in contrast acquiring businesses with high recurring, retained revenue models can help improve overall group value.

Having identified a suitable target, conducting thorough due diligence ensures the potential acquisition is financially stable, culturally compatible and strategically aligned with the business goals.

Financing the acquisitions

Acquisitions require significant financial investment, so MSPs must carefully plan how they will finance their buy and build strategy. This may involve a mix of debt financing, minority equity investment or reinvesting profits. It’s important to balance growth ambitions with financial prudence, ensuring that the company remains financially healthy while pursuing acquisitions.

Achieving rapid expansion requires funding beyond that generated by the core business, so many MSPs seek debt financing to support their acquisition strategy. Our debt advisory partner, Guy Taylor, notes that, while high interest rates have made the lending market challenging for business over the last 18 months, as interest rates are now trending downwards the appeal and affordability of obtaining debt to finance acquisitions will increase.

Structuring acquisitions

Beyond simply avoiding overpaying for a target acquisition, it is important to consider how to structure an acquisition to reduce risk and keep the management of acquired entities motivated. A common way to do this is through employing an earn-out, where a percentage of consideration is deferred over a set period after completion, contingent on a certain level of performance being met. This can help incentivise the shareholders to help drive the business forward within the combined group.

Alternatively, it may be worth considering offering the shareholders of the acquired business equity in the combined group as part of the consideration paid. This is not without risk and should be reserved for cases considered key to continued growth or maybe taking on a senior position across the group.

Integrating acquisitions

The integration of acquired IT firms into existing operations is critical to the success of the buy and build strategy. Developing a detailed integration plan should include aligning service delivery processes, merging IT systems and integrating company cultures. A smooth transition helps minimise disruption for clients. This is particularly important where contracts have a change of control clauses that could allow clients to leave post-acquisition.

Similarly, when acquiring other firms, businesses must focus on retaining key employees and integrating them into the broader organisation. Offering clear career development paths, competitive compensation and a supportive work environment helps retain top talent and maintain continuity in service delivery. Indeed, employees of the target company may see the acquisition as an opportunity to progress further as part of a larger organisation. Identifying high-potential employees and considering how best to incentivise them is a key part of the commercial diligence process.

Help from the experts

At Moore Kingston Smith, we offer a range of strategic advisory services to support you in growing your business and achieving your strategic goals. If you are considering a buy and build strategy as part of your business journey, get in touch with our Corporate Finance experts to discuss how we can help.