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In today’s private equity landscape, Buy-and-Build strategies have emerged as one of the most effective methods for scaling companies and driving value. As larger deals become more complex and riskier—especially in an environment of rising interest rates—PE firms are increasingly turning to Buy-and-Build as a more reliable, scalable option. This approach allows firms to acquire smaller companies, known as add-ons, and integrate them into a platform company, creating operational synergies and increasing the overall value of the platform.
At its core, the success of Buy-and-Build comes down to one crucial factor: multiple arbitrage. When a firm acquires smaller businesses at lower EBITDA multiples and then rolls them up into a larger platform, the overall enterprise value often increases significantly.
As Dan Kobayashi from SourceCo puts it,
“If you buy a $1 million EBITDA company for five times earnings and sell it for ten times, you’ve effectively doubled its value.”
This dynamic is what makes Buy-and-Build so attractive in today’s market—PE firms can generate strong returns without the heavy capital requirements of larger acquisitions.
But Buy-and-Build isn’t just about making acquisitions.
The real challenge lies in finding the right targets.
Successful Buy-and-Build strategies depend on sourcing high-quality, complementary businesses that can be integrated smoothly into the platform. Firms that rely solely on broker-led auctions often face stiff competition and overpay for assets, eroding the potential value.
Proprietary sourcing, on the other hand, provides access to off-market deals that offer better pricing and terms.
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As Tomos Mughan, CEO at SourceCo highlights,
“Broker-led deals are where competition drives prices up. The real advantage comes from proprietary sourcing, where we can negotiate directly with the seller.”
Finally, for Buy-and-Build to deliver on its potential, integration is key.
Bringing these smaller add-ons into the platform must be done seamlessly, with operational and cultural alignment playing a critical role in ensuring that the value created during the acquisition isn’t lost post-deal. Missteps in this phase can quickly diminish the gains of multiple arbitrage, making integration the critical phase of the entire process.
As Dan Kobayashi mentioned:
“It’s easy to acquire companies; it’s much harder to integrate them. That’s where most of the value gets unlocked—or wasted.”
In short, Buy-and-Build has become the strategy of choice for private equity firms because it allows them to scale efficiently, capture value through multiple arbitrage, and manage risk in an increasingly complex market. When executed correctly, it’s a powerful tool for driving returns and long-term growth.
One of the most decisive factors for success in a Buy-and-Build strategy is the ability to source high-quality, off-market deals.
In private equity, the difference between winning and losing value often comes down to how you acquire your targets. While many firms rely on broker-led auctions, these processes are often riddled with competition, driving up prices and cutting into future returns. This is where proprietary deal sourcing becomes a game-changer.
Related:
Proprietary sourcing refers to identifying and negotiating directly with potential sellers, rather than relying on intermediaries like investment bankers or brokers.
The ability to access these off-market opportunities gives PE firms a critical advantage. Deals sourced through proprietary channels are often less competitive, leading to more favorable pricing, better terms, and less pressure to overpay during a bidding war.
As Tomos Mughan, CEO of SourceCo, explains:
“Broker-led deals are where competition drives prices up. The real advantage comes from proprietary sourcing, where we can negotiate directly with the seller.”
By engaging with business owners directly, PE firms can build trust, understand the owner’s motivations, and position themselves as preferred buyers.
Related:
While broker-led auctions can seem like a quick way to source deals, they come with serious disadvantages:
The Buy-and-Build strategy thrives on proprietary sourcing for several reasons.
First, it allows PE firms to find target companies that align closely with their platform company’s objectives.
Proprietary sourcing enables firms to identify businesses that might not be actively for sale but are open to discussions. This approach can significantly increase the pool of potential targets and reduce competition.
Dan Kobayashi of SourceCo notes,
“When you go off-market, you’re not just finding better deals—you’re finding the right deals. Proprietary sourcing lets us access the companies that others can’t.”
Additionally, proprietary deals allow for greater flexibility in negotiations. Without the pressure of competing buyers, firms can structure deals in ways that maximize long-term value. This could include creative financing options, earn-out structures, or post-acquisition advisory roles for the selling business owner. These elements help ensure a smooth transition and stronger long-term relationships.
For deal teams looking to sharpen their proprietary sourcing capabilities, there are key steps you can implement to start seeing immediate improvements:
Proprietary sourcing isn’t just about finding deals today—it’s about building relationships for tomorrow. Many business owners aren’t looking to sell immediately, but developing a long-term rapport makes you their first call when they are ready.
Consider hosting industry events, staying connected via LinkedIn, or sending occasional updates on industry trends.
As Dan Kobayashi explains:
“It’s all about relationship-building. Many business owners need time to consider selling, and if you’ve built trust, you’re the first person they call when they’re ready.”
Brokers tend to focus on larger, mainstream businesses, leaving niche markets largely untapped. These markets are often highly fragmented and rich with smaller targets that are perfect for Buy-and-Build. Identifying these opportunities requires industry-specific knowledge and granular data, both of which SourceCo specializes in.
“Fragmented industries are ideal for Buy-and-Build strategies because they offer numerous small, overlooked targets that can be rolled into a larger platform.” – Tomos Mughan.
In the age of big data, tools like AI-driven analysis can help you identify targets that traditional methods might miss. By analyzing patterns in industry data, financials, and market trends, you can uncover potential targets that fit your investment thesis but aren’t yet actively marketed.
Engage business owners through multi-channel marketing before they even think about selling. Use content marketing, email outreach, and programmatic advertising to position yourself as a trusted resource in their industry. Offer valuable insights or industry reports that help build credibility and stay top-of-mind.
Below is a snippet of SourceCo's CEO recent relevant post on LinkedIn, which you can read in its entirety here:
Sometimes, enhancing proprietary sourcing means working with buy-side firms like SourceCo that have the expertise, infrastructure, and networks to bring you deals that your internal team might miss. Buy-side firms focus solely on uncovering off-market opportunities, ensuring you never miss a critical add-on.
“Partnering with buy-side specialists isn’t just about deal flow—it’s about securing the deals that perfectly align with your platform’s long-term goals.” – Tomos Mughan.
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One of the most powerful drivers of value in the Buy-and-Build strategy is multiple arbitrage—the ability to acquire smaller companies at lower EBITDA multiples and then integrate them into a larger platform to create exponential value. While Buy-and-Build offers operational synergies and economies of scale, the true financial gain comes from multiple arbitrage, which allows private equity firms to dramatically increase the enterprise value of the companies they acquire.
As Dan Kobayashi of SourceCo explains,
“Multiple arbitrage is the engine of Buy-and-Build. You’re not just buying companies, you’re buying value gaps that the platform can fill, and that’s where you see the return.”
Multiple arbitrage refers to the practice of acquiring companies at lower valuation multiples (often based on EBITDA) and increasing their value by integrating them into a larger entity. These smaller companies might be valued at 4-6x EBITDA when acquired, but once they’re part of a larger platform, the combined entity can trade at a much higher multiple—sometimes as high as 10-12x EBITDA or more.
For example, if a PE firm buys a $1M EBITDA company for 5x earnings, they pay $5M.
However, after integration into a larger platform that trades at 10x EBITDA, the $1M EBITDA now contributes $10M in value to the overall platform.
This multiple expansion is the cornerstone of Buy-and-Build, allowing PE firms to create value without needing drastic operational improvements or long-term organic growth.
Visual Example:
The platform company is key to realizing multiple arbitrage.
A platform typically has a higher valuation multiple due to its size, stability, and established market presence. By adding smaller companies to the platform, private equity firms can immediately increase the value of the acquired companies.
As Tomos Mughan explained:
“The platform company is the growth engine. It drives the overall strategy and creates the environment where multiple arbitrage becomes possible.”
The platform company benefits from each add-on by either increasing its market share, expanding into new geographies, or enhancing operational efficiencies. These synergies not only drive growth but also justify higher valuation multiples when the combined entity is eventually sold.
Not every company is suitable for multiple arbitrage, and identifying the right targets is crucial.
Companies that provide the greatest potential typically share a few common characteristics:
1. Lower Multiples in Fragmented Markets
Companies operating in fragmented markets often trade at lower multiples, as they are smaller, less organized, or face operational challenges. These companies offer ripe opportunities for acquisition at lower valuations.
Example: A PE firm acquiring a collection of fragmented healthcare providers, each valued at 4-5x EBITDA, and then rolling them up into a larger healthcare platform that trades at 10x EBITDA.
2. Complementary Business Models
Companies that can integrate smoothly into a platform and add complementary capabilities or market access are prime candidates. Their EBITDA multiples are often lower because they lack the scale or geographic reach of the platform company, but these gaps can be filled after acquisition. As Dan Kobayashi explains:
“You don’t want to buy just any company—you want businesses that complement the platform’s strengths and have room for growth once integrated.”
3. Limited Exit Options for Smaller Companies
Smaller businesses often have fewer options for selling, which allows PE firms to negotiate better terms and acquire at lower multiples. This is especially true for family-owned businesses or those lacking formal representation.
Related reading:
To successfully unlock the hidden value of multiple arbitrage, PE firms need to approach acquisitions with a disciplined strategy.
Here are several best practices to ensure the full value is realized:
Prioritize targets that offer complementary capabilities or market access, ensuring the add-ons can integrate seamlessly and boost the platform’s overall value.
Avoid the temptation to overpay, even for attractive targets. The more favorable the purchase price, the greater the room for multiple expansion after integration.
“Disciplined pricing is key. The more room you leave for value creation, the greater the returns when you sell.” – Dan Kobayashi.
Ensure that the post-acquisition integration team is in place before the deal closes. This team should have a detailed roadmap for combining operations, systems, and cultures.
By acquiring smaller companies at lower multiples and integrating them into a larger, more valuable platform, PE firms can significantly enhance their returns.
But to realize the full potential of multiple arbitrage, it’s essential to have the right sourcing strategy, maintain valuation discipline, and ensure seamless integration.
SourceCo’s deep experience in sourcing high-fit, off-market deals and ensuring effective integration helps PE firms maximize the value of each acquisition.
“Multiple arbitrage is where the magic happens in Buy-and-Build, and our role at SourceCo is to ensure you unlock every bit of that value.”
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“Scaling efficiently is about building a machine that can handle complexity and volume. The firms that do this right create tremendous value in a short period.”
As private equity firms become more aggressive with Buy-and-Build strategies, scaling the number of acquisitions over a short time frame has become a powerful growth tool.
Today, many firms aren’t just looking to add one or two companies—they’re pursuing 10-20 add-ons in just a few years to build market dominance, capture synergies quickly, and drive exponential growth.
However, this approach requires precision, structure, and careful resource management to avoid overwhelming the platform company.
As Dan Kobayashi explains,
“Scaling aggressively with 10-20 add-ons doesn’t just require capital; it requires a well-oiled operational machine to integrate, manage, and extract value from each acquisition.”
Without that structure, the risk of operational bottlenecks, cultural misalignment, and integration failures increases.
Scaling Buy-and-Build strategies is particularly attractive in fragmented industries, where numerous small companies operate independently, making it easier for a platform company to consolidate the market and dominate within a short period.
As Tomos Mughan puts it,
“The larger and more integrated your platform, the more attractive it becomes to future buyers, which can push multiples even higher.”
However, this aggressive approach requires careful management of resources, planning, and integration—especially when acquiring 10 or more companies in a short time frame.
As attractive as it sounds, scaling Buy-and-Build strategies with multiple acquisitions in rapid succession presents several operational challenges:
Management Bandwidth
The leadership teams of both the platform and add-on companies often become overwhelmed when handling multiple acquisitions at once. With each new acquisition comes the need for close oversight, operational realignment, and continuous integration processes.
“Without proper bandwidth allocation, your leadership team quickly becomes stretched too thin, and that’s when mistakes happen.” – Tomos
1. Integration Bottlenecks
Each add-on requires operational and cultural integration, but when multiple acquisitions are happening at once, the process can easily hit bottlenecks. IT systems, HR processes, and even basic operational workflows can get bogged down, slowing down value creation.
2. Cultural Alignment Across Multiple Teams
As the number of add-ons increases, so does the complexity of managing diverse company cultures. The risk of cultural clashes becomes more pronounced, especially if acquired companies operate in different geographic regions or industries. These challenges are often magnified when managing 10-20 acquisitions in a short time frame.
“Managing multiple cultures across a growing platform requires careful navigation. You need a strategy that allows all teams to see their role in the bigger picture.” – Dan Kobayashi.
3. Operational Integration Delays
As the scale of the platform increases, operational integration becomes increasingly complex. Add-ons might be at different stages of integration, and the processes required to align each company’s operations with the platform may lead to delays in realizing synergies.
Financing a Buy-and-Build strategy has always been a delicate balance of leveraging debt to maximize returns while maintaining flexibility for future acquisitions.
However, with rising interest rates and an evolving economic environment, private equity firms must rethink how they structure deals and finance add-ons. In today’s market, the cost of capital is higher, which requires a more disciplined approach to managing leverage and structuring debt.
As Dan Kobayashi explains,
“Money has gotten more expensive, and this changes everything. You can’t approach financing today like you could a few years ago. The cost of debt means you need to be more strategic, particularly when executing Buy-and-Build.”
Debt is a fundamental tool in Buy-and-Build strategies because it allows firms to scale quickly without diluting equity. Typically, private equity firms leverage senior debt to finance the acquisition of add-ons, using the target’s cash flow to service the debt.
This approach allows firms to preserve capital for future acquisitions while optimizing returns through multiple arbitrage.
In a rising interest rate environment, this reliance on debt becomes riskier, making it critical for firms to balance how much leverage they take on and at what cost.
As interest rates rise, the cost of debt increases, which affects the overall return on investment (ROI) for Buy-and-Build strategies. This can make it harder to justify the levels of leverage that were previously manageable in a low-interest environment.
Key Challenges Include:
With interest rates climbing, debt servicing costs rise, eating into the cash flow generated by the platform and its add-ons. The higher the debt burden, the less flexibility the company has to reinvest in growth or pursue further acquisitions.
As Tomos explains, “When debt servicing costs climb, every dollar you spend on interest is a dollar you can’t reinvest into your platform’s growth.”
As lenders become more conservative in a high-interest environment, the availability of senior debt for acquisitions can become constrained. This limits a firm’s ability to finance multiple add-ons and may require creative financing solutions to keep deals flowing.
Higher debt costs can reduce the willingness of PE firms to bid aggressively, especially in broker-led auctions where multiples are already inflated. If the cost of capital is too high, it can erode the returns from multiple arbitrage, which is the core driver of value in Buy-and-Build strategies.
In a high-interest environment, PE firms should avoid overpaying for add-ons and focus on value creation through integration and synergy realization.
“Creative financing is no longer optional—it’s essential. In a high-interest environment, success depends on your ability to structure deals that balance risk, flexibility, and long-term value.” - Tomos
To navigate the challenges posed by a high-interest environment, PE firms need to adopt more creative and flexible financing strategies. Here are several approaches that can help firms continue to execute Buy-and-Build strategies despite the rising cost of capital:
When scaling Buy-and-Build, it’s important to use debt structures that offer flexibility and prevent firms from being overly constrained by debt covenants. This often means using a mix of debt instruments to balance cost and flexibility.
Unitranche Financing
A hybrid financing structure that combines senior and subordinated debt into a single loan. Unitranche financing often comes with fewer covenants and more flexible terms, allowing firms to scale acquisitions without hitting restrictive debt limits.
“Unitranche financing is a great option when you need flexibility but still want to leverage debt. It combines the benefits of senior debt with the flexibility of mezzanine financing.” – Dan Kobayashi.
Mezzanine Debt
While mezzanine debt carries higher interest rates, it allows for additional leverage without diluting equity. This can be particularly useful when a platform company has already reached its senior debt capacity but needs additional capital to execute more acquisitions.
In a rising rate environment, PE firms need to maintain pricing discipline when acquiring add-ons. Overpaying for a company—especially when financing costs are higher—can drastically reduce returns and negate the value created through multiple arbitrage.
“With debt costs rising, you have to be more disciplined in how you price acquisitions. Paying inflated multiples in a high-interest environment can destroy your returns.” – Tomos
To combat this, PE firms should focus on identifying off-market deals through proprietary sourcing, where competition is lower, and pricing is more favorable. Proprietary deals allow for better pricing and flexibility in structuring, ensuring that the overall return remains attractive even in a higher debt-cost environment.
To mitigate the impact of higher interest rates, PE firms can explore alternative financing structures that reduce reliance on traditional debt. This includes a variety of options:
Seller Financing: In some deals, the seller may be willing to provide financing for part of the purchase price, often at a lower interest rate than traditional lenders. This reduces the amount of external debt needed while aligning the seller’s interests with the success of the platform.
Earn-Out Structures: An earn-out allows part of the purchase price to be deferred and tied to the future performance of the acquired company. This reduces the upfront cash needed and aligns the seller’s incentives with the platform’s long-term success.
Example: A PE firm acquires a manufacturing company and structures 20% of the purchase price as an earn-out, contingent on the company achieving specific growth targets in the next three years. This minimizes the need for external debt financing while preserving capital for future add-ons.
While debt is crucial to Buy-and-Build strategies, firms should also consider balancing it with equity financing to maintain long-term flexibility. Excessive leverage can limit a firm’s ability to execute future acquisitions or reinvest in growth, especially when debt covenants are restrictive.
While strategic deal-making, valuation discipline, and effective integration are critical to executing a successful Buy-and-Build strategy, the real long-term success often hinges on one key element: relationship building. In the world of private equity, it’s not just about finding the right companies at the right time—it’s about building trust and rapport with business owners long before they’re ready to sell.
Cultivating long-term relationships with potential acquisition targets creates a steady pipeline of high-quality deals and ensures that when the time comes, PE firms are the first to receive a phone call.
As Dan Kobayashi of SourceCo notes:
“Buy-and-Build success isn’t just about buying companies—it’s about building relationships that ensure you’re top of mind when those companies are ready to sell.”
In many Buy-and-Build strategies, the most valuable deals aren’t found in broker-led auctions—they’re the result of years of relationship building with business owners who trust the buyer’s vision and approach. Business owners are often hesitant to sell, especially those who have built their companies from the ground up.
You can read the entire thought on Tomos' LinkedIn.
In an essence, by establishing relationships early, PE firms can position themselves as trusted partners, offering guidance, insight, and a roadmap for the company’s future growth.
Key Benefits of Relationship Building:
Building relationships with business owners provides access to off-market opportunities that aren’t being widely marketed. These proprietary deals often come with more favorable pricing and terms, as the seller is more comfortable working directly with a trusted partner.
When you’ve built trust with an owner, the deal becomes more about alignment than about competitive bidding. These relationships allow PE firms to avoid the frenzy of an auction process.
“When a business owner knows you and trusts your vision for their company, they’re less likely to shop the deal around. That trust is your competitive advantage.”
Relationships built pre-acquisition also tend to lead to smoother integrations, as the seller is more likely to remain involved in the transition process, offering their insight and support to ensure long-term success.
Fragmented markets present an ideal environment for Buy-and-Build strategies to flourish. In industries where numerous small to mid-sized companies operate independently—without significant market leaders—private equity firms can leverage Buy-and-Build to consolidate and create value.
These markets offer fertile ground for acquiring multiple smaller companies at lower valuations, integrating them into a larger platform, and driving value through operational synergies and multiple arbitrage.
Fragmented markets are ripe for consolidation. They offer a wealth of opportunities for PE firms to scale through buy-and-build, particularly when competition is low, and companies are often undervalued.” - Tomos
As SourceCo's CEO, Tomos, explains:
“Fragmented markets are where Buy-and-Build strategies really shine. With the right approach, PE firms can turn a fragmented landscape into a market leader.”
Fragmented industries are characterized by the presence of many smaller companies, often family-owned or privately held, which operate without significant market leaders or dominant players.
These industries are particularly attractive for Buy-and-Build strategies for several reasons:
Companies in fragmented markets typically trade at lower EBITDA multiples compared to their counterparts in more consolidated industries. These businesses often lack the scale, resources, or market positioning to command high valuations, making them ideal acquisition targets.
“Smaller companies in fragmented markets don’t attract the same level of interest as larger targets. This means PE firms can acquire them at lower multiples, leaving more room for value creation through integration.” – Dan Kobayashi.
The sheer number of smaller companies in fragmented industries provides ample opportunities for private equity firms to execute multiple acquisitions. PE firms can cherry-pick the best targets, gradually building a dominant platform through successive add-ons.
Fragmented markets are often overlooked by larger buyers or strategic acquirers, who focus on larger, more consolidated industries. This lack of competition enables PE firms to negotiate better deals and build strong relationships with business owners.
For private equity firms looking to execute Buy-and-Build strategies in fragmented industries, here are the key factors to consider:
Given the low visibility of many companies in fragmented markets, proprietary sourcing is critical to uncovering the best opportunities. Rely on long-term relationship building and specialized buy-side partners like SourceCo to access these off-market deals.
“Fragmented markets are where proprietary sourcing really shines. The deals aren’t always visible, but with the right relationships and partners, you can uncover hidden gems.” – Tomos
Get a free company dataset and access off-market deals with the help of our proprietary software and expert research team.
Build a scalable integration process that can be applied across multiple acquisitions. Standardization is key, but flexibility will also be needed to accommodate the unique aspects of each add-on.
In fragmented markets, Buy-and-Build strategies should focus on achieving market dominance within a specific region or niche. Acquiring complementary companies that expand geographic reach or service offerings will help you consolidate the market.
“In a fragmented industry, the goal is to build market dominance by acquiring the right companies that expand your footprint and capabilities.” – Dan Kobayashi.
Many companies in fragmented industries will require investments in technology, management, and operational upgrades to scale effectively. Be prepared to allocate resources to bring these companies up to platform standards.
Identify opportunities for quick synergies such as consolidating supply chains, standardizing back-office operations, or pooling resources across multiple add-ons. These quick wins can drive early returns and build momentum for more complex integration efforts.
SourceCo specializes in proprietary deal sourcing, giving PE firms access to off-market targets that aren’t widely available through broker-led processes or via public databases.
Our combination of AI-driven insights, expert research & outreach team trained by comapnies like Bain, and long-term relationship building ensures that we deliver high-fit acquisition targets that align with your platform’s long-term strategy.
“Buy-and-Build is about seeing the bigger picture—about building something greater than the sum of its parts. SourceCo helps you realize that vision. With us, you’re not just getting deals—you’re getting access to companies no one else is seeing. That’s the power of proprietary sourcing."
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