The Best Industries in which to start a Buy and Build Strategy and Quality of Earnings

Clients often ask us to finance buy-and-build strategies across a range of industries. But if the industry has poor quality of earnings, the strategy doesn't have legs and won't get funded — unless the acquirer has a PE sponsor backing them with a significant cash equity injection on day one at completion. Lenders will want to know whether your business and the targets you acquire can service their debt; equity investors will want to know whether you can deliver growth on top of that. Get the industry wrong and you can't satisfy either.

So in which industries should business owners and acquisitive entrepreneurs launch buy-and-builds?

Before we begin, we recommend you read the two articles below as a primer:

Buy at 4x, Sell at 10x: What You Need to Fund Your First Buy-and-Build Acquisition

Playbook: The minimum amount of capital it takes to acquire two businesses with £2m in combined EBITDA and £8m in combined revenue

High Quality of Earnings - What it Means

First, and ideally, you stand the best chance of having most, if not all your acquisition costs (cash consideration, outstanding debt repayment, transaction fees) financed in debt if you find B2B targets with high quality of earnings.

1. Recurring income. Revenue repeats because customers can't easily stop paying. The strongest form is contractual — subscriptions collected by direct debit — or regulation that forces the spend (e.g. mandatory annual health-and-safety inspections and the replacement of any equipment that fails them). Failing that, look for long-term framework agreements with large customers, ideally where your target sits on a preferred-supplier list with hard qualifying criteria and the framework is retendered only every 4-5 years. Failing both, look for long average customer lifespans, which prove repeat business even where the revenue isn't contractually recurring.

2. High revenue visibility. Can you convince a lender the company will earn at least as much over the next 12 months as it did over the last 12? Recurring revenue demonstrates this by definition; in its absence, signed customer contracts evidencing future spend do the same job.

3. Low customer concentration. What share of annual revenue comes from the top 10 customers, and is any single customer relied on too heavily? The lower the share, the better.

4. Non-cyclical, defensive demand. The service still gets bought in a downturn — compliance, essential maintenance, healthcare, waste, "grudge" spend. Lenders lend against the trough, not the peak.

5. High cash conversion and low capex intensity. EBITDA that actually turns into cash. If most of the profit is reinvested in equipment or working capital, there's nothing left to service the debt.

6. Sticky customers / high switching costs. Low churn, long tenure, regulatory or integration lock-in. Predictable retention is what makes the forecast bankable.

7. Stable, non-lumpy revenue. Steady run-rate work rather than one-off projects. Lumpy, project-based income wrecks quality of earnings even when the annual total looks fine.

8. Stable or expanding margins. Gross and EBITDA margins that hold steady or improve year on year, rather than swinging with input costs, discounting or one-off jobs. Volatile margins tell a lender the earnings aren't truly repeatable — and a repeatable number is the whole point of the exercise.

The more of these boxes a sector ticks, the more of the deal a lender will fund and the less equity you will need, either to fund yourself or from an outside investor.

What Else Should You Look For?

At a high level you stand the best chance to fund most if not all of your transaction, including transaction fees, in debt if you secure heads of terms with target companies in sectors with the below characteristics:

• Fragmented market — hundreds of small owner-operated players, no dominant consolidator, so you're never short of the next target and you're not bidding against trade buyers who've already rolled up the space

• Ageing owners seeking to exit after 1-2 years handing over to you

• Recurring or contracted revenue — retainers, subscriptions, maintenance agreements, framework contracts. Revenue you can see 12 months out is the single biggest driver of a clean QoE report and the first thing a lender's diligence team stress-tests

• Management or a workforce that runs without the seller — a business that is genuinely the owner is not an acquisition, it's a job. You need a second tier that stays after handover

• Multiple arbitrage — the sector reliably prices sub-£1-2m EBITDA businesses well below where the combined group will trade (the 4x-to-10x gap in the first article above). Without that spread, there's no equity value being created by the roll-up itself

• Low disruption risk — no imminent technology or regulatory change that could hollow out demand over your hold period

Sectors that tend to tick most of these boxes

Regulation- or compliance-driven (someone is legally forced to buy):

Fire safety and fire-risk assessment, lift and lifting-equipment inspection (LOLER), electrical testing (EICR/PAT), gas safety and boiler servicing, air-conditioning and F-gas compliance, water hygiene and legionella control, asbestos surveying and removal, occupational health and health-and-safety inspection, environmental and emissions monitoring, PAT and fixed-wire testing, backflow and drainage compliance, and calibration and testing/inspection/certification (TIC) services.

Essential B2B maintenance (the asset breaks and has to be fixed):

HVAC installation and servicing, commercial refrigeration, industrial door and shutter maintenance, lift maintenance, generator and UPS servicing, pumps and industrial equipment repair, catering-equipment servicing, security systems (CCTV, access control, alarms and monitoring), pest control, and grounds and landscape maintenance under contract.

Recurring-revenue / contracted services:

Managed IT and MSP services, cyber-security monitoring, cloud and managed hosting, telecoms and connectivity resellers, SaaS with high net revenue retention, insurance broking (commercial and specialty), employee-benefits and pensions advisory, accountancy, bookkeeping and payroll bureaux, wealth management and IFA consolidation, and commercial waste and recycling collection.

Healthcare and specialist care (defensive, demographically supported):

Dental practices, veterinary practices, optometry and audiology, physiotherapy and specialist clinics, care homes and domiciliary care, pharmacy, medical devices servicing, and diagnostics and pathology services.

Other defensive, fragmented service niches:

Facilities management and cleaning under contract, testing and laboratory services, specialist distribution of consumables (parts, filters, PPE, medical or dental consumables), equipment rental and hire, funeral services, self-storage, property and block management, and specialist B2B education, training and certification.

Sectors that usually fail the test

• Construction and main contracting (lumpy, thin margins, retentions, project-based income);

• housebuilding and property development (cyclical and capital-intensive);

• civil engineering and infrastructure projects (milestone billing, concentration);

• hospitality — restaurants, bars, hotels, cafés (cyclical, low switching costs, thin margins);

• retail and e-commerce (cyclical, discount-driven, working-capital hungry);

• creative, marketing, PR and advertising agencies built around a founder rainmaker (people walk out the door each night);

• recruitment and staffing (highly cyclical, low retention);

• commodity manufacturing and print (capex-heavy, price-driven, volatile margins);

• one-off project consultancy and systems integration (no recurring base);

• travel and events (cyclical and shock-prone);

• automotive dealerships and forecourts (thin margins, capital-intensive);

• agriculture and commodity trading (price-taking, weather- and cycle-exposed); and

• any business with heavy customer concentration, seasonal spikes, or revenue that has to be re-won from scratch every year.

Enquiries

For further information, please contact info@langdoncap.com 

About the author

Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Deutsche Bank. He has executed over £200 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

Langdon Capital raises £5 million to £100 million in debt and equity for businesses with EBITDA between £2 million and £20 million from private credit funds, banks, private equity firms, special situations funds, family offices and venture debt funds. We raise capital to fund acquisitions, organic growth and turnaround situations. We hold direct relationships with key decision makers including CIOs, Heads of Direct Lending, Partners, MDs and Fund Principals at leading multi-billion £/$/€ AUM global institutional investors and provide our clients with swift, direct market access.

contact info@langdoncap.com | visit www.langdoncap.com 

#CapitalIntroductions #CapitalRaising #CorporateFinance #CashflowLoans #CashflowLending #DebtFinance #Finance #Capital #Debt #Equity #PrivateCredit #SpecialSituations #VentureDebt #BridgingLoans #BusinessLoans #BTLMortgage #AssetFinance #InvoiceFinance

This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.