Serial Acquirers: The Art of Buying and Growing Businesses

Serial acquirers have become an increasingly popular business model, particularly in the Nordic countries. These companies specialize in buying multiple smaller private businesses and growing them under a decentralized structure. While the model can generate impressive returns when executed well, it also comes with unique challenges and risks for investors to consider.

What is a Serial Acquirer?

A serial acquirer is a company that regularly acquires smaller private businesses, typically growing by at least 10% per year through acquisitions. They tend to target companies with annual sales between $5-30 million.

Some key characteristics of successful serial acquirers include:

• Buying companies with strong competitive moats in niche markets
• Paying disciplined prices, usually 7-9x EBITDA
• Maintaining a decentralized structure
• Focusing on cash flow generation
• Having a strong capital allocation culture

While conventional wisdom suggests most acquisitions destroy value, serial acquirers are often able to defy this by buying smaller private companies at reasonable multiples without relying on synergies.

The Attraction of the Serial Acquirer Model

There are several reasons why the serial acquirer model can be attractive:

Access to Deals

By focusing on smaller private companies, serial acquirers can access a large pool of potential acquisition targets that are often too small for private equity or large strategic buyers. This allows them to find reasonably priced deals.

Decentralized Structure

Maintaining the acquired businesses as independent units with their existing management teams allows serial acquirers to grow without building a large corporate bureaucracy. This keeps costs low and preserves entrepreneurial cultures.

Reinvestment Opportunities

The cash flows generated by acquired businesses provide ongoing capital for additional acquisitions, creating a flywheel effect when executed well.

Multiple Expansion

Successful serial acquirers can often achieve higher valuation multiples in public markets compared to the multiples they pay for private acquisitions, creating value through multiple arbitrage.

Key Success Factors

Some of the most important factors for success as a serial acquirer include:

Disciplined Acquisition Criteria

The best serial acquirers have strict criteria for the types of businesses they acquire, focusing on companies with strong competitive positions in niche markets. This discipline is crucial for maintaining quality as they scale.

Reasonable Purchase Prices

Paying too much for acquisitions can quickly break the model. Successful acquirers typically pay 7-9x EBITDA for private companies.

Decentralized Operations

Maintaining acquired businesses as independent units with their existing management teams is key for preserving entrepreneurial cultures and keeping costs low as the organization grows.

Strong Capital Allocation

Having leadership with excellent capital allocation skills is critical for making good acquisition decisions and managing the overall portfolio.

Focus on Cash Flow

A relentless focus on generating strong cash flows from acquired businesses provides the fuel for future acquisitions.

Becoming a Buyer of Choice

Building a reputation as a good home for businesses can provide access to proprietary deal flow and help win competitive situations.

Common Pitfalls

While the serial acquirer model can be very successful when executed well, there are several common pitfalls to avoid:

Overpaying for Acquisitions

Paying too high of multiples for acquisitions can quickly erode returns. Discipline on price is crucial.

Buying Low-Quality Businesses

Acquiring businesses without strong competitive positions or in overly cyclical industries can lead to problems down the road.

Overleveraging

Taking on too much debt to fund acquisitions removes flexibility and increases risk.

Inadequate Due Diligence

Not thoroughly vetting acquisition targets can result in unexpected issues post-close.

Loss of Focus

Expanding into too many disparate industries or geographies can lead to a loss of focus and expertise.

Poor Post-Acquisition Management

Not having the right systems and processes to manage a growing portfolio of businesses can lead to integration challenges.

Evaluating Serial Acquirers

When analyzing serial acquirers as potential investments, there are several key areas to focus on:

Acquisition Track Record

Examine the company's historical acquisition activity, including number of deals, size, multiples paid, and post-acquisition performance.

Organic Growth

While acquisitions drive most growth, look for at least modest organic growth to indicate the health of underlying businesses.

Returns on Invested Capital

Assess whether the company is generating adequate returns on the capital deployed for acquisitions.

Balance Sheet and Liquidity

Evaluate the strength of the balance sheet and access to capital to fund future deals.

Management Quality

Assess the track record and capital allocation skills of leadership.

Valuation

Compare the company's valuation to both public market peers and the multiples paid for private acquisitions.

Reinvestment Opportunities

Consider the runway for future acquisitions based on target market size and competition for deals.

Examples of Successful Serial Acquirers

Some examples of companies that have executed the serial acquirer model successfully include:

Constellation Software

A Canadian company that has acquired and operates over 500 vertical market software businesses.

Lifco

A Swedish industrial group that has acquired over 250 companies across diverse niche industries.

Indutrade

Another Swedish industrial conglomerate built through acquiring niche industrial product companies.

Addtech

A Nordic technology trading company that has grown through numerous small acquisitions.

Conclusion

The serial acquirer business model can generate impressive returns when executed well, but it also comes with unique risks and challenges. For investors, thoroughly understanding a company's acquisition strategy, capital allocation approach, and track record is crucial when evaluating these businesses. While past success doesn't guarantee future results, the best serial acquirers have demonstrated an ability to compound capital at high rates over long periods by following a disciplined approach to buying and growing niche businesses.

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