3 questions to smart minds
Photo: Dr. Tobias Fenck

Challenges in buy and build transactions

For this 3 questions to Dr. Tobias Fenck

Bryan Cave
Photo: Dr. Tobias Fenck
11. July 2017

Buy and build stra­te­gies (lever­a­ged build-up, stra­te­gic roll-up) are part of the active port­fo­lio manage­ment of private equity (PE) compa­nies. In this context, PE houses specia­lize in speci­fic, usually highly frag­men­ted indus­tries. Often a buyout tran­sac­tion is carried out with a larger company (plat­form invest­ment). Subse­quently, one or more smal­ler compa­nies (add-ons) from the same indus­try are acqui­red and merged into one corpo­rate entity. 

For this 3 ques­ti­ons to Mana­ging Part­ner at Bryan Cave in Frank­furt a. M.

1. What are the chal­lenges in buy & build transactions?

In the (small) mid cap segment, many equity spon­sors now follow a buy & build approach. While in auctioned proces­ses the main risk for deal fail­ure is paying a lower price than a compe­ti­tor, the chall­enge in add-on acqui­si­ti­ons is not to “lose” the entre­pre­neur on the way to signing the deal. The targets are often smal­ler, the available figu­res are rarely suffi­ci­ent for spon­sors, and the legal under­stan­ding of tran­sac­tion issues is regu­larly less deve­lo­ped. For spon­sors and their advi­sors, this means a considera­ble amount of extra work both in the run-up to and during the tran­sac­tion. The inten­sive test­ing phase is often percei­ved by the entre­pre­neurs as mistrust. The report­ing requi­re­ments after the tran­sac­tion has been execu­ted act as a deter­rent, and in-depth support is often requi­red for their implementation.

The chall­enge for legal advi­sors is to map a rela­tively complex matter “in a manner suita­ble for medium-sized compa­nies” in the contrac­tual docu­men­ta­tion. In nego­tia­ti­ons, the needs and econo­mic view­points of the spon­sor must be commu­ni­ca­ted with a great deal of tact. What is parti­cu­larly chal­len­ging is that entre­pre­neurs are regu­larly even more risk-averse than profes­sio­nal sale­s­peo­ple. Usual contract stan­dards cannot be taught. GmbH & Co. KG MEP struc­tures, for exam­ple, are percei­ved as too complex, which is why the return parti­ci­pa­tion must also be struc­tu­red in a lean yet flexi­ble way for further add-ons. With the closing of the tran­sac­tion, the work then often only begins. The acqui­red company must be successfully inte­gra­ted into the Group in order to grow accor­ding to plan.

2. Which sectors or indus­tries are curr­ently ripe for conso­li­da­tion and ther­e­fore attrac­tive for Buy & Build?

This does not depend on the indus­try. All highly segmen­ted areas are gene­rally suita­ble for buy & build. Howe­ver, this can be obser­ved to a grea­ter extent in sectors in which regu­la­tion has been rela­xed some­what in recent years (e.g., in the field of human medi­cine). In indi­vi­dual cases, it is important to find a suita­ble plat­form that is scalable. Right from the start, the market envi­ron­ment must be tested for suita­ble add-on candi­da­tes in terms of content and geogra­phy. With the company “Rehms” in Borken, which Ufenau Capi­tal Part­ners took over in 2014 by way of a succes­sion solu­tion, this has been achie­ved excel­lently, for exam­ple. Through the acqui­si­tion of a further five compa­nies, the “NRW Buil­ding Tech­no­logy” Group has been expan­ded into a leading full-range supplier of tech­ni­cal buil­ding equip­ment with a focus on heating, air-condi­tio­ning, venti­la­tion, plum­bing, and measu­re­ment and control tech­no­logy. A few weeks ago, the resul­ting group was successfully sold to the private equity house Bregal.

3. What role does legal tech play in private equity tran­sac­tions today?

All tran­sac­tions (inclu­ding private equity tran­sac­tions) are nowa­days regu­larly proces­sed with IT support. At Bryan Cave, we divide the tech­ni­cal solu­ti­ons available today into (1) auto­ma­tion, (2)colla­bo­ra­tion, (3) due dili­gence, and (4) work­flow management.

(1) Today, there are alre­ady good tools for the auto­ma­ted crea­tion of docu­ments, such as “HotDocs” or “Neota Logic”; even the first SPA drafts or compa­ra­ble longer docu­ments can alre­ady be crea­ted as a first blank using such special soft­ware. Nevert­hel­ess, it is neces­sary for the docu­ments to be carefully revi­sed by lawy­ers and adapted to the indi­vi­dual case.

(2) Plat­forms such as FirmEx and HighQ are alre­ady being used on a daily basis to stream­line data exch­ange, due dili­gence proces­ses and other tran­sac­tion work­flows. Incre­asingly, tools such as “Caps­hare” and “eSha­res” are also being used to auto­mate and track cap-tables.

(3) The due dili­gence review is faci­li­ta­ted and acce­le­ra­ted by soft­ware solu­ti­ons such as “Kira”, “LawGeex” and “Contract­Sif­ter”. Natu­rally, the defi­ni­tion of the search crite­ria for the contrac­tual features or clau­ses remains indis­pensable. Howe­ver, such solu­ti­ons are still not very suita­ble for due dili­gence audits of smal­ler compa­nies with little stan­dar­di­zed contract documentation.

(4) While we see many in-house plat­forms, at Bryan Cave we have deve­lo­ped in-house “Cross-Lite” tech­no­logy that allows us to tailor and work with the client to create and edit reports for indi­vi­dual advi­sory items and contracts; also provi­des due dili­gence support. In addi­tion, BCXpo­nent is a dedi­ca­ted depart­ment that advi­ses our lawy­ers on the use of tech­ni­cal tools to maxi­mize the bene­fits for clients.

Howe­ver, despite all the hype surroun­ding Legal­Tech, tran­sac­tions still depend on tailor-made solu­ti­ons for indi­vi­dual cases. This is where the expe­ri­ence of the lawy­ers is needed, which cannot be repla­ced by any solu­tion, no matter how sophisticated.

About Dr. Tobias Fenck, Mana­ging Part­ner, Bryan Cave Frankfurt

Dr. Tobias Fenck is Mana­ging Part­ner in the Frank­furt office of the commer­cial law firm Bryan Cave. He advi­ses clients in the areas of M&A, private equity and venture capi­tal. In this context, Dr. Tobias Fenck regu­larly acts on both the buyer’s and the seller’s side. He advi­ses his clients on ente­ring into majo­rity and mino­rity investments.

In addi­tion to advi­sing on tran­sac­tions, Dr. Tobias Fenck focu­ses on provi­ding ongo­ing corpo­rate law advice to compa­nies, inclu­ding in the context of restruc­tu­rings, coope­ra­ti­ons and joint ventures. His clients include funds, medium-sized and owner-mana­ged compa­nies as well as inter­na­tio­nal corporations.

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