Buy-and-build (B&B) strategies are becoming increasingly common across the European healthcare space.

For PE, the attraction of such deals is obvious, particularly in fragmented industries such as dentistry, veterinary, or physiotherapy practices. One study has found B&B deals significantly outperform standalone PE deals on average (31.6% IRR for B&B deals compared to 23.1% IRR for standalone deals*). 

Success is by no means guaranteed, however, and it’s not uncommon to see companies struggle to deliver the expected value and create the expected economies of scale. There remains a need for greater understanding of both the key risks and the critical success factors in B&B strategies for healthcare services. 

What are the risks?

Weaknesses in the acquisition strategy, such as an inconsistent or incoherent approach to selecting add-ons, either straying away from core competencies or acquiring businesses that need significant capital investment, can result in expected cost synergies failing to materialise. 

Vertical integration is a common feature in B&B approaches but requires a clear strategic foundation to be executed successfully. For example, for many healthcare services groups, laboratories – while clearly important to their operations – are not necessarily a core part of their offering. Often, the decision is taken to acquire without a clear strategic consideration of whether there might be a better way to capture value than via integrating vertically.

Another major risk is that the unique value proposition offered by practitioner owners can be undermined. Clear lines are not always drawn between what the group should do, and what should be left to practices. Practitioners themselves can be left unclear how the centre adds value to their clinics. 

B&B critical success factors

While no two B&B strategies are exactly alike, successful approaches often share some common features. 

These include making clear distinctions between growth drivers at group level, (e.g. strategy, marketing, transformation, M&A) and practice level (e.g. operations, clinical, compliance). 

At a group level, successful approaches are often characterised by the development of clear, investment-based business cases for resources that will support growth, such as strategy or marketing). Meanwhile, at a practice level, success factors include building positive relations with practice managers and clinicians and supporting their business development activities. 

There should also be clear ‘guardrails’ that establish what activities are managed closer to the practice (i.e. within operations and clinical teams) and which are a central, shared services support function.

Having clarity on expected cost synergies across different support functions is also critical. For example, in strategic support functions such as finance, costs should not increase significantly in line with business growth, whereas in coverage-based functions such as operations, costs are likely to increase in proportion with the number of new practices acquired.

Many groups across the dental and veterinary services industries that have followed a B&B path are also characterised by the successful pursuit of lean support functions, with the costs of these functions typically not much above (and in some cases below) 5% of total sales.


Six key takeaways for B&B approaches in healthcare

  1. Due diligence must be robust. An effective acquisition strategy will ensure only add-ons with high margins that require minimal incremental CAPEX are targeted. The growth prospects of clinics to be acquired must be properly calibrated – ‘mature’ clinics in local areas with a high concentration of clinics will likely have lower growth prospects unless they are able to add more associates. Our experience also suggests that structural differences in practices (margins and investment needs) are a strong indicator of future profitability. To this end, the potential to deploy a clear and consistent approach towards pricing and cross-selling will also be vital, while remaining mindful of potential regulatory attention that may be attracted by group scaling through acquisitions.
  2. Clarity regarding how/where cost synergies can be found across support functions is key. Careful distinctions need to be drawn between expected synergies across strategic support functions and coverage-based functions.
  3. Normalising a group’s brands can make integration more complex. Groups need to carefully consider the potential trade-offs involved in marketing and branding decisions. Normalising the group’s brands may increase pricing power and brand awareness, but it can also lead to increased overheads and integration complexity.  
  4. Monitoring performance after an earn-out period is critical. In particular, succession planning for when founding practitioners exit following an earn-out period can minimise risk. Regular monitoring and early intervention is essential.
  5. Vertical integration – is it strategically viable? Decisions on vertical integration should always be underpinned by a coherent strategy, e.g. is this a core or ancillary offering? How will operating model principles be embedded post-integration?
  6. Providers need to buy into the culture and strategy. For clinical professionals, care quality and autonomy of care delivery are likely to be key priorities. The way these issues are catered to across the group will affect whether they buy into the overall culture and strategy. This particularly relevant with regard to understanding the real value drivers and the related incentivisation for key personnel. Retaining clinics and the talent within them is vital, which otherwise runs the risk of diluting the value of the initial acquisition. 



*Source: Journal of Public Governance (2022): “Structuring Management of the Post-Merger Integration Phase in the Buy-and-Build Model: The Case of a Private Network of Integrated Healthcare Entities”