Six Risks Private Equity Investors Should Consider in a Buy-and-Build Strategy

• Centralization can raise costs before synergies materialize. Shared services, governance, and systems require upfront investment, while the expected savings remain deferred and uncertain.
• Shareholder alignment matters as much as operational efficiency. Founders and holding companies may disagree over shared costs, capital allocation, and when investor intervention is justified.
• Staged-control deals require objective, measurable triggers. If milestones governing a future control acquisition leave room for interpretation, an option designed to bridge a valuation gap can become a source of conflict.

Few private equity slide decks are as convincing as the buy-and-build. The playbook is simple: acquire controlling stakes in small companies across a fragmented industry, leave the founders running daily operations, and centralize the back office in the holding company (HoldCo). One HR team instead of five. One billing team instead of five. One enterprise resource planning (ERP) system, etc.

In 2024, add-on acquisitions accounted for roughly 76% of all private-equity-backed buyouts1. In US healthcare alone, sponsors completed 621 add-ons across 383 platforms in a single year2. It is not an overstatement to say that the strategy is the industry’s default growth engine.

By centralizing the back-office of several companies, the economies of scale are expected to create shareholder value by reducing the average selling, general & administrative (SG&A) costs as a percentage of revenue—and boosting EBITDA margin. This is the theory. The strategy is sound and the savings are real. In practice, the spreadsheet tends to assume something the transaction itself does not guarantee: shareholder alignment.

Centralization creates value only if the partners agree on what should be centralized, who pays for it, and what each party receives in return. Those questions are difficult to capture in an Excel model or PowerPoint presentation, but they can determine whether the projected synergies ever materialize.

Drawn from our own experience consolidating a portfolio of founder-led companies in an emerging market, we share six nuanced approaches that few analysts price when valuing such business models, structuring a share and purchase agreement. or drafting a shareholders’ agreement.

When you acquire small, founder-led businesses, you generally inherit lax governance, little formality, and few processes. On their own, these companies would never fund an auditor, an IT director, an ERP, or a treasury function — they lack both the incentive and the scale. The moment they join a shared-service holding, they pay for all of it, whether they wanted it or not. SG&A may increase before it drops. While the cost of governance is real and immediate, the upside isn’t guaranteed.

A shared-service model works cleanly in a wholly owned subsidiary, where one owner answer decides how (and how much) money is spent. It ceases the instant the holding company has distinct partners and the entrepreneur who sold part of his company stops understanding why he is paying for shared infrastructure he might never have chosen had he stayed independent, even though he agreed to it. It is important for the shareholders’ agreement to specify not only which costs are eligible for the shared center, but the criteria for adding new costs and the formula for allocating them across portfolio companies. Crucially, portfolio companies cannot be allowed to opt in or out at their convenience. Leave that door open, and every invoice becomes a renegotiation of what is fair, what is proportional, and what is merely the holding company’s overhead in disguise.

Some investments matter enormously to the holding company’s long-term strategy but not that much for the individual founder. A data lake integrating information across every portfolio company is a clean example. It is the connective tissue of a future exit narrative, and it is invisible on any single company’s P&L. The operating partner funds infrastructure whose primary beneficiary (at first glance) is the investor. But while the main beneficiary is the investor, founders will also benefit from these types of investments at the exit moment. In this context, founders need to trust the investor’s capital allocation strategy.

The holding company states its own long-term goals and aligns, up front, with who carries the cost of pursuing them and what each party receives in return.

Every corporate relationship carries with it the classic principal–agent problem. It is hard for the founder who sold his company to verify whether the shared-service cost allocated to him is efficient or inflated. The holding company controls the cost base and has incentive to load more costs on companies that generate more cash than to those who burn it (given it will have to fund it through equity or debt). And even when no one acts on that incentive, its mere existence corrodes trust — the operating partner might suspect the meter is rigged and might behave accordingly. The antidote is transparency by design: an itemized cost schedule, an allocation formula agreed in advance, and a periodic, independent review the founders can actually see.

The relationship with a founding partner is delicate in a way no covenant captures. These are people who have lived experiences in the company for years. They are optimists by nature and unaccustomed to being overruled. Proposing a change to the status quo, even one that is not working, might land as an affront. Although you chose this founding partner for his know-how, managing risk/business exposure and ensuring one company’s losses do not contaminate the others is the HoldCo's job.

So, when the operation begins to run through cash or when a founder’s decisions go against the collective strategy, how long do you defer to the entrepreneur’s vision, and when do you intervene? Intervention is never the obvious move. A dissatisfied operating partner who runs the business day to day can do permanent damage to morale, to client relationships, and to the asset itself. Being prepared to remove him from operations therefore means having an immediate replacement, ideally one the holding company already trusts. The implication is uncomfortable but unavoidable: succession planning is not a post-close nicety. It belongs in the deal, drafted in parallel with due diligence, so that the option to intervene exists before the day you need to exercise it.

A common way to make a minority deal look safer is to turn it into a staged-control transaction. The private equity fund buys a minority stake today, agrees on a valuation framework for a future control acquisition, and includes in the SPA a right to acquire a controlling stake if certain operational milestones are achieved.

On paper, this is elegant. The founder keeps control until the business proves its worth. The fund avoids paying a control premium before the company has delivered. The valuation gap is not solved upfront; it is deferred to an objective test. The problem is that the test is rarely as objective as the spreadsheet suggests.

What qualifies as “professionalized management”? What counts as “integration completed”? Was EBITDA achieved before or after the holding company’s shared service charge?

When the trigger is reached, the option changes economic control. The fund may discover that it no longer wants to buy the control stake at the pre-agreed valuation. The founder may believe the agreed milestones were achieved and expect the liquidity that was promised. At that point, the contract stops being a valuation bridge and becomes a battlefield.

Analysts often model the minority-to-control conversion as a clean future event: year three, operational milestones achieved, control acquired, synergies unlocked. In practice, the conversion right may be the moment when every unresolved ambiguity in the deal comes due. If control depends on performance, performance must be measurable without requiring trust.

The SPA should define each milestone with the same precision used for a financial covenant. It should state the accounting policy, the measurement date, the treatment of extraordinary items, the effect of related party charges, and the consequences of disagreement.

If the trigger to control is subjective, the fund has not bought an option. It has bought an argument.