Exceptional Returns from DACH’s Mittelstand: The Art of Buy & Build Strategy Leveraged by Winterberg Group
The Mittelstand companies in the DACH region (Germany, Austria, and Switzerland), characterised by their small to medium size and often family-owned operations, are essential to the economic stability of their respective countries. However, these firms frequently fly under the radar of many larger institutional investors. Yet, for those with strategic foresight, these very enterprises offer a wealth of opportunity. A notable exponent of this perspective is Winterberg Group which is laser-focused on Buy & Build investment strategy.
The backbone of the DACH region’s economy, Mittelstand companies blend stability, resilience and niche market domination, often powered by an unrivalled degree of specialised knowledge. These attributes, along with their substantial employment creation and export potential, make them significant contributors to the regional GDP and societal stability. The Buy & Build investment strategy, focusing on the acquisition of a company that subsequently serves as a platform for further acquisitions, has proven to be incredibly potent within the Mittelstand universe. The DACH region, teeming with highly specialised, often complementary companies, is ripe for this approach.
Our Managing Partner, Fabian Kröher, shed some light on why this strategy has been so successful:
„The Buy & Build strategy aligns perfectly with the Mittelstand culture. These enterprises are often at the forefront of innovation, demonstrating extraordinary resilience in niche markets. With each strategic acquisition, we can integrate new product lines, broaden market reach or bolster existing capabilities, resulting in a stronger, more versatile entity. Essentially, we’re capitalising on the inherent strengths of these Mittelstand companies – their stability, innovative potential and profound market knowledge serve as the ideal foundation for growth.“
The returns stemming from this approach in the DACH region have been nothing short of remarkable. A well-executed Buy & Build strategy can spur significant revenue and EBITDA growth, create meaningful economies of scale and strengthen market positioning, ultimately enhancing the appeal of the combined entity for future exit opportunities, be it via a sale to financial investor or a strategic player.
Buy & Build strategy is inherently capable of mitigating the risks that are typical for Mittelstand
Succession Planning: Many Mittelstand companies are family-owned, often managed by founders or their descendants. The problem arises when the current management grows old or wants to retire. It’s not always guaranteed that the next generation will be willing or capable to take over. There may also be disputes among family members over leadership. Inadequate succession planning can lead to leadership gaps, business disruption, or even the sale or closure of the company. If there’s a lack of suitable successors in the family, a Buy & Build strategy could help. When we buy the company, if the need exists, we bring in professional management. This helps ensure a smooth transition and continued growth, without the need for family succession. The ongoing succession challenges faced by many Mittelstand owners, with impending retirement and no obvious successors. This dynamic offers an added opportunity for investors, like Winterberg Group, implementing a Buy & Build strategy, as these owners may be more inclined to sell to an investor who guarantees their legacy’s ongoing success.
Digital Transformation: Digital transformation involves using digital technologies to create or modify existing business processes and customer experiences to meet changing business and market requirements. While it provides opportunities to innovate and improve efficiency, it also poses challenges. Many Mittelstand companies may lack the necessary technical skills or financial resources. Failure to successfully transform can lead to lost competitive advantage, inefficiencies and lower profitability. We provide both financial resource and technical expertise to drive the company’s digital transformation. This would help the company stay competitive and increase efficiency without needing to develop these capabilities in-house.
International Competition: Globalisation has expanded markets, but it has also increased competition. Companies worldwide can offer similar products or services, sometimes at lower costs due to factors like cheaper labor or raw materials. This can put significant pressure on Mittelstand companies‘ revenues and profitability, especially those that are highly specialised in a particular niche. A Buy & Build strategy could help companies scale and expand their operations more rapidly, helping them compete more effectively on the global stage. With more resources and a broader reach, they can better face off against international competitors.
Supply Chain Risks: Global supply chains can be disrupted by various events such as political instabilities, trade disputes, natural disasters or pandemics. Such disruptions can lead to increased costs, delays, or inability to deliver products or services. Mittelstand companies may lack the resources or expertise to manage these risks effectively compared to larger, multinational firms. Winterberg brings expertise in supply chain management and risk mitigation strategies gathered during our Managing Directors’ prior expertise in top Strategy Consulting firms. Moreover, a larger, more diversified company may have a more resilient supply chain, with more options for sourcing materials and distributing products.
Economic Conditions: A company that’s part of a Buy & Build strategy can better weather economic downturns due to its greater size and diversification. It may also have more resources to hedge against economic risks, such as fluctuations in interest and exchange rates.
The potential of Mittelstand companies in the DACH region is immense. For investors like Winterberg Group, that recognise the inherent value in these enterprises and have mastered the Buy & Build strategy, the opportunity for exceptional returns is not only possible but likely. Winterberg Group’s success underscores the effectiveness of this approach in the vibrant and promising segment of the DACH market.