What is an “Add-On” Acquisition Strategy?
As a business owner, a key part of preparing to sell your business is being able to look at your company through a potential buyer’s eyes. What is the buyer looking for? What are they trying to accomplish? And perhaps most importantly, why (or why not) would your business look attractive to them?
As we’ve written in the past, private equity (PE) firms have been increasingly interested in investing in add-on acquisitions. The strategy itself is relatively simple. First, the PE firm looks for and purchases a platform company, or a company to “add to.” Then the firm identifies other smaller firms to add to the platform company, increasing its overall value. When the PE firm is satisfied that they have maximized the value of the new organization, it is sold at a premium price.
What is a platform investment?
We would define a platform investment as a company that a private equity group can view as a starting point to build upon … adding more acquisitions to it in the future. Given the large number of private equity firms, there are typically numerous firms targeting investments in a particular industry. In terms of financial characteristics, firms in the lower middle market generally want to see a target company generating $5M or more in EBITDA to be considered as a potential platform. Companies generating $5M or more in EBITDA typically already have the baseline infrastructure or “platform” in place that can be built upon by private equity investors.
What is an add-on investment?
In contrast, add-on companies are usually smaller and generate under $5M in EBITDA. Add-ons are typically marketed as a smaller asset that can add value to a larger platform in the industry. The added value may be complementary services, technology, or market expansion. Depending on the industry, add-on companies may be considered competitors to the original platform company, making them a good fit if the goal is increasing overall revenues and earnings. These companies may be more prone to suffer issues with management, undercapitalization, and lack of exposure in their industry and can benefit from the larger infrastructure of a platform company.
Is your company a platform or an add-on?
If you are considering selling your business, how you answer this question deeply affects how you approach potential buyers. Firms marketed as platform investments must prove that they are solid industry leaders with a strong business model and growth potential. Firms marketed as add-on investments need to focus on their core competency and, where they can, bring value to a larger strategy – be it access to a specific customer base or territory, specific technology, or a complementary offering that will improve the platform investment.
If you are considering selling your business, please contact us for a confidential discussion of your specific situation. We have experience helping business owners across a variety of industries sell their businesses, as well as relationships with buyers who are interested in new opportunities.