Is Your Business a Platform or Bolt-On Candidate?

Private Equity Firms Account for a Substantial Amount of Action in the M&A Market

by Terry Stidham

Private equity groups are well known for acquiring large companies. Their deals, measuring in the hundreds of millions and even billions are regularly reported in the local and national business pages.

Less known is the fact private equity groups make a lot more acquisitions of companies with sales under $20 million than of companies with sales over $100 million. The Wall Street Journal seldom reports on PEG's acquisition of $1 or $2 million companies, but they are taking place quietly, on a regular basis. 

If you have a business for sale and are being courted by a private equity firm, it might be helpful to know they make two types of purchases: platform and add-on acquisitions.

Platform Acquisition:

A platform acquisition is going to be larger company within a particular industry for the private equity firm—essentially a foundational operation they will continue to develop through both organic growth and “add-on” or “bolt-on” acquisitions.

Add-On /Bolt-On Acquisition:

An add-on /bolt-on acquisition is when a private equity-backed company acquires another company as a "bolt on" to enhance the private equity-backed company's value.

Generally, for a private equity group to make a platform purchase, the acquisition target ha-s to be doing at least $10 million to $20 million in sales and at least $2 million in EBITDA.

When a private equity group makes an add-on purchase, on the other hand, it’s more of a strategic play because they already own at least one company in that industry. They add smaller companies to the platform in order to expedite top line and bottom line growth, making the company more profitable and more attractive to the next purchaser. 

By growing a company from a $2 million EBITDA to a $6 million EBITDA through both organic growth and acquisition, the private equity firm will typically get a significantly higher multiple for the entire entity than they paid for each company alone.

The M&A Source with support of Pepperdine University has begun tracking private equity platform and add-on purchases as part of its quarterly market pulse report.  In the third quarter of 2012, national members reported that private equity purchases were almost nonexistent until opportunities reached $5 million in value.

In that study, private equity dominated lower middle market purchases of $5 million and above, at 68 percent of deals closed.  Of those, nearly all were add-on acquisitions.

From a seller standpoint, this helps you understand that the private equity firm will be making a more strategic play for your business, rather than looking at it from a financial standpoint.  That impacts both positioning and value.

Also, if you are being purchased as a platform company, you can usually expect a longer transition time.  The private equity buyers will want you to stay around longer to transfer your knowledge and contacts to a new leader or in many cases to leave some equity in the deal and get a second bite at the apple four to five years down the road.  If you want to get out of the business sooner, you’ll have better chances as an add-on acquisition.

Reasons to Deal with Private Equity Buyers

• Higher Valuation
•  In the case of an add-on acquisition, PEGs can often pay more than other buyers, because an add-on acquisition is a synergistic acquisition. That is, by combining the add-on with their existing platform company(s), they can make 2 + 2 = 5. They can take advantage of synergies like economies of scale, market clout, and more to justify a higher valuation.
• PEGs virtually all have an aggressive growth strategy and that strategy typically involves -- add-on acquisitions. Their whole reason for being and their investor mandate is to acquire companies. Simply put, they are under pressure to do what they are in business to do--buy companies.

• Professional Deal Makers
• Because PEGs exist to buy companies, they are run by people who have a lot of acquisition experience. They know how to cut through a lot of the typical red tape and other time wasters involved in buying a business. They know what is and isn't important and how to avoid getting caught up in details that tend to slow a deal down. PEGs will often issue a letter of intent within days of first meeting with a seller.
• To private equity groups, buying companies is their business. Most buyers, including business owners pursuing a strategic acquisition, are not experts in the process and cannot devote full time to getting the deal done. This of course, stretches the time it takes to complete an acquisition. Private equity buyers, on the other hand, know the business buy/sell process and have the resources in place to consummate an acquisition deal. Running their business means making the acquisition.
• Committed Funds
• Private equity groups have committed funds for acquiring businesses. That is, investors have committed to provide funding up to a stated amount upon request. They have made their commitment in advance, in essence agreeing to accept the judgment of the PEG management for any acquisition it wants to make.
• Financing (without committed funds)
• Those groups that are not in the position of having pre-committed funds for acquisitions usually have very solid banking relationships. The banks know them and they know which banks will finance which kinds of acquisition deals. In a nutshell, a private equity acquisition deal, even one that needs bank financing, is likely to get done and get done much more quickly than a non-PEG acquisition.

Is your Business Right for Private Equity Acquisition?

Some companies are good candidates for sale to private equity and some are not. We at Target Search Group know the language of the Sellers and the Buyers and we know what Private Equity Groups look for.  Contact Us today to discuss your situation and to find out if your business meets their criteria.