In September 2019, Presidium Network Services, a client of our team at Generational Equity, was acquired by Baymark Partners. A successful transaction in the active business services sector – is there anything missing here?
Well, what makes this deal stand out is it being an example of an add-on acquisition. The goal of Baymark in purchasing Presidium was to support the development of their existing platform company, Slappey Communications.
Baymark identified the compatibility between both their platform and this new acquisition, and believed these similarities alongside the skills, services and location of Presidium would effectively accelerate the growth of Slappey, and subsequently secure them a greater return on investment.
This is just a first-hand example of where I’ve encountered add-on acquisitions, a topic I’ve covered on this blog in the past. However, since then, this M&A strategy has become even more prevalent among private equity firms worldwide. And, therefore, they represent a very viable option for business owners looking to exit for an optimal offer.
In this piece, I want to outline the purpose of add-on acquisitions and the ‘buy and build strategy’, assesses the popularity of these transactions, and offers some advice for sellers before pursuing this path.
Add-On Acquisitions and Buy-and-Build – An Overview
Divestopedia defines an add-on acquisition as a company added by a private equity firm to one of its established platform companies.
It is a technique many PE firms apply in order to spur the development of a company that they have interest in growing and increasing the value of, with a typical end-goal of selling it for a greater return on their investment or taking it public. The value of the add-on or ‘bolt-on’ company almost comes secondary to how it synergizes with the platform company.
Simply put, if a PE firm sees potential in a target to benefit a platform they’ve invested into, they’re more likely now to pursue the opportunity. And that can be incredibly lucrative to middle market business owners.
Take the approach of Audax Private Equity: In their 20-year history, they’ve invested over $5 billion into 126 platform companies and 774 add-ons. That breaks down to an astonishing 39 add-on acquisitions per year! This demonstrates that for many working in M&A, this is THE approach for them.
This technique is also often referred to as a ‘buy-and-build strategy’. As opposed to the financial engineering strategies I saw widely employed in the 1980s and 90s, this approach is designed to improve the operations of platform companies, while simultaneously growing the separate business units strategically.
As Bain & Company’s annual Global Private Equity Report illustrates:
“Buy-and-build can offer a clear path to value at a time when deal multiples are at record levels and GPs are under heavy pressure to find strategies that don’t rely on traditional tailwinds like falling interest rates and stable GDP growth.”
And this isn’t just gradually bolting on one or two companies to a platform over the course of several years – Bain defines buy-and-build as “building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies.”
The prevalence of the buy-and-build strategy offers an effective avenue for PE firms to accelerate the development of their platforms, and potentially make companies in the middle market much more attractive propositions.
So, why are they not more widely considered by those looking to exit their company?
In my experience, I’ve noted a lack of awareness among clients about this type of buyer. This isn’t surprising, as they tend to fly under the radar to deflect any publicity – you often don’t see these transactions front-and-center on the Wall Street Journal!
But, for owners of middle market businesses, this is now a solid path to achieving an optimal offer, provided you are working with experienced M&A professionals. Especially now, with add-on acquisitions arguably more prevalent than ever before.
The Rise in Add-On Acquisitions
In their 3Q 2019 US PE Breakdown Report, Pitchbook identified that add-on acquisitions now constitute 68% of all PE buyouts. So far in 2019, the number of reported add-ons is in excess of 1,700, with Pitchbook anticipating that this year will see a record number of these transactions completed.
Through my personal insight and Pitchbook’s findings, there appear to be three key factors in this growing predominance:
- The amount of dry powder available to PE firms
- Heightened focus on the buy-and-build model
- The rising buyout multiples
Firstly, the level of dry powder accessible to private equity firms is at its highest since the lead-in to the global financial crisis, sitting at around $2.5 trillion. This capital can only be used to invest in companies and, with this extraordinary seller’s market still holding strong, there is a race to invest while the timing is right.
On top of this, as I’ve alluded to earlier, the buy-and-build strategy is being employed more and more often to help a platform company reach the next level. The more this is turned to, the better investors are becoming at spotting opportunities and applying it effectively.
Finally, US PE buyout multiples are at a very high level. This potential to develop an investment and make substantial returns is high right now, and may continue that way for the foreseeable future. And while that remains the case, add-on acquisitions will remain an attractive proposition, both to buyers and, as I will now discuss, sellers.
Why Sellers Should Consider Add-On Buyers
Now it’s been established what add-on acquisitions are and how prevalent they have become among prospective buyers, why do they present such a viable option for those considering their exit plans?
As I’ve covered throughout this piece so far, the advantage of an add-on acquisition strategy is it places smaller middle market companies in the crosshairs of significant investors looking to grow a platform.
Whether this is achieved by harnessing the add-ons skilled workforce, introducing new products and services, or expanding into previously unexplored markets, add-ons represent a strategic answer to the question “how can we grow X company?”
PE firms will devote a lot of time and resources to finding targets that fit what they’re looking for. And, consequently, they will be more willing to pay a premium for those in that bracket.
This should be encouraging middle market business owners contemplating their exit plans to throw their net further in a bid to find the right buyer. Reaching these firms looking for companies that synergize with their platform could prove a lucrative investment, as firms hope to make the turnaround on their initial investment as profitable as possible.
Furthermore, the art of the add-on acquisition for sellers is that in many cases, the PE firm will retain the management team under a newly capitalized format. So not only does that allow you as a business owner an opportunity to continue to build your legacy into your business with access to new resources and strategic support – it allows you to participate in a second bite of the apple when the larger entity is sold or taken public.
Sounds more intriguing now, doesn’t it? Fundamentally, your success in securing an optimal offer from a PE firm interested in add-on acquisitions will depend on two key factors:
- How well your company aligns with the platform entity; and
- How effectively you can locate and market to these buyers.
The first of these will very much depend on the buyer and what their objectives are. The second is the real challenge – as mentioned earlier, these buyers work under wraps and do not often publicize their dealings.
Therefore, it’s essential to work with an experienced, well-connected M&A advisory firm who can help put you in front of the firms that are searching for a company with your qualities, like Generational Equity. They will understand how to negotiate with these groups and highlight the intangible assets your company possesses that will encourage them to pay a premium for your company.
To conclude, if you take anything away from this article, it’s to consider all available buyers when acting on your exit plans. The growth of add-on acquisitions is just one of numerous factors in how you can pursue an exit for maximum value.
But, without the expertise, connections and support of a highly-skilled M&A firm, you are likely to miss out on the potential these buyers offer your business, which could mean you leave money on the table when your exit is finalized.
If you’d like to learn more about add-on acquisitions and the value they can offer to your exit plans, Generational Equity’s insights provide useful knowledge and guidance across the entire M&A process.
Alternatively, if you would like to read more from me, check out my blog for further articles on M&A, business, personal development and more.