John Binkley

The Advantages of the Add-On Acquisition Strategy

November 1, 2019 By John Binkley

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.

In Summary

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.

Knowing The Motivations Behind Your Exit Strategy

September 5, 2019 By John Binkley

The M&A process is only half the story when guiding a client to exit. This is one of the great lessons Dr. John Binkley’s decades at Generational Equity has taught him. What often goes underappreciated is the emotional aspect of an exit strategy.

What does Dr. Binkley mean by this? Well, when you dedicate years to nurturing your business, especially if you started from the ground up or it has been in your family for generations, making the decision to exit can be incredibly difficult.

The timing might be perfect, the offer could be ideal, the buyer the right fit… but you still find yourself not ready to let go.

Dr. Binkley’s son Ryan explored the emotional journey to selling a business in a recent article on LinkedIn, which covers this experience in greater depth. With many years working in the M&A industry behind them, they’re familiar with phrases from business owners such as:

“I’m just not ready to exit.”
“I will miss my employees.”
“I have no hobbies or interests outside of the business.”
“I am worried about the legacy I am leaving behind.”
“No one can run the business as well as I do.”
“What am I going to do when I leave?”

The final statement has been highlighted as it leads to the subject of this piece: knowing your motivation behind your exit strategy.

Understanding Your Incentive to Exit Your Business

Most people exit their business with a motivation in mind, whether it’s an offer too good to refuse, they’ve taken their company as far as it will go, or they’re ready to retire and take back time for themselves.

However, that motivation to exit can easily find itself buried under the emotions that can hinder any sale – the doubt, the grief, the fear. In Dr. Binkley’s experience, losing sight of this reasoning can make it more likely for sales to fall apart at the 11^th hour and you potentially walk away from an optimal deal.

What is the consequence of this? Not only do you lose out on the time and resources you’ve devoted to valuing your company, sourcing a buyer and negotiating this deal, but it can also lead to greater issues later on, including:

A host of confidentiality issues between you and the other party, which may lead to legal difficulties
Issues forming between your loved ones, employees and partners over the uncertainty surrounding your business
You develop a negative reputation among potential buyers, who will be more apprehensive about entering negotiations with you when you next decide to exit, likely hurting the value you receive

Furthermore, holding off on exiting because you are unclear regarding your personal motivations means you may one day find yourself forced to sell. Dr. Binkley often says there are two types of business owners:

Those that PLAN to sell
Those that HAVE to sell

It is far more beneficial to find yourself in the former group than the latter. So it is essential to make sure you’re mentally ready to exit early in your journey to keep you on course for a well-planned, successful outcome.

What is Your Reason to Sell?

As alluded to earlier, there are a host of reasons why you might be motivated to exit your business. But how do you find yours? Obviously, the answer to that can only come from you and your inner circle, but addressing this should take time and plenty of thought.

A decision of this magnitude should not be taken lightly, especially if you hope to achieve the optimal exit strategy. Rash decisions are the ones most likely to be reconsidered down the road, so it should take a lot of rationalizing and deliberation both internally and with those closest to you, be it your family, other shareholders or trusted advisors.

Indeed, talking to an experienced M&A advisor can be a huge help in reinforcing your motivations to exit. At Generational Equity, Dr. John Binkley places a strong emphasis on dealmakers getting to know their clients closely, understanding their background, needs and ambitions before proceeding any further in the process.

This focus has helped many of Generational’s clients understand their incentive to exit their business in pursuit of the maximum value. No two clients’ goals are exactly the same, which is why it’s crucial to work with an M&A professional that treats you as an individual, rather than taking a cookie-cutter, one-size-fits-all approach.

If finding and sticking to your motivations to exit are proving difficult, Dr. Binkley would like to share some of these clients’ stories, helping you understand:

How diverse reasons for exiting a business can be; and
How working with a professional keeps those motivations top of the agenda throughout the journey to exit.

Security for the Future – Mike Aman

*“I would have been doing my wife and my children a disservice had I not had a plan in place for when the time came for me to sell the business.”*

We can’t predict the future. For Mike Aman, it took a wake-up call to fully appreciate this when a close friend suffered an unexpected stroke. Mike used this as motivation to talk to his family and reach the conclusion that selling his business in order to secure their financial future, so they were ready for any eventuality.

Freedom to Explore – Bobby & Stacy Evans

*“My wife and I love to travel, and we’ve got the time available to us now to be able to do more travelling than we have in the past.”*

Being tied to their company restricted the time Bobby and Stacy Evans had to travel and experience different cultures. This vision was a big motivator for them in their exit strategy, giving them the time, resources and freedom to spread their wings and journey around the world.

Explore Your Passions – Tommy Barker

*“I learned in business that time is money. I’ve changed this in the time since I’ve sold my company – right now time is more valuable than money.”*

When you’re a serious business owner, your other passions often take a backseat. When the time was right, Tommy Barker decided he was ready to dedicate more time to his love of restoring classic muscle cars. This motivation carried him through the process, keeping him on the road to his optimal exit.

Partner for Growth – Debbie Ritchey

*“You’ve really got to ask yourself do I want to just get out, or do I want somebody that has the capital that I don’t to grow this thing?”*

Sometimes exiting the business outright isn’t the motivation, but instead selling part of it to a partner to help it continue to grow. That was the case for Debbie Ritchey, who sought out an investor to support her company’s development, with the goal of reaching its full potential.

Enjoy Retirement – Michael & Rebecca Baker

*“We wanted to get out while we could still walk and still enjoy, have time to play with the kids and not have to worry about things*.”

Often, the goal of an exit strategy is to reap the rewards following years of hard work and perseverance. Having taken their company as far as they could, Michael and Rebecca Baker’s motivation changed to selling for the maximum value, giving them the freedom to enjoy life on their terms.

Finding Your Motivation to Exit

Dr. Binkley hopes this dive into the importance of keeping your motivations for exiting in the forefront of your mind has proved useful, as well as the stories of real business owners’ exit journeys. The psychological side of selling a business is in many ways just as important as the steps to achieving a deal, so it is important to take this into consideration.

Again, how your M&A advisor approaches the emotional aspect of the exit planning process should be a key consideration in who you work with. Make sure you choose an individual or team that prioritizes your goals as much as you do, helping these stay fresh in your thoughts during the difficult moments along the way to your exit.

You can discover more about both the psychological and practical aspects of exiting a business in many of Generational Equity’s in-depth insights. Alternatively, explore Dr. John Binkley’s blog for more articles on M&A, business, ministry, and more.

Ready for Tomorrow – 5 Ways to Future-Proof Your Business

June 11, 2019 By John Binkley

For Dr. John Binkley and the team at Generational Equity, preparing clients for the future is at the heart of what they do every day.

Whether its introducing techniques to enhance a company’s value, minimizing risk in the eyes of potential buyers, or helping an owner create a comprehensive exit strategy geared to achieving the maximum value when they depart, Generational’s M&A professionals are dedicated to giving clients the future they deserve.

Unfortunately, the future is now arriving faster than ever. Factors such as increased globalization, the rapid development of technology and an increasingly competitive business landscape means that the world we see today could look completely different tomorrow. And, for business owners who are too focused on the present day, there is a real risk that they’re missing out on a brighter future.

Consider this for a moment: in 1965 the average tenure of a company on the S&P 500 was 33 years. By 1990, this had dropped to 20 years and, if forecasts are correct, by 2026 it will be down to 14 years.

For Dr. Binkley, this significant shrink in company lifespan illustrates how important it is for business owners to place a priority on future-proofing their business and preparing for life beyond it. This is not something that can be placed on the back-burner while you worry about day-to-day operations – without a plan for tomorrow, your business might not have one.

Future-proofing your company not only helps to ensure its survival in an increasingly competitive business landscape, but it also plays a big role in convincing potential buyers and investors that your organization will be around for years to come. If your company isn’t set up to embrace the future, your chances of securing an optimal sale diminish greatly.

Here, Dr. John Binkley breaks down five ways you can help secure the future of your business in pursuit of your goals, from establishing your ambitions early to securing its legacy with a thorough succession plan.

1 – Establish Your End Game

First and foremost, ask yourself an important question:

“What does success look like to me?”

This is something Dr. Binkley recommends you ask whether you’re just starting out, or have been at the helm of your company for decades. Knowing your ambition for your company and for life after business is vital when deciding what direction to take both now and in the future.

Maybe it’s to be the top player in your industry? Perhaps you want to make a difference in the world? Or you could simply want to earn enough to retire comfortably and look after your loved ones?

Whatever your goal, write it down and reflect on it regularly. Your aspirations could change over time, so it’s essential to keep this up-to-date. Keeping your aims fresh adds clarity to your future and ensures the decisions you make to progress and develop your company are proactive, not reactive. This means you’re thinking clearly about how to tackle tomorrow in the best way in order to achieve your ambitions.

2 – Invest in Your Employees

When we hire new staff, we tend to do so to address a present need in the business. However, those who are focused on future-proofing their company will concern themselves with what their business will need tomorrow.

To keep up with changing demands in your industry and among your customer base, it’s crucial to invest in your employees’ development with training opportunities. This helps your business grow into new markets, enhances its repertoire and makes it a much more valuable proposition to buyers when the time comes to exit.

In addition, this investment shows your staff that you care about their future, as well as the future of your firm. This motivates them to work harder for your cause and helps develop a sense of unity and shared purpose. Let’s face it – without a happy, fulfilled workforce you can rely on, your business won’t have much of a future to look forward to.

If you’d like to learn more about ways to encourage employees to support the future of your organization, Dr. Binkley recommends reading the “5 Ways to Put Your People First” insight on Generational Equity’s website.

3 – Keep Up with Technology

A quote Dr. John Binkley likes to refer to in this situation is by the Danish physicist Niels Bohr:

“Technology has advanced more in the last thirty years than in the previous two thousand. The exponential increase in advancement will only continue.”

Remember that Bohr passed away in 1962. Technology has since developed at an even faster pace, to the point the world is almost unrecognizable to that of 1962. Keeping up with the latest technology is crucial to a business staying relevant and efficient, so it doesn’t fall behind competitors.

Of course, this investment in developing technology in-house can be extremely costly and time-consuming for companies. As a result, Dr. Binkley has noted a trend towards M&A activity with the goal of incorporating new technology and expertise, rather than investing in R&D, particularly as part of cross-sector M&A activity.

This helps companies address the need to keep up with technology demands in an effective way, as well as increase the appeal and value of middle market firms that have been more agile in adopting this technology.

4 – Avoid Dependencies

Next, it is crucial that a company looking towards the future embraces diversity and doesn’t place all its eggs in one basket.

Dr. Binkley and Generational Equity’s staff have previously spoken about how any business that is too dependent on a single customer, supplier or partner waves a massive red flag to prospective buyers. This is because it indicates that the company’s success is reliant on not only their own hard work and initiative, but maintaining a consistent relationship with a third-party.

As a rule of thumb, if a potential buyer would be worried about your organization’s future, it’s a good sign that you should be too. To avoid this, it’s important to devote energy to diversifying your customer and supplier bases, as well as your offering over time.

This enhances your company’s chances of survival and means when the time comes to secure an exit, a buyer will feel more confident that if a revenue stream is lost post-transaction, your business will continue to grow.

5 – Start Your Succession Plan

Finally – and arguably most crucially of all – create your succession plan as early as possible. Last year, an article in USA Today revealed that 58% of small business owners didn’t have a written succession plan, even though 60% of the 15 million privately held businesses in the United States are owned by people born before 1964.

This is a staggering statistic. Having a succession plan in place is vital to your company’s long-term viability, as well as the legacy you leave behind when you depart. Far too many fall into the assumption that the business will be taken over by a family member, or they’ll be bought out by one of their key employees. Both options carry substantial risks:

What if the family member you’ve earmarked is not passionate about your industry, or has ambitions outside of your company?
Are you sure your offspring/employees have the characteristics required to be an effective owner?
Will other employees resent the person you handpick to take over the reins, especially if they’re part of your family?
How will your key employees finance the acquisition, and will this be enough to support your life after business?

Considering these questions is not something you can afford to leave to the last minute. Plus, in Dr. Binkley’s experience as Chairman of Generational Equity, the most lucrative and trustworthy end goal for a succession plan is to negotiate with interested buyers.

By building your succession plan around your ideal buyer, you establish the key characteristics required to drive your company forward after you depart, greatly increasing your chances of locating a buyer that is willing to present an optimal offer.

The Future Is Now

Dr. Binkley hopes that this has demonstrated the importance of future-proofing your business in today’s landscape, while giving you an understanding of some of the core ways you can accomplish this.

Given the day-to-day responsibilities of owning and managing a company, it’s all too easy to let the demands of today overtake your needs for tomorrow.

Devoting time to plan and strategize for the future of your business not only helps to preserve it for years to come and craft the legacy you wish to leave behind, but also makes your company a more attractive proposition to buyers when you are ready to exit.

If you’d like to learn more about steps to future-proof your business or the process of building a buyer-ready business, Generational Equity’s regularly-updated, in-depth M&A insights provide a wealth of information on preparing for the future you’ve always hoped for.

In addition, Dr. John Binkley’s blog has several articles across the M&A spectrum, as well as other inspiring and motivational pieces.