*As of 6/30/2022 - Source: PitchBook
As you can see, despite some overall slowing in PE activity through Q2 of this year, add-ons are well over 70% of all activity this year.
So, what technically is an add-on? Why are they so popular with PE firms? Why does an add-on transaction make sense to a business owner? How can a business owner position his/her firm to be an add-on target?
Let’s take a look at each of these important questions.
First, an add-on simply is a business added to a PE firm’s portfolio via a “platform company”. A platform company is typically the first entre a PE firm makes into an industry with the goal of “adding on” or “bolting on” smaller companies to the platform.
This allows the PE firm to grow an investment in an industry without the risk of making a much larger acquisition – under the proven theory that it is more efficient to absorb a number of smaller, synergistic acquisitions under the platform company than take a much bigger risk of making one very large investment.
And that also answers the second question above regarding why add-ons are a very popular strategy with private equity entities today: It is risk diversification in action!
As for business owners, the fact is that most PE firms that focus on the middle market not only make an initial investment in the business to acquire a portion of the company, they then make subsequent follow-on investments in terms of capital, people, processes and infrastructure, often items that the original owner could not afford or even imagine.
And most importantly, once the acquisition program is finished, quite often the PE firm will sell the now much larger entity to a strategic player in that space and/or take the new business public; either way the original owner of the add-on can then get a “second bite of the apple” as a partial owner of the larger enterprise.
So, add-ons have truly become a win-win option all around and you can see that in the graph above, with add-ons growing from around 50% of all PE investments just seven years ago to over 70% today.
Now the final question (and probably the most important) is how do you position your business to attract PE firms using an add-on strategy in your industry?
First, and most challenging for those not intimately involved with buyer databases, is finding firms active in your niche. Because of the sheer volume of inquiries that they get annually, many private equity firms do not publicize their acquisitions, using a far more targeted approach to find acquisition candidates.
This is especially true of a subset of PE firms, the Family Office which as we have discussed in past posts, are very secretive about their acquisition searches.
Assuming you have found several (and remember one buyer is no buyer) that are active in your industry, you then need to create documentation about your business that is not only accurate, it is also in a format that an equity firm wants to see. Again, they are approached by hundreds of targets annually, making it a real challenge to sort the “wheat from the chaff” as it were.
Bottomline: You will need experienced exit planning advice to appropriately and adequately target any PE firm specializing in an add-on program. Fortunately, Generational and its team has the experience and expertise to not only locate appropriate targets but also approach them with information that is relevant to the PE firm’s review committee.
To learn more about add-on strategies in action, and how you can benefit from their growing popularity, please plan on attending a Generational Growth and Exit Strategy Conference in your area soon. To find one near you, please use this link.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
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I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
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Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
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