One of the topics we have examined several times over the last few years is the idea of add-ons as an M&A strategy (AKA bolt-ons). For those of you that are unfamiliar with the term, at its basic level, equity firms pursue add-ons because they can “add them on” to their existing platform companies (the initial investment in an industry) because the add-ons are usually smaller and less risky, making lower middle market companies (generally those valued below $50 million) very attractive.
Odds are good that there are several PE firms/Family Offices pursuing this strategy in your industry and you are probably unaware of it!
Recently our friends with Axial released a study on lower middle market add-on design that we found quite informative. Here is the basic conclusion from their research:
A survey of 150 deal professionals across the Axial network documents the extent to which financial sponsors have descended upon the lower middle market to power add-on strategies. Regardless of how the economic picture unfolds, the majority only anticipate add-on activity will accelerate from here.
The results of the survey confirmed the lower middle market has indeed become a beneficiary as sponsors of all sizes turn to this fertile pool of assets to source their add-on, tuck-in and bolt-on activity. In fact, the consensus among the financial investors surveyed was that the pace of add-on transactions would either accelerate (80%) or hold steady (20%) over the next year:
While the lower middle market has always been one of the more dynamic segments of the broader M&A universe, the growth of add-on activity represents yet another factor that reinforces the strength and vibrancy of this overlooked corner of the market.
Add-ons, in many ways, represent an ideal vehicle for financial buyers to grow their platforms, while adding economies of scale that can position the combined business to take on external challenges that may await. Buyers will remain motivated, which will give sellers confidence there’s a market for their assets. And this could help create its own virtuous cycle that helps to underpin LMM activity even in an uncertain environment.
We would concur with Axial’s findings. Despite recent economic and geopolitical uncertainty, add-on activity is quite strong, and growing, in 2022. You can see this in a sampling of transactions we have closed in the last seven months.
The challenge for most business owners is that despite having ample add-on activity in their industries, they have a hard time identifying good targets for their business. Simply put, you need the experience and skills of an investment banking firm to adequately tap into the add-on market.
To find out how, call us at 972-232-1121 or visit our website and leave us your contact info and we will reach out to you.
If you would like to download and review the entire report, you can do so here.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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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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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
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We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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 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.
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
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
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