Equity firms specialize in acquiring platforms and then during the ensuing 5- to 7-year “hold period” make additional investments in synergistic companies in order to expand the platform far beyond the size of the initial investment. These additional investments are called “add-ons” or “bolt-ons.” These descriptors refer to the fact that the subsequent investments are acquired and then rolled into the platform acquisition. They are typically “additive” and enable the equity firm to grow its investments beyond just organic expansion.
This strategy has become extremely popular for equity firms to pursue, according to PitchBook, a leading research company focused on private equity and venture capital firms. They do a great job compiling research on an industry that is notoriously secretive.
As you can see, based on their analysis, add-ons are now extremely popular with equity firms:
As shown, in 2005 add-ons accounted for only 39% of the acquisitions and investments made by equity firms. In only nine years, that percentage has exploded to 61% of all investments (through half a year in 2014). What is fueling this dramatic increase? In a word: success.
Equity firms have learned through years of trial and error that it is far more financially lucrative to make a number of smaller, less risky acquisitions (relatively speaking) and combine them into a new entity rather than trying to hit a home run with $1 billion deal.
The Great Recession was a real eye opener for many firms who had made highly leveraged, somewhat speculative mega deals only to see the investments fail or at best flounder when demand shrank. Because of this, funds are now targeting their investments in narrow synergistic ranges after the initial investment in a platform company.
The really good news is that for most private equity firms, the size of the add-on can be quite small (more on that in our next posting on the 17th). Lots of business owners that attend our seminars are surprised to learn that add-on acquisitions are popular and can be quite small in size.
And, because the equity firm wants existing management to stay with the acquired company post-acquisition, a good portion of these add-ons are partial sales. If you are unfamiliar with that deal-making strategy, typically the equity firm will acquire 51% or more of the target’s stock and recapitalize the new firm by rolling it into the platform company. Existing management and ownership is retained and most often is given added incentive by taking stock (ownership) in the new entity. This can prove quite lucrative for many owners who are young enough to stay and grow the new firm 5-7 years and then participate in a second liquidity event when the much larger entity is sold or taken public.
If this information is all new to you, then I recommend attending a Generational Equity exit planning workshop. An investment of a few hours of your time will really speed you along the path of determining when and how you want to exit your company.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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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.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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.
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.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
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
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
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.
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 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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
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
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