Insights & Info

Insights > What Are Add-Ons and Why Do Private Equity Firms Acquire Them?

What Are Add-Ons and Why Do Private Equity Firms Acquire Them?

By Generational Equity

what are add-ons

There is a common misconception among many lower middle-market business owners that private equity firms are only interested in making large “platform” acquisitions. In reality, nothing could be further from the truth.

Certainly equity firms do create funds that have very specific goals in terms of the types of companies acquired and their size. And most often the initial investment in an industry player will be larger and is often termed “the platform acquisition.” However, after that, size restrictions are often less important, and the focus is on synergistic investments in smaller companies that bring key resources to “add on” to the platform company.

As we have examined in the past, during the last few years, add-ons as a percentage of all deals closed by equity firms has risen from 39% in 2005 to more than 60% midway through last year. And this increase is not an aberrational spike; the percentage of deals that are add-ons has grown every year since 2005.

So the question we are often asked is, why? What makes an add-on strategy so popular today? The answer takes us back to the merger and acquisition bubble years of 2007 and 2008 when professional investors were gobbling up large deals at inflated valuations and loading them with significant debt to finance the transaction. The recession that hit in late 2008 and carried over into 2009 taught these buyers a valuable lesson in how not to acquire over-valued assets, place too much leverage on deals, and try to hit home runs with a single acquisition.

Axial, a leading B2B database that connects businesses with capital providers, indicates that the following are some of the benefits of an add-on program:

Analyzing possible synergies makes a critical difference when valuing add-ons. The most desirable add-ons can bring benefits like:

  • Lowering costs by merging sales staff with similar expertise
  • Expanding sales into regions not currently served, either domestically or internationally
  • Increasing product offerings
  • Cross-selling/upselling opportunities for existing products
  • Eliminating duplicate management
  • Consolidating financial functions, such as treasury and tax
  • Eliminating idle manufacturing capacity
  • Boosting buying power

In addition to these, one of the greatest benefits we have seen over the years is this: Private equity firms that are in the process of building a larger entity in an industry via add-ons also bring key managerial, financial, operational, sales, and marketing skills to the newly acquired entities. These are key areas that most lower middle-market companies do not have access to either because of lack of capital or lack of bandwidth to add to their operations.

Too often private equity firms are lambasted in the mainstream business press for acquiring then tearing apart operations via financial re-engineering. However, most of the firms that we deal with in the lower middle-market acquire companies for one simple reason: to help them grow and expand

If you are the owner of a lower middle-market company (typically a company with less than $100 million in revenue) and are profitable and growing, you may be surprised to learn that you could be a good add-on for an equity firm investing in your industry. Of course the first question that needs to be addressed is, are there equity firms operating in your space? Given the literally thousands of firms out there, the odds are good that there are one or many that are rolling up your industry.

To learn more about this interesting type of buyer and to learn about all buyer types (equity firms are only one slice of the pie), attend a Generational Equity M&A workshop. While there you will be exposed to a significant amount of information that will educate you and allow you to begin formulating your own exit strategy for the business you own.

To learn more, visit our website and take a look at the agenda for one of our meetings. If it looks interesting, call us at 972-232-1121 or fill out a contact form and one of our M&A associates will arrange for you to attend a meeting in your area.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

Make an informed decision

The best decisions in life are informed decisions. We release educational business insights like this every week. Subscribe to make sure you don’t miss the latest news, views and analysis.


Success, you have been added to our list.

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 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
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
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.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
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
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 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.
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 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 must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
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
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
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
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.
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
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.
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 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
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
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
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 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
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