Add-On Strategy – A Common Method for Growth

By Generational Equity


Loyal readers of this column know that from time to time we like to highlight specific deals that have recently closed. We do this when the completed transaction has some specific features that you might find of interest.

In this case, the deal that caught our attention was the announcement last month that Boot Barn acquired RCC Western Stores (RCC). The deal included not only RCC’s 29 retail locations but also its website and brand.

The synergies of the deal are clearly apparent. Boot Barn’s retail operations are located largely in the western half of the U.S., and RCC has a strong retail presence in the Midwest and the South. Combining Boot Barn’s 85 locations with RCC’s 29 now creates, according to the press release, “the largest specialty retailer in the industry, with stores coast-to-coast.”

The transaction was announced on Aug. 8, 2012. The most interesting facet of this deal though is that Boot Barn was itself acquired by Freeman Spogli & Co., a leading middle-market private equity firm, in December of 2011.

This is how Brad Brutocao, General Partner of Freeman Spogli, described the transaction last December:

"Patrick Meany and the entire Boot Barn team have done a fantastic job establishing Boot Barn as the leading destination for authentic western and work wear. Boot Barn's customers value the company's broad selection, strong customer service and convenient shopping options both in stores and online. We are pleased to become a long-term investor in the company and look forward to helping Boot Barn continue its growth."

Platform Acquisitions Lead to Add-Ons

I highlighted the last segment of that paragraph on purpose. We are hearing lots of noise right now about how evil equity firms are and how they acquire companies simply to saddle them with loads of debt and/or sell off the assets.

Although some equity firms that specialize in billion-dollar deals have learned the hard way how excessive debt can destroy a great investment, firms that specialize in the middle-market, like Freeman Spogli, acquire companies to help them grow.

They don’t do this for altruistic reasons. Their focus is on generating an ample return for their investors. And the best way to do this is to acquire a platform company like Boot Barn and then “add on” to it by making additional synergistic acquisitions during the ensuing years.

Hundreds, if not thousands of equity firms located in North America are using this strategy today. Quite often, because of the relatively small size of the deals, most of these transactions fly under the radar.

In fact, there are probably equity firms creating platforms in your industry right now, and you are unaware of it!

A Second Bite of the Apple

There is one more point that we would like to make about the Freeman Spogli acquisition of Boot Barn. According to the press release at the time:

“The existing management team, led by Patrick Meany, will continue to manage and operate the business.”

What does this mean? It tells us that Boot Barn’s existing ownership and management team participated in this sale by retaining a partial interest in the business. This will allow them to participate in a secondary liquidity event when the new, larger entity is sold or taken public in a few years.

This creates a win-win for both the equity firm and the management of Boot Barn. Freeman Spogli gets access to industry experts to grow the business and Boot Barn gains a financial and marketing partner to help it grow and achieve its goals.

Again, this is just one example in one industry of this in action. Generational Equity is in contact with hundreds of buyers across North America that are exercising the same roll-up, add-on strategy. It most likely is occurring at some level in your industry.

If you have great ideas on how to grow your business but lack the capital and the financial know-how to achieve them, you should attend one of Generational Equity’s no-obligation M&A workshops. While there you will learn about how you too can effectively manage your M&A process and find optimal buyers for your business.

No matter what, if you need investment partners, keep equity firms in mind. They have capital to burn and are pursuing add-on acquisitions like never before. In fact, according to many estimates, nearly half of all acquisitions now completed by equity firms are add-ons. So keep that in mind as you look at your expansion plans.

© 2012 Generational Equity, LLC All Rights Reserved