Add-Ons Flourish in Middle Market M&A

By Generational Equity


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:

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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.

The good news is that Generational and its team of top-rated deal makers is here to help!

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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