Why Add-Ons Are Popular in M&A

By Generational Equity


One of the most important questions you will face when selling your business is this: Who are the optimal buyers for my company?

The term “optimal” is key in the question above. Note I do not use terms like best, greatest, or premium. The term optimal means that in all facets of the transaction, both the process and the deal is optimal for you.

An optimal deal is much more than just getting your asking price for the company. It also means that the process getting there (negotiations and due diligence), the relationship you develop with the buyer as it relates to your company, and finally the deal structure is all optimal, again, for you.

So as you begin to consider buyers when you decide to sell your business, think about what you want in a transaction. If you want an immediate exit, then a strategic buyer is probably your best bet, possibly someone who already knows your industry. However, if you are interested in staying, and helping to grow your business, then an equity firm could make sense.

Too often business owners sacrifice an optimal deal with an equity firm not realizing that a partial sale, with equity retained, can often generate substantial returns down the road. Equity firms specialize in making large initial entries into an industry and then over time, grow them via “add-ons,” smaller acquisitions that are great synergistic fits with the platform company.

It is a great strategy for PE firms to follow because making ten $5 million acquisitions over 7-10 years is far more effective (and profitable) than making one $50 million deal and hoping it works out.

Add-ons have grown in popularity in the M&A industry as shown in the following chart from PitchBook, a leading research provider covering private equity:

Add-on % of US buyout activity

Add-ons continue to be a key strategy in the M&A industry, comprising 64% of all US-based buyouts in 2017 to date.

Add-Ons Popularity in M&A 2017

Source: 3Q 2017 US PE Breakdown

As the data reflects, over the past 7 years or so, add-ons have grown from 56% to 64% of all private equity transactions, meaning that the “add and grow” strategy has become very appealing, not only for buyers but also sellers when approaching M&A. Have a listen to what a few of our clients say about working with a PE firm post close:

The reality is that a partial sale scenario can be quite “optimal” for many of our clients looking to sell their company. It allows them to cash out part of the company, retain equity in the newly capitalized entity and most importantly, achieve an even greater return when the much larger entity is sold or taken public 5-7 years down the road.

So, the definition of an optimal exit strategy requires the combination of a number of factors, most importantly your personal and financial goals. Just as with fingerprints and snowflakes, no two of our clients are exactly alike in terms of long-term needs and goals.

For many, the dreams of moving on and doing charity work, starting another company, or simply spending time with the grandkids are most important. For others, the goal is to help grow the company to the next level and achieve the success unavailable due to a lack of capital under current management.

Our dealmakers are fantastic at spending time to understand not only the key factors driving your business, but also getting to know you as a client, your partners, spouse, and any other important players in the decision-making process. It is this attention to the personal side of the transaction that has made us so successful over the years. We understand that not only are finances important in deciding to sell a business, so too are the personal factors.

To sum up, as you think about buyers, take stock of where you are in your personal and professional journey. Think about where you want to be in five years and determine who the optimal buyer might be to help you get there.

And if you need help getting started, we offer educational M&A conferences that are designed to answer many of your initial questions about how and when to exit your business for maximum value. You will gain so much by investing just a few hours in attending. To learn more, use the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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