• Michael Shaw

The Ins and Outs of Add-Ons

The portfolio companies of private equity firms and family offices should consider supplementing organic growth by acquiring and consolidating another entity into existing operations.

These “add-on” transactions can be excellent deals for both buyers and sellers and, by some estimates, make up half of all PE-backed M&A. In an environment marked by high valuations, this sort of “buy-and-build” strategy is becoming even more popular.

While there are unique factors to consider in these complex deals, recognizing the right opportunities and executing carefully can lead to successful outcomes.

When to Add-On

The deal participants in an add-on transaction generally include:

  • Platform: The buyer, a portfolio company meant to stand on its own.

  • Add-on: The seller, to be acquired and rolled into the operations of a larger platform company.

So, why would a private equity firm or family office pursue an add-on?

First, it can help drive down the average multiple of a platform business. If, for example, a professional investment firm paid 10x EBITDA for a platform business, that firm could increase overall return to investors by paying only 6x EBITDA for an add-on that is accretive to the purchase multiple.

Add-ons can also be strategic in nature. Although a platform company already has management and infrastructure in place, add-ons may provide:

  • New or diverse set of products and/or services

  • Expanded geographic area

  • Complementary customer base

  • Economies of scale

Because add-ons can be completed relatively quickly, they can be less expensive than starting a new business line or starting a de novo location.

For sellers, which usually are considerably smaller (making them easier to fold into existing operations), add-on transactions can deliver much-needed scale. Add-on entities should always understand why the buyer is interested, how they will be consolidated into the platform, and the plan for growing the combined entities.

At Copper Run, we like to ensure that a target company understands who our client is and what they bring to the table from a value perspective. This helps to shape expectations, which can be particularly important when a buyer is competing against other potential buyers in the marketplace.

Executing Add-Ons

Although add-on deals can be completed in as little as 45 days, in-depth due diligence is absolutely critical to completing these deals. Private equity firms and family offices may rely on their platform companies to evaluate add-on opportunities for strategic benefits, cost synergies and overall cultural fit, but this is also where advisors are key.

The most successful acquirers know what they are targeting and know how to seamlessly integrate these add-ons. It is best to have a highly tailored approach, using industry-specific knowledge to build a target list from scratch. At Copper Run, we look to differentiate our buy-side clients in terms of how they might structure a deal, making them more appealing to add-on targets.

Add-ons are a great way to enhance growth, and we encourage both buyers and sellers to weigh their options and consider the strategy.

Michael Shaw is a Partner and Managing Director at Copper Run. He specializes in both buy side and sell side assignments.

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