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.
Analyzing possible synergies makes a critical difference when valuing add-ons. The most desirable add-ons can bring benefits like:
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 877-213-1792 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.
© 2015 Generational Equity, LLC. All Rights Reserved.
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.