Add-On Acquisitions

We arrange acquisition deals for private equity groups. Most of our deals are add-on acquisitions. That is, our buyers are already operating in a particular industry, and they have decided to grow in that industry via acquisition.

Typically, a PEG will first buy a large company within a particular industry, and then grow that company by acquiring smaller companies within that same industry. In private equity parlance, the large company acquisition is called a platform acquisition, and the smaller company acquisitions are called add-on acquisitions (or bolt-on acquisitions).

Smaller Acquisition Deals for Private Equity Buyers

Private equity groups are well known for acquiring large companies. Their deals, measuring in the hundred of millions and even billions of dollars, are regularly reported in the local and national business pages.

Less known is the fact that private equity groups make a lot more acquisitions of companies with sales under $10 million than of companies with sales over $100 million. The Wall Street Journal seldom reports on PEGs’ acquisition of $1MM or $2MM companies, but they are taking place quietly, on a regular basis.

Advantages To Selling Your Company To a PEG

There are lots of advantages to selling your company to a PEG. Here are a few of them:

Higher Valuation

• In the case of an add-on acquisition, PEGs often will pay more than other buyers, because an add-on acquisitions is a synergistic acquisition. That is, by combining the add-on with their existing platform company(s), they can make 2 + 2 = 5. They can take advantage of synergies like economies of scale, market clout, and more to justify a higher valuation.
• PEGs virtually all have an aggressive growth strategy and that strategy typically involves add-on acquisitions. Their whole reason for being and their investor mandate is to acquire companies. Simply put, they are under pressure to do what they are in business to do — buy companies.

Professional Deal Makers

• Because PEGs exist to buy companies, they are run by people who have a lot of acquisition experience. They know how to cut through a lot of the typical red tape and other time wasters involved in buying a business. They know what is and isn’t important and how to avoid getting caught up in details that tend to slow a deal down. PEGs will often issue a letter of intent within days of their first meeting with a seller.
• Buying companies is their business. Most buyers, including business owners pursuing a strategic acquisition, are not experts in the process and cannot devote full time to getting the deal done. This of course, stretches the time it takes to complete an acquisition. Private equity buyers, on the other hand, know the business buy/sell process and have the resources in place to consummate an acquisition deal. Running their business means making acquisitions.

Committed Funds

Most of the private equity groups that we deal with have committed funds for acquiring businesses. That is, investors have committed to provide funding up to a stated amount upon request. They have made their commitment in advance, in essence agreeing to accept the judgment of the PEG management for any acquisition it wants to make. Upon request of the PEG, they must send in a check for up to the amount they committed to within a short period, such as 30 day. This is a bit of an over-simplification, but as a practical matter it works as described. Note that not all PEGs have committed funds for acquisitions; we know the ones who do.