Private Equity Groups (PEGS) have become some of the most active acquirers of middle-market businesses. For over twenty years, the FBB Group has been exposing and selling its client companies to PEGs. Our first transaction with a PEG was a platform with EBITDA of over five million dollars. As the PEG business model developed and more PEGs came into existence, the size of the target company decreased, due to demand, in part due to the ‘add on’ strategy discussed in this month’s featured article.
About Add-On Acquisitions
PEGs may look at thousands of businesses every year, so it is important to know what appeals to each PEG, especially for add-on acquisitions, and be able to communicate with the PEG the benefit that the particular transaction brings to them. Due to our long-term relationship with many of the PEGs, we can often make a phone call to get on a PEG’s radar screen and increase the probability of getting a transaction completed.
Many small business owners automatically presume that their company is not large enough or attractive enough to be acquired by a Private Equity Group (PEG). The reality is that, in the right circumstances, it could be. While many PEGs do have size requirements for acquisitions that are beyond many small businesses, there is an increasing trend for them to dip into the lower end of the market looking for add-on companies that can be added to a larger, platform company already in their portfolio.
A platform company differs from an add-on company in that the platform company typically has developed management, administrative capabilities, and financial infrastructure that can support growth through acquisitions. These companies are usually much larger than add-ons and usually produce north of $3M EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
An add-on company is acquired by a PEG and added to a platform when there are synergies that can produce positive results for the PEG. The add-on may bring diversification of products, complementary services, or expansion of market share in a specific geographic region. Since the company would be added on to a platform, the add-on does not need to have a developed infrastructure and often does not need to meet any specific level of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or SDE (Seller’s Discretionary Earnings).
Add-on acquisitions are becoming increasingly more popular. According to PitchBook research, nearly 30% of PE (Private Equity) backed companies take on at least one add-on acquisition. More impressive is the fact that over half of all global acquisitions are now add-ons, and in the United States, add-ons account for over two-thirds of all buyouts. The research shows that PEGs that utilize a “buy and build” strategy generate superior returns, and this performance has led to some PEGs becoming prolific buyers. PitchBook found that 25% of add-ons are acquired by platforms that already have five or more add-ons.
Pitchbook.com – Additive Dealmaking
Pitchbook.com – Additive Dealmaking: Part II
Relationships and current knowledge are key factors in identifying businesses for potential add-on acquisitions. The FBB Group Ltd., has spent decades creating and maintaining relationships with PEGs, Search Funds, and independent buyers. We stay current with what these entities are looking for and constantly scan the market, identifying possible synergies and strategic partnerships. If you feel like your business may be a candidate for an add-on acquisition, please give us a call. We would be happy to discuss the possibilities.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
(originally posted in the October 2018 newsletter)