Monthly Update – October 2018 Add-On Acquisitions
Featured Clients this issue:
**Details of each client below article
– B2B Specialty Equipment Service Business #1618
– Pair of Highly Profitable Fitness Centers #318 & 418
– Servicing Restaurant Equipment #2017
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 ad on strategy discussed in this month’s featured article. 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.
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Ronald V. Chernak
Inspiring business relationships since 1982!
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 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.
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.
This RELOCATABLE value-added company provides custom park and playground equipment from around the world. Located in the Rocky Mountain Region and having a focus on fun, creativity, and safety, this business services landscape architects, general contractors/developers, parks departments, amusement parks, schools, child care centers, and HOAs…not individual homeowners. Backlog of $2.4+M. Steady growth of sales and profits.
Pair of Highly Profitable Fitness Centers #318 & #418
These two well established, non-franchise fitness centers have demonstrated increased profitability year after year. Location #1 opened its doors in early 2009, became profitable very quickly, and continues to consistently generate good cash flow. Location #2 opened its doors a few years later, has been profitable the last three years, and has plenty of room for growth. Both locations have well-trained managers and staff already in place taking care of the daily operations. The management team prides itself in having a clean and friendly environment, which explains the high use and membership retention rates. The asking price reflected below is for both locations, but the sellers will entertain the sale of each location separately.
This Metro Denver company provides services for restaurant commercial equipment, including refrigeration, Hot Side equipment, HVAC, Hood and MUA, along with plumbing and electrical services. The company does only commercial service and maintenance work, which provides consistent recurring revenue. There are over 180 clients. Gross Sales and Seller’s Discretionary Earnings have nearly doubled over the past three years, and they continue to grow. The company should appeal to: 1) a buyer already in the construction industry; 2) a buyer in a related field, such as plumbing, HVAC, or electrical contracting; or 3) an experienced business person. No construction-related licenses are required.