By Scott Bushkie

Private equity firms account for a substantial amount of action in the Merger and Acquisition market.  Currently, these companies have an estimated $500 billion in ready cash they need to invest. If you have a business on the market and are being courted by a private equity firm, it might be helpful to know they make two types of purchases: platform and add-on acquisitions.

A platform deal is going to be a new industry for the private equity firm—essentially a foundational operation they will continue to develop through both organic growth and “add-on” or “bolt-on” acquisitions. Most times, for a private equity group to make a platform purchase, the acquisition target has to be doing at least $10 million to $20 million in sales and at least $2 million in EBITDA. When a private equity group makes an add-on purchase, on the other hand, it’s more of a strategic play because they already own at least one company in that industry. They add smaller companies to the platform in order to expedite top line and bottom line growth, making the company more profitable and more attractive to the next purchaser.

By growing a company from a $2 million EBITDA to a $6 million EBITDA through both organic growth and acquisition, the private equity firm will typically get a significantly higher multiple for the entire entity than they paid for each company alone. The International Business Brokers Association and the M&A Source, with support of Pepperdine University, have begun tracking private equity platform and add-on purchases as part of its quarterly market pulse report.

In the third quarter this year, national members reported that private equity purchases were almost nonexistent until opportunities reached $5 million in value. In that study, private equity dominated lower middle market purchases of $5 million and above, at 68 percent of deals closed.  Of those, nearly all were add-on acquisitions. At Cornerstone, we’ve sold both platform and add-on acquisitions and are currently in due diligence for a platform deal.  But we can see from both the study and experience that most companies in the lower middle market will be add-on acquisitions.

From a seller standpoint, this helps you understand that the private equity firm will be making a more strategic play for your business, rather than looking at it from a financial standpoint.  That impacts both positioning and value. Also, if you are being purchased as a platform company, you can usually expect a longer transition time.  The private equity buyers will want you to stay around longer to transfer your knowledge and contacts to a new leader or in many cases to leave some equity in the deal and get a second bite at the apple four to five years down the road.  If you want to get out of the business sooner, you’ll have better chances as an add-on acquisition.

Scott Bushkie is Principal of Cornerstone Business Services. To request a book (at no cost) with advice on the exit planning process, contact Scott at (888) 829.9061 or [email protected]

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.