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Platform versus Bolt-on Acquisitions

When the owners of a business are considering an exit, one standard avenue they look to explore is private equity (“PE”). Alongside trade buyers, PE has emerged globally as a leading buyer of established businesses.

For a deeper dive into PE, click here.

One important consideration when thinking about PE as a potential buyer of a particular business is the distinction between a platform versus a “bolt-on” acquisition. Whether a seller’s business has the potential to serve as a platform investment for a PE firm as opposed to a bolt-in is a very important starting point.

Platform Investments

A platform investment represents a PE fund’s first or foundation investment in a new investment thesis. For example, a PE firm might decide after detailed industry research that genetic screening represents an attractive area for future investment. That is the PE firm’s investment thesis.

The firm’s first investment based on this new thesis – its platform investment – will need to have a minimum level of scale to justify making that initial investment. The exact size of that investment will vary between firms, but the investment will nevertheless need to meet that firm’s internal benchmarks.

So, why is having a platform investment important?

First, PE firms make money by earning returns on their investors’ capital. Therefore, in order to earn meaningful returns, they need to have sufficient amounts of capital allocated to a particular investment thesis.

For example, let’s say that a PE firm has decided to follow through on its genetic screening investment thesis. Clearly, the firm will want to invest sufficient capital so that if their thesis proves correct, they will receive a meaningful return in the context of their portfolio. In other words, earning a 100% return on $1.0m is less attractive to the firm than earning, say, a 25% return on $100m.

So, when considering a platform investment, a PE firm must always ensure that their first investment gets sufficient capital into the market to ensure they have a chance of earning a meaningful future return. They cannot risk getting “stuck” with a small investment and never being able to get sufficient capital behind the thesis.

Second, a platform investment provides the framework that will allow for future growth – whether that growth is through acquisition or is organic. A platform investment will typically have the management systems, the leadership personnel, the brand and so on under which future acquisitions or organic growth will take place.

Typically, a business needs to be of a certain scale before it is sufficiently robust and has the systems and other attributes needed to serve as a platform investment. Smaller businesses will invariably tend to buckle or flounder when used in that way.

For a business owner looking to exit via PE, it is important to genuinely assess whether the business has the attributes of being a platform investment: is it of sufficient size and sophistication to represent a new, stand-alone platform investment for a PE firm?

Bolt-on Acquisitions

Many businesses do not meet that threshold of representing a potential platform investment. That does not necessarily mean that they may still not be an attractive target for PE. However, rather than a platform investment, they may be a bolt-on opportunity.

As the name suggests, a bolt-on is a business that can be acquired and added or “bolted on” to an existing platform investment. Clearly, for a business to be relevant to an existing platform, it needs to be in the same broad industry or be otherwise relevant to the existing platform. In many ways, these are the same broad criteria that will attract a trade buyer.

First, the potential bolt-on could simply add market share to the platform. When a PE firm invests in a new thesis, it has from the very start a clear focus on its eventual exit. Central to that is a target of how large the platform needs to become before it can be either listed or on-sold to another industry player. Therefore, a potential bolt-on will be attractive if it adds revenue, and particularly EBITDA, to the existing platform.

Second, a potential bolt-on may offer the platform attributes that it does not already have. This may be a new geography or product or customer or skillset. The key point is that the bolt-on is bringing something new to the platform, which with its superior financial resources and other strengths, will look to leverage even more effectively into the future.

It is worth making a couple of points in relation to bolt-on acquisitions.

When looking to “pitch” a potential bolt-on to a platform investment, it is important to consider and emphasise where the potential synergies may be. Many smaller businesses often have “prize” clients or specialist skillsets that are particularly relevant to larger businesses. Knowing what they are and being able to demonstrate the relevant value is very useful when pitching a bolt-on acquisition.

Another aspect to consider is that PE firms typically have fairly prescriptive valuation metrics that they are prepared to ascribe to a bolt-on acquisition. While a PE firm may be prepared a higher multiple in particular circumstances, most bolt-on acquisitions will tend to be completed within a relatively narrow band of multiples.

If you would like to discuss how CFSG may be able to assist you in planning for a business sale, please don’t hesitate to contact us.

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