An add-on acquisition refers to a strategic investment made by a company to expand its existing operations, product portfolio, or market presence by acquiring another company that complements its core business.
This kind of strategy can go by many names, sometimes buy and build, roll-up strategies (roll-ups) or bolt-in acquisitions (bolt-ins) are typically synonyms for add-ons where the acquiring company purchases a smaller company. This kind of M&A strategy is used by firms or companies in fragmented industries looking to create value through several, small acquisitions.
The primary objective? Leverage the synergies between the acquiring and add-on companies to create greater value than either company could achieve independently.
The buy and build strategy is becoming more and more popular with dealmakers. According to Bain’s 2023 Private Equity Report, add-ons made up 72% of North American buyout transactions in 2022.
By acquiring a company that possesses complementary products, services, technologies, or customer bases, the parent (or platform) company aims to strengthen its competitive position and accelerate growth.
Add-on acquisitions are typically pursued by companies that have already established a strong market presence or possess a significant customer base.
When executing an add-on acquisition, the acquiring company will likely integrate the operations of the add-on company into its existing structure by aligning management, streamlining processes, and eliminating redundancies. After the integration process is complete, they can optimize cross-selling opportunities, increase market penetration, and expand their customer base.
The 5 Advantages of Add-ons
There are several advantages to an add-on strategy. First and foremost, higher returns. This is particularly important to PE firms who need to generate returns for their LPs. But for corporate development teams looking to expand their market presence, the advantages of add-ons are crucial to reaching aggressive growth.
“As the predominant open source Java vendor, we’re always looking for ways to expand market share and complement our existing product lines. Acquisition of the right company is a viable strategy to achieve those goals. It’s all about strategy, structure, and fit.” - George Gould, SVP of Corporate Development at Azul.
Add-ons Create Higher Returns
At the heart of any investment lies the expectation of financial returns. Add-on strategies can bring in higher returns for both financial sponsors and strategic corporates.
For example, purchasing 5 $10 million with 3.4x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) can be a considerably lower valuation cost than 1 $50 million company. The lower cost upfront means that the synergies, increased market share, cost savings, and revenue growth that result from the acquisition can enhance profitability and create long-term value.
Add-ons Speed up Market Expansion
Launching new products or entering new markets from scratch can be a time-consuming process. Add-on acquisitions offer a shortcut to faster growth and reduced time-to-market.
By acquiring a complementary business, companies can swiftly expand their offerings, tap into established customer bases, and leverage existing brand equity. With these new resources, companies can expand into new markets quickly.
Add-ons Mitigate Risk
Diversification is a key pillar of a robust portfolio strategy. Add-on acquisitions allow companies to diversify their product or service offerings, reducing reliance on a single market segment. By integrating a complementary business, companies can mitigate risks associated with market fluctuations or changing consumer preferences, ensuring stability and long-term sustainability.
In June 2023, Nevin Raj, Grata’s co-founder and COO predicted:
Deals are getting smaller and less macroeconomic sensitive. “Rollups” and “tuck-ins” (collectively, “add-ons”) are the new strategy of choice for PE and corp dev, which lead to smaller deals. While deal leverage has risen over the last decade, smaller deals (<$100M) have less debt according to GF Data. Deals under $50M TEV average debt 3.4-3.6x EBITDA compared to deals >$50M TEV averaging 3.8-4.4x EBITDA. Add-on deals are less financially engineered and therefore less sensitive to interest rate hikes.
The purchase of add-on companies are easier to leverage and they diversify portfolios. Both of these factors mitigate financial risk for the firm or platform company.
Add-ons Promote Cross-Selling Opportunities
We’ve focused on the benefits for the firm or platform company, but add-on acquisitions provide benefits to the add-on company as well.
By becoming part of a larger organization, the add-on company can gain access to greater resources, increased financial stability, and a broader customer base. Moreover, the add-on company may benefit from the expertise, infrastructure, and support of the acquiring company, enabling it to scale its operations and realize its growth potential more effectively.
When two complementary companies come together, cross-selling opportunities abound. This synergy ideally results in increased sales, expanded market share, and a strengthened customer relationship, driving overall business growth.
Add-ons Boost Talent Acquisition
In a talent-driven economy, acquiring skilled employees and experienced management teams is invaluable. Add-on acquisitions provide companies with a unique opportunity to tap into a new pool of talent. By integrating the add-on company, the acquiring organization gains access to a wealth of knowledge, expertise, and fresh perspectives, fostering innovation and accelerating growth.
This infusion of resources and expertise allows companies to differentiate their offerings, outperform competitors, and solidify their market position.
How to Identify the Right Add-on Opportunities
By strategically integrating a complementary business, companies can propel their growth trajectory. You’ve made it this far into the article, so you must be considering an add-on strategy. The next question you’re likely asking: How do you find the right companies to implement an add-on strategy?
You need the right technology.
A deal sourcing platform like Grata will help to quickly:
- Find a private company’s revenue estimates. You can do this through painstaking scrolling or have the information you need easily displayed in a company’s profile.
- Identify middle market companies by industry (particularly niche industries like software-enabled companies that could be easily expanded on to achieve the platform companies’ inorganic growth goals)
- Set automated alerts for companies that fall into your criteria.
To uncover those smaller bolt-on companies you need to be searching the middle market, companies that have been notoriously hard to find. Until now.
Uncover More Companies with Grata
Grata unifies complex business development workflows into a single solution that helps you find, research, and engage with the middle market. Powering over $400B of AUM and backed by deep search technology, Grata is built for proactive dealmakers who want a competitive edge. Set up a demo today.
