A bolt-on acquisition (also known as an “add-on” or “follow-on”) is the acquisition of a typically smaller company in a similar line of business as a larger platform company. This approach is typically employed by private equity funds with a “buy-and-build” strategy. PitchBook reports a significant increase in North American PE-backed add-ons over the past decade, from 1,277 transactions in 2010 to 3,169 in 2019. As a result of the COVID-19 pandemic, this trend has become even more pronounced – add-on deals accounted for over 70% of all buyouts in the first two quarters of 2020.
Private equity firms and other financial buyers have found that a buy-and-build strategy is attractive for many reasons. First, EBITDA multiple expansion can be realized, as companies that alone are smaller and have less diverse customer bases, geographic footprints, or revenue streams can be combined and sold at a premium valuation above what they were each individually acquired for. After centralizing administrative functions, cross-selling to customers with new, complementary products or services, and implementing operational best-practices across all bolt-on entities, the consolidated entity can rapidly grow EBITDA and margins.
If you’re interested in selling your business, partnering with a PE-backed company as an add-on can provide access to capital and an expanded network of industry experts to help the company experience tremendous growth. This growth, paired with potential rollover capital can end up being a very lucrative “second bite of the apple” in the sale of the consolidated entity.