As a business owner, you know that continued growth is crucial to the long-term success of your company. One strategy that can help you achieve this growth is an add-on acquisition.
In this post, I’ll walk through what an add-on acquisition is, the different types of add-on acquisitions, and how you can add them to your original platform company.
Let’s dive in.
What is an add-on acquisition?
An add-on acquisition is a strategy where a company acquires another business that complements its existing operations. This acquisition can help the acquiring company grow its market share, diversify its products or services, and enhance its operational capabilities.
In other words, it’s a way for companies to grow by acquiring businesses that will help them achieve their strategic goals.
One of the key benefits of an add-on acquisition is that it allows companies to expand quickly and efficiently. Instead of trying to build new products or services from scratch or enter new markets on their own, you can acquire a company that has already established itself in those areas. You’ll see this strategy commonly used within private equity firms to grow fast and improve platform company value.
What are platform companies?
Platform companies refer to businesses that serve as a foundation for further acquisitions and growth within a specific industry or market sector. Private equity firms may acquire a platform company with the intention of using it as a base for building a larger, more diversified portfolio of companies through add-on acquisitions.
For example, a private equity firm may acquire a platform company in the healthcare sector, such as a hospital or healthcare services provider. The private equity group may then use platform investments as a foundation for acquiring additional healthcare businesses, such as clinics or specialized medical practices, to create a larger healthcare services platform.
The goal is to create a more valuable and integrated business by combining your platform company with strategically selected add-on acquisitions.
What is the difference between an add-on and bolt-on acquisition?
An add-on acquisition and bolt-on acquisition are similar concepts, but there is a slight difference.
An add-on acquisition is a strategic move by a company to acquire a smaller firm that operates in a related business. The acquired company is then integrated into the acquiring company’s operations to enhance its existing capabilities, broaden its customer base, or enter new markets. Add-on acquisitions are usually smaller in size and can be completed relatively quickly.
On the other hand, a bolt-on acquisition involves the acquisition of a smaller firm that is not directly related to the acquiring company’s core business. The acquired company operates independently and is managed separately from the acquiring company.
The purpose of a bolt-on acquisition is to diversify the acquiring company’s portfolio by investing in a company with a different set of products, services, or customers.
Types of acquisitions
Add-on strategies can take many forms to improve your larger platform company – let’s walk through a handful:
- Vertical add-on acquisition: the acquiring company purchases a supplier or distributor of goods or services that is part of its value chain. This type of acquisition can help the acquiring company control the supply chain and reduce costs.
- Horizontal add-on acquisition: the acquiring company purchases a competitor or a company that operates in the same industry. The purpose of this type of acquisition is to expand the acquiring company’s market share, eliminate competition, and enhance its product or service offerings.
- Geographical add-on acquisition: the acquiring company purchases a company that operates in a different geographic region. This type of acquisition can help the acquiring company expand its customer base, enter new markets, and diversify its operations.
- Product or service add-on acquisition: the acquiring company purchases a company that offers complementary products or services. This type of acquisition can help the acquiring company enhance its existing offerings and cross-sell to its customer base.
- Talent or technology add-on acquisition: the acquiring company purchases a company that has specialized talent or technology that can help the acquiring company improve its operations or develop new products.
- Customer-base add-ons: involves acquiring a company with a similar customer base, which can help the acquiring company increase its market share.
- Capability add-ons: involves acquiring a company with a unique capability or technology that can enhance the acquiring company’s operations.
Advantages of add-on acquisitions
There are several advantages to using add-ons to grow your existing business, including:
- Reduced risk: Add-on acquisitions are less risky than starting a new business from scratch because the acquiring company already has a proven track record. By acquiring companies in related but distinct markets, you can create a more robust and resilient business that is less vulnerable to changes in the economy or industry. For example, if you own a construction company, you could acquire a design firm, a project management company, or a building materials supplier to create a more comprehensive offering and reduce your dependence on any one area.
- Faster growth: Add-on acquisitions can help a company grow faster than relying solely on organic growth because it allows the company to enter new markets and diversify its offerings quickly. Rather than trying to grow your business organically or through the costly and time-consuming process of launching new products or services, you can simply acquire a complementary business that already has a customer base, expertise, and established operations.
- Acquire talent, expertise, and technology: By acquiring companies with specialized skills or innovative technologies, you can enhance your own operations and stay ahead of the competition. You can also acquire a team of experienced professionals who can help you execute on your vision and drive growth.
- Gain access to new markets: If you acquire a company that operates in a different region or serves a different demographic than your own, you can quickly expand your customer base and increase your market share. This can be particularly valuable for businesses that have hit a ceiling in their existing markets or are facing increased competition.
- Increased efficiency: Add-on acquisitions can help a company increase its efficiency by leveraging the acquired company’s resources, capabilities, and expertise.
- Competitive advantage: Add-on acquisitions can give a company a competitive advantage by acquiring complementary products or services, a new customer base, or unique technology.
6 strategies to grow with add on companies
Let’s make this actionable and transition into what this means for you.
What types of businesses would make sense to acquire for your company? It might seem like there are an infinite number of possibilities…where do you start?
I’m going to lay out 6 categories of potential options for add on companies and recommend that you treat this as a brainstorming exercise.
Identifying add-on targets
The key is to think strategically and look to uncover the best adjacency opportunities for your particular situation.
It’s important to get clarity and focus on what will give you the greatest leverage.
When going through this process I want you to answer these 2 questions:
- Where area of your business is weakest and needs improvement?
- What is the missing piece for your next stage of growth?
Depending on your answer, there are six categories of bolt-on acquisitions that can grow the value of your business.
Which will help you the most? What you pick will lead you to what you should consider acquiring.
- Increase Market Share
- Increase Number of Leads
- Strengthen Team / Infrastructure
- Improve Average Order Value (AOV) and Lifetime Customer Value (LCV)
- Boost Innovation or Capabilities
- Increase Profit Margins
Let’s dig into each category:
Want to Increase Market Share?
- Acquire a Competitor: think about indirect and direct competitors to your business. This type of acquisition can help to quickly expand your customer base or geographical reach. Think about any companies that would complement your existing customer base.
- Examples: competitors in similar or different geographies, any substitute or replacement offerings in the market
Want to Increase Your Number of Leads?
- Acquire Media: everyone who aggregates the attention of your ideal clients would be an ideal acquisition opportunity (this could be a company or traffic asset that exposes you to new customers)
- Examples: print publications, digital media, TV broadcasting, email lists, podcasts, Facebook groups, blogs
Want to Strengthen Your Team or Infrastructure?
- Acquire Talent: think about other companies with employees who have expertise or skills that complement your existing workforce. This type of acquisition can quickly expand your pool of talent and expertise.
- Think about any teams and expertise that would help you: sales, marketing, R&D, engineering, marketing etc. Instead of starting these functional areas from scratch, you can acquire a fully formed team and simply plug them in to your existing operation.
Want to Improve Average Order Value (AOV) and Lifetime Customer Value (LCV)?
- Acquire a Product Vendor: any company currently providing products to your business or your customers. Think about product lines which can complement your existing product offerings. This type of acquisition can help to expand your product offerings and potentially tap into new markets.
- Acquire a Service Vendor: any company currently providing services to your core business or their customers is another prospective acquisition.
- Think about anything related to what you sell already which can help your current customers. Examples include an upsell, downsell, cross-sell, any types of substitute products/services, or a less expensive version of your existing offering.
- Can you use acquisitions to strengthen your MRR (monthly recurring revenue) using repeating services, auto-ship, or subscriptions?
Want to Boost Innovation or Capabilities?
- Acquire Intellectual Property (IP): this could include customer lists, patents, inventions, trademarks, licensing or standard operating procedures
- Acquire Technology: think about potential technology platforms that would complement your existing technology offerings. This type of acquisition can help to expand your technology capabilities and potentially tap into new markets.
Want to Increase Margins?
- Acquire a Supplier or Distributor: think about which target company’s supplier and distributor relationships complement your existing relationships. This type of acquisition can help to strengthen your current supply chain.
- Think about anyone you currently purchase from or any distribution channels your business or customers use. Are there any middlemen currently cutting into your margins?
Keep in mind that each of these categories will uncover dozens of potential businesses you can acquire.
Conclusion
Acquisition is a great way to expand your capabilities, gain access to new customers and markets, increase profit margins, and unlock innovative products and technologies. As you identify potential acquisition opportunities, assess each one carefully against the goals of your broader business strategy.
Doing so can help ensure that each acquisition supports your company’s overall success.
If you’re looking for additional guidance in buying businesses, I’d recommend getting in touch with a qualified M&A advisor.
Good luck!
