Bolt On Acquisitions: 6 Little Known Secrets to External Growth 

In this post, we’re going to cover how you can use bolt on acquisitions to massively boost the value of your business with external growth.

Many small businesses face a dilemma when it comes to growth. They can either pursue organic growth, which typically requires a significant investment of time and resources, or they can pursue growth through acquisition. While both options have their advantages, I’m going to make a case why pursuing growth through acquisition can be a more attractive option.

While organic growth may be the only option you’ve considered in the past, a bolt on acquisition can offer a number of significant benefits that make it worth pursuing.

Here’s the punchline: there is no faster way to grow than by buying adjacent businesses that support your core business. If you currently have revenues of $5M per year and acquire a competitor with $5M in revenue, you can effectively double the size of your business overnight. 

We’ll start with why you should consider growth through acquisition, explain how bolt on acquisitions work, and provide actionable steps for you to implement within your own business.

If there was ever a way to shortcut the growth curve, this is it.  

Let’s get started. 

Why Pursue Growth Through Acquisition?

While small business owners may initially be hesitant to pursue growth through acquisition, there are quite a few reasons that make it an attractive option.

First of all, being an acquiring company often provides a faster, more efficient way to grow a company compared to organic growth. Private equity firms use this proven method frequently, but it’s available for companies of any size.

Here are a few advantages of a bolt acquisition:

• Provide a ready-made customer base, which can help to quickly drive revenue growth
• Offer the opportunity to quickly expand into new markets and extend the geographic reach of existing products and services (or into a new industry)
• Increase scale and market presence
• Provide access to new technologies or capabilities
• Provide an opportunity for financial leverage, which can help boost shareholder value
• Can help businesses consolidate fragmented industries
• Bring together complementary teams and expertise, allowing small businesses to tap into new areas of knowledge and expertise
• Finally, bolt ons can also lead to greater economies of scale, which can help businesses to reduce costs and compete more effectively

Another appealing reason to consider being an acquiring company are the macroeconomic trends:

1. 4.5 Million Businesses worth $10T will transition over the next 10 years – Exit Planning Institute
2. 10,000 baby boomers retire on average each day, with 19% of them owning small businesses. This represents the greatest wealth transfer in history of the US – Forbes
3. 80% of businesses don’t sell (LinkedIn). Many of these owners would likely be willing to sell for an affordable price instead of just closing their doors.

To sum it up, there are quite a few potential benefits for small businesses to pursue growth through acquisition. When done thoughtfully, it can be an excellent way to build a successful and sustainable business in a relatively short period of time.

Types of M&A: What is a Bolt On Acquisition?

A bolt on acquisition is an acquisition of a company that is complementary to the acquirer’s business. The main purpose of a bolt on acquisition is to extend the buyer’s product or service offering into a new market or to fill a gap in the current offering.

For example, a company that manufactures cars might acquire smaller companies that produce car parts. The benefits of a bolt on acquisition include the fact that it can be easier to integrate the acquired business, since it is already in the same industry. 

A bolt on acquisition is typically smaller than other types of acquisitions, such as a merger or an acquisition of a major competitor. The advantage of a bolt on acquisition vs. other types of acquisition is that they are typically less risky with a simpler integration process because they are complementary to the acquirer’s existing business.

Bolt on acquisitions can also be a good way for a company to grow without having to make a major investment or take on a lot of debt.

Examples of Bolt On Acquisitions

As mentioned above, bolt-on acquisitions can be an effective way for companies to expand their businesses without having to build new products or services from scratch.

One example of a bolt on acquisition: a company that makes software for accounting firms might buy a company that makes tax preparation software. The two companies would be complementary because they both serve the same customer base.

To provide some real life examples, let’s run through five large scale bolt-on acquisitions that you’ll probably recognize. For each, you’ll quickly see what capabilities and advantages the larger company was looking to acquire from the smaller businesses.

1. Google’s acquisition of YouTube in 2006 for $1.65 billion

This was a watershed event not only for the search giant, but also for the entire online video space. The deal solidified Google’s position as the top player in the burgeoning market and signaled to other companies that online video was a space to be reckoned with.

Since then, Google has continued to invest heavily in YouTube, pouring money into improving the site’s infrastructure and content offerings. This has paid off handsomely, with YouTube now boasting over 2.6 billion monthly active users and generating billions of dollars in advertising revenue each year. While YouTube is no longer the only game in town when it comes to online video, it remains the clear leader, thanks in large part to Google’s continued investment.

2. Microsoft’s acquisition of Skype in 2011 for $8.5 billion

This was Microsoft’s largest ever acquisition at the time. The purchase of Skype was widely seen as a move by Microsoft to gain a foothold in the new market for internet-based voice and video communications. The bolt on acquisition also gave Microsoft access to Skype’s large base of users, which was around 660 million at the time of the acquisition.

Microsoft has since integrated Skype into a number of its products and services, including Outlook, Office, and Bing. The company has also made a number of changes to Skype’s pricing and features in an effort to make it more competitive with other messaging and calling apps such as WhatsApp and FaceTime.

3. Facebook’s acquisition of WhatsApp in 2014 for $19 billion

In 2014, Facebook announced that it would be acquiring the popular messaging app WhatsApp for $19 billion. The acquisition was seen as a way for Facebook to tap into the fast-growing market of mobile messaging, and it made WhatsApp one of the most valuable startups in the world.

Since then, WhatsApp has continued to grow in popularity, with over 1.5 billion monthly active users as of 2018. The app has also been integrated with Facebook’s other messaging platforms, such as Messenger and Instagram.

4. Oracle’s acquisition of Sun Microsystems in 2010 for $7.4 billion

The acquisition was widely seen as a direct response to the growing popularity of open source software, particularly the Linux operating system. Sun was a leading proponent of open source software and had developed several popular products, including the Java programming language, the MySQL database, and the Solaris operating system.

With the acquisition of Sun, Oracle became one of the largest providers of open source software in the world. The company has continued to invest in open source projects and now offers a wide range of products and services based on open source technologies.

5. Amazon’s acquisition of Whole Foods in 2017 for $13.7 billion

This was the tech giant’s largest ever purchase up to that point. The move was seen as a way for Amazon to get a stronger foothold in the grocery business.

This bolt on acquisition caused a stir in the industry, with some analysts saying it would put pressure on other grocers to lower prices and improve their online offerings. Whole Foods has also been working to make its stores more appealing to a wider range of shoppers, including those who are looking for more affordable options.

6 Categories of Bolt On Acquisitions: Your External Growth Strategy

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 and recommend that you treat this as a brainstorming exercise.

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:

1. Where area of your business is weakest and needs improvement?
2. 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.

1. Increase Market Share
2. Increase Number of Leads
3. Strengthen Team / Infrastructure
4. Improve Average Order Value (AOV) and Lifetime Customer Value (LCV)
5. Boost Innovation or Capabilities
6. 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.

Next Steps

As you work through the brainstorming exercise, I’d encourage you to take your time.

You’ll want to cycle through this process a few times to think about what will be most impactful for your existing business or PE firm.

I hope I’ve convinced you by this point that bolt-on acquisitions can be a great way to increase the value of your business and is a lower cost option than building from scratch.

By acquiring complementary companies, you can create all sorts of other benefits: expand your product offerings, technology capabilities, geographical reach, or talent pool.

To wrap up, here are a few key things to remember when as you create your strategic plan for bolt on acquisitions:

1. Know your goals and objectives: what does your ideal acquisition look like? What business functions or capabilities are you trying to strengthen? This will help you to identify the right type of company to pursue.

2. Do your homework: research potential companies thoroughly before making any decisions. In addition to reviewing their financials, take the time to understand their culture, operations, and team.

3. Have a solid plan in place: acquisitions can be complex, so it’s important to have a clear plan from start to finish so both companies benefit.

4. Be prepared to act fast: once you’ve found the right company, it’s important to move quickly. The best companies are often snapped up quickly, so you need to be ready to make an offer when the time is right.

If you keep these things in mind, you’ll be well on your way to making a successful acquisition that will help to take your business to the next level.

As you get started, I’d love to hear your biggest takeaway from this post.

What resonated with you most? Let me know in the comments below.