There are many strategies business owners may choose to grow their company. Growth via acquisition is one such strategy that can result in accelerated growth if executed properly. Whether a business is considering this strategy for itself or has been approached by a larger company looking to acquire the company as an add-on (also known as a bolt-on acquisition), the process may seem complex and unfamiliar. As a private equity firm that’s been on both sides of this transaction, we’re demystifying the acquisition process.
Being Acquired
When business owners are evaluating potential buyers for their company, it is important to understand whether a buyer is viewing their company as a platform investment or as an add-on acquisition. Some buyers (typically financial buyers) may be looking at the company as the basis for a larger consolidation or roll-up platform. Other buyers who are interested in the company as an add-on could be an independent strategic buyer, such as a public corporation or other founder-owned business in that industry, or a private-equity-backed strategic buyer looking to add-on to a platform investment. These buyers may be motivated by revenue accretion, cost synergies or a combination of the two (see below “Acquiring a Company” section for more information on why companies pursue an add-on acquisition).
Before considering an offer from either type of buyer, business owners should think carefully about what their goals are for a transaction. Is it part of plans to retire? Is it in hopes for meaningful or full liquidity so they can diversify their assets? Is preserving the legacy they built important? Do they have major growth plans for the company that require significant capital or other resources? Answering these questions can help business owners determine which buyers align with their goals. Typically, buyers viewing a company as a platform investment will want the existing business owner to continue to run the company (or already have a solid succession plan in place) but can offer significant liquidity and accelerated growth of the business. Buyers who are proposing to acquire a company as an add-on can provide meaningful or even full liquidity, along with access to more resources, and founders are typically able to fully retire post-transaction.
With businesses acquired as a platform investment, owners may find they keep more operational control and have a larger voice in future decisions (for example, they’ll likely have a board seat if the buyer forms a board of directors post-closing). There is typically more flexibility for the structure of the deal, such as the percentage of ownership being sold. It’s also likely that the buyer would want everyone on the leadership team to stay in place to ensure the continued success of the business. Lastly, for financial buyers, there is usually a second, later exit; many owners who retain some partial ownership of the company (also known as rolling equity) will have the opportunity to get a bigger, “second bite of the apple” when the investor sells the company to a future buyer.
For companies acquired as an add-on, owners are less likely to have the ability to roll equity. Depending on the structure and size of the buyer, they may not have a board seat and likely will have a boss if they continue to work at the company post-closing. For some owners used to working for themselves, this can be a difficult transition. It’s also critical to understand a buyer’s plans for the acquired company’s employees early in a transaction. With add-on acquisitions, particularly if plans include merging the employee bases post-closing, there could be job elimination or benefit plan changes.
Regardless of the type of transaction, the qualities of the company a buyer is looking for likely are the same. Buyers in either case typically look for a more diversified customer base, past financial performance and future growth paths available to the company. The due diligence process will also look very similar in both cases, which involves a heavy lift from the seller to provide all the requested data and explanations. The process could be more streamlined if the buyer is a strategic buyer, as they already have a baseline level of expertise in the company’s industry. Sellers will need to carefully weigh the pros and cons of sharing information if the buyer is also a competitor.
Acquiring a Company
Rather than being acquired, a company may be in a position where its owner prefers to acquire other businesses. Business owners typically pursue add-on acquisitions for revenue accretion, cost synergies or a combination of both. On the revenue side, there can be an instant boost to revenue if the add-on company brings new customers, unlocks new sales channels, adds new products or services to the existing company or expands its geographic footprint. For example, a manufacturing company selling products into two channels, such as retail and gas stations, may look to acquire a company that sells products into hospitality channels. Cross-selling or upselling opportunities can also increase revenue. The diversification of revenue is an added boost here, reducing a company’s reliance on historic customers. In some cases, there may be technical capabilities, patents or even equipment buyers want to incorporate into their business that can spur further growth.
From a cost perspective, combining two or more companies can result in overall cost savings for the consolidated business through economies of scale. This can be achieved through merging back-office functions, leveraging internal sales and marketing resources rather than outsourcing, or through more favorable pricing due to improved negotiating position with suppliers. Some owners find that integrating parts of their supply chain into the company — such as purchasing a smaller but key product supplier — also creates cost efficiencies.
To acquire a company, business owners first need to define what exactly it is they’re looking to acquire. This includes laying out the goals of the transaction: Is the primary purpose to gain more equipment? Adding specific customers or channels? What is the target size or geography? It’s important that business owners be specific as to what they want to buy and what they don’t want to buy.
Once business owners have a clear idea of what they’re looking for, it’s time to actually find the company to acquire. Business owners may choose to hire an investment bank or broker to identify and reach out to targets. If businesses have a capital partner, that partner may have the resources to lead these efforts. Business owners can look at their competitors or others in their supply chain or ecosystem and gauge their interest in a sale. Networking in their industry and asking for referrals can be another way to identify potential opportunities. After the target list has been created and actually narrowed down to who may be interested, the diligence phase begins.
The diligence for an add-on acquisition is very similar to any kind of business sale diligence, though the scope depends on the size. For example, smaller transactions may not engage a third party to conduct a quality of earnings review. During the due diligence phase, this is the time for business owners to dig in and ask the right questions to understand the business, identify potential concerns, and confirm that the reasons they wanted to acquire the company in the first place are true. Among other areas to focus on are assessing the cultural fit of the acquired company with the acquiring one, especially if the acquisition will involve merging employee bases. It’s important to ensure the there is a fit with company values and mission and there is a plan in place to combine these with minimal friction.
Whether or not business owners hire an intermediary to lead the search, they’ll still need some advisors to assist with the transaction to protect their company and interests. The most important of these is a good attorney with M&A experience. Depending on the complexity, business owners may or may not want to engage a specialized accountant.
Post-closing is an exciting time for both the acquiring company and the acquired company, but also one that should be navigated with care. The messaging to both groups of employees in particular is important, especially if they were previously competitors. Think about it as “marketing” the acquisition or merger to employees, as well as customers and suppliers, with the goal of reassuring all parties that business will continue as usual (or even better than before). Along with the message, the acquiring company should have an integration plan in place prior to closing the transaction to ensure nothing falls through the cracks. An important example would be to have all benefit plans set up prior to closing so that if an employee has an emergency on day one, he or she is covered.
Beyond the immediate transition, we recommend implementing a 100-day plan after closing. This plan should include consolidating financials and executing on other, operational integration action items. This period can be fragile, so business owners will want to keep a sharp eye to ensure they’re not losing key people or customers and that no administrative tasks are being missed.
As a senior vice president of portfolio acceleration at Montage Partners, 
Cole Jackson collaborates with the firm’s portfolio company management teams to establish and execute each company’s growth strategy. Previously, he was a senior manager at Accenture Strategy, where he worked with clients across industries to improve operations and develop and implement new operating models. Jackson holds a bachelor’s degree in industrial engineering from the University of Oklahoma and a master’s degree in management science and engineering from Stanford University.
