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The Art of the Add-On Acquisition

By Generational Equity

11/04/2019

From time-to-time, we like to bring completed transactions to your attention in order to highlight key features of how buyers operate and plan their transaction activity. Recently a deal caught my attention because it is a perfect example of exactly how a private equity firm pursues an add-on strategy.

The equity firm is named Guardian Capital Partners (Guardian) and it recently acquired PetFusion via its platform company, Cosmic Pet. PetFusion is an online seller of dog and cat products including cat furniture, dog beds, litter solutions, and toys. PetFusion is the fourth add-on investment for Cosmic Pet, further transforming Cosmic Pet into one of the largest pet hardgoods and accessories companies in North America.

The original platform company was acquired by Guardian in 2016. The Company now has a large portfolio of brands including Hyper Pet, Pet Zone, OurPet’s, Aussie Naturals, Wild Eats, Ultra Paws, and Mad Cat.

According to Peter Haabestad, co-founder and Managing Partner of Guardian and Chairman of Cosmic Pet:

“The addition of PetFusion enhances the offering Cosmic Pet can provide to its valued end-customers and we are incredibly enthusiastic to have the PetFusion executive management team join Cosmic Pet’s extended management team. This most recent add-on investment continues to demonstrate how much Guardian believes in Cosmic Pet as an outstanding platform company.”

Although the sizes of the add-on companies are not disclosed, in typical add-on scenarios, the companies added to the platform tend to be far smaller than the original platform acquisition. In fact, according to Guardian’s recently published investment criteria on their website, they have no minimum revenue or EBITDA requirement’s for add-ons. 

The Role of Add-Ons in Middle Market M&A

The goal of equity firms like Guardian that focus on companies in the middle market is building value through investing capital in a firm and enriching its business model by bringing professional marketing processes, sales, and financial experience honed over countless years to the acquired firm. This gives the added companies access to skillsets that normally would not be available to them.

This is a real benefit to business owners that have built a legacy in their company and would like to see the legacy continue and grow. In addition, in many cases, the equity firm retains the management team under a newly capitalized format as partial owners, allowing them to participate later in a second bite of the apple when the much larger entity is sold or taken public.

If you and your team are not interested in an immediate exit, then the add-on scenario as practiced by Guardian might make sense for you. And odds are good that there are equity firms, like Guardian, operating in your industry as well. In fact, quite often clients are surprised when we create buyer lists that have equity firms with holdings in their industry that they were not aware of.

And one other item to consider, equity firms are not just operating in the “sexy” industries. Guardian is an excellent example of this. They are strategically expanding in the pet products industry because their research demonstrates that pet ownership is on the rise and will be for years AND that Americans are spending more on their pets than ever before.

Definitely not a “sexy” industry, but one with huge upside. Other industries are just as fragmented, most likely yours is too, allowing for equity firms to gain substantial market share over time.

To learn more about how add-on strategies might make sense for your firm, you should arrange to attend a Generational Equity exit planning conference. Even if your eventual partial or full exit is years away, it is far better to start planning early than delay. To learn more about how you can participate in an add-on strategy, please use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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