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What is the Deal About Add-On Acquisitions?

By Generational Equity

10/10/2022

From time to time over the years, we have highlighted what I like to call add-on strategies in action.

These articles have been very popular because they focus on a private equity firm (PE) buying strategy that most business owners are not aware of: The acquisition of relatively small businesses by “platform companies” held by PE firms; firms that often have HUGE amounts of capital raised, but are focused on growing their initial investment in an industry by successive smaller acquisitions.

A recent case in point was news from Pfingsten Partners:

Pfingsten announces its portfolio company, Omega Systems Consultants, LLC ("Omega") has acquired Professional Implementation Consulting Services, Inc. ("PICS"). PICS is a provider of managed IT services, cloud services, managed VOIP, help desk services and managed security services, in addition to professional IT services.

PICS represents Omega's second strategic acquisition since Pfingsten became majority shareholder in February 2021.

"PICS is a key addition to the Omega platform," said Phillip Bronsteatter, Managing Director at Pfingsten. "Adding significant talent, resources and geographic coverage are all important steps in achieving our goal of creating a leading provider of managed IT solutions to small and medium-sized businesses."

Although details of the transaction are not provided, it is clear that PICS was acquired by Omega to augment or, if you will, “add-on” to the existing platform in order to grow it, expand it and essentially improve it. This is the key goal of any add-on strategy: The initial platform company is grown through related acquisitions so that the old adage of “1 + 1 = 5” becomes true.

You see successful PE firms like Pfingsten have a long-range plan in place which has a two-fold goal: Help their holdings to profitably grow AND to provide a sizable return to their limited partners. These two aims go hand-in-hand.

Here are some additional Pfingsten Pfacts you may not be aware of:

Founded in 1989, Pfingsten is an operationally oriented private equity firm focused on building better businesses. From their headquarters in Chicago, and their representative offices in China and India, they work with entrepreneurs and management teams to build better businesses by applying its unique operational and global resources to offer real solutions to unlock value and propel growth.

Pfingsten typically invests a minimum of 50% equity into the capital structure of each portfolio company, providing the flexibility to create value through operational improvements, professional management practices, global capabilities and profitable business growth.

Company Parameters

$3 to $12 million = EBITDA

$20 to $150 million = Revenue

$15 to $100 million = Transaction Value

Pfingsten will consider companies of any size as add-on investment opportunities

Pfingsten has raised five investment funds with total commitments of approximately $1.3 billion and has acquired 158 manufacturing, distribution, and business services companies.

I have taken the liberty of highlighting several sections above. First, middle market PE firms like this PARTNER with their acquisitions to enhance them, they don’t use a top-down, “our way or the highway, one way fits all approach”. Rather, they provide capital, professional management, marketing expertise, and operational know-how to help their investments truly meet (and exceed) their objectives.

Secondly, and very importantly, the size of an add-on for most middle market PE firms is irrelevant when bolting it onto an existing platform. Often business owners find this fact hard to fathom because the business press tends to vilify and focus on mega, billion-dollar PE deals that have gone awry. Keep in mind that the reason so many of these transactions do not live up to their billing is because of the size. It is far less risky to make multiple acquisitions of smaller companies and bolt them onto a platform than to “bet the farm” on one huge deal.

Finally, many of you are probably in the manufacturing, distribution and business services industries and yet you have never heard of the excellent work that Pfingsten is doing. My goodness, 158 transactions over 5 funds so far! Now their website does not indicate how many of these are add- ons, but it’s safe to guess most are.

So, the key takeaway for you from this article is this: Do not disregard PE firms from your potential buyer list when making your exit. They not only can help you monetize your most significant asset, they can then help you grow it to its full potential.

The great news about hiring Generational to represent you as your investment bank is that not only do we have deal teams with literally decades of combined experience, we also have over 35K buyers in our proprietary database that have told us exactly what they are looking for in add-on opportunities (size, location, industry, corporate structure, ownership goals, etc.).

Because of this I am sure we can successfully help you on your exit journey as we have countless others:

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

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