When a private equity firm decides to invest in a new industry or investment type, it can initially do so by acquiring a platform company. The acquisition will then serve as a foundation for the purchase of smaller firms, called add-ons, that will be synergistic to the operations of the platform firm.
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A platform company should, therefore, have a strong and experienced management team that has proven to have the ability to develop or grow a business. It will also help if it is a major player in the industry to make it a strategic buy for a private equity firm.
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Since the buyer would be acquiring a new business it could not combine with its existing investments, it has to make sure that the platform acquisition will generate attractive returns.
For add-on acquisitions, on the other hand, private equity firms would be looking at the acquisition’s complementary fit and strategic benefits to the initial transaction.
Business owners looking to fund growths with partners should look into platform acquisition as a way to do so. Private equity firms are always on the lookout for lower middle-market companies they can use as an entry to new business niches.
And if these businesses are not considered large enough to be a platform company, it is still possible for the company to be acquired as an add-on to a synergistic portfolio holding.
Ryan Binkley is Generational Equity’s president. The Texas-based M&A firm specializes in the middle-cap market. Read more on his credentials by visiting this website.
