An add-on is the purchase of a company by a private equity firm or strategic buyer in which the acquired company becomes part of an existing company. In the case of private equity, add-ons are sought out to add value to their platform or portfolio companies. Companies might also seek out add-ons themselves as a means of inorganic growth prior to sale.
In a capital market environment flush with capital, private equity firms are exhibiting renewed focus on improving the operations of their portfolio companies through a buy and build strategy. As a result, the add-on space has seen a fair amount of growth. The latest data tells us that add-ons comprise of 61% of private equity acquisitions, up from 49% in 2012.
In this primer, we’ll define and discuss add-ons and their valuation relative to platform companies. We’ll also cover five ways add-ons boost ROI and five common pitfalls that derail add-on acquisitions.