Portfolio -- Growth by Bolt-On Acquisition
Have you ever seen a business that seems to have it all—a business in every corner in town? Have you ever talked to the owners of that business only to find out they started small, smaller than you could have imagined?
There is a new strategy in business buying known as Bolt-On Acquisition. It’s a fabulous opportunity for any entrepreneur to buy a platform business, make it successful, and then they buy bolt-ons for the platform business.
The bolt-ons are typically added by a private equity firm to one of its platform companies.
A PE firm will often partner with a larger company that has a position in a particular market. This larger company becomes a platform to expand into the market because it has the management capabilities, infrastructure, and systems that allows for organic or acquisition growth.
While the idea of adding businesses to a business is not new, the idea of small-scale entrepreneurs being able to do this new.
“This is something that private equity groups have been doing for years,” says Cortney Sells, “It used to take money to make money. These were big guys who were piecemealing companies. Now anyone can do this. The lending becomes a lot less intensive.”
The platform company will look for bolt-on acquisitions that provide complementary services, technology, or geographic footprint, and can help acquire the means to project the company into fast growth. That means a smaller company that has little financial and administrative infrastructure can sell to a company with those services, benefiting both the core company and the bolt-on company.
The first bolt-on business for a company is the toughest to manage. An entrepreneur who is used to going in to one business every day at 8 a.m. and leaving at 5 p.m. now has to juggle going to two businesses. That entrepreneur has to learn to trust his staff and to let them get business done so growth can happen. That trust and growth becomes easier when an entrepreneur gets to three or more businesses.
What also becomes easier is managing the financials and technologies of the companies.
“When you can take that type of cost out of 10 businesses, and then you have one marketing person, or one accountant, then you only have one subscription for Quickbooks,” Sells says. “That is when you can see the savings. Now the business owners are getting four and five times the cashflow because of the bolt-on aspect.”
Another pro of bolt-on is that it is industry agnostic. It can apply to all industries.
What this does take, however, is knowledge of buying and industry, and that is where The Firm comes in. They are becoming experts at bolt-on.
“I spoke at Harvard Business School in November 2017 about this phenomenon,” says Sells. “It’s neat because we are seeing young entrepreneurs between ages 28-34 for whom this is their whole game plan. These entrepreneurs are looking at $500,000 deals and taking them to businesses that make over $2 million in just a few years.”
It seems like a familiar concept. One business has a business, and a game plan, and then they create another business in a second location. Isn’t that right?
“You often hear about people that are multiple franchisees,” Sells says. “In those cases, a corporation will be doing the marketing and rolling out new product. In this case, the entrepreneur has to develop those marketing and product strategies. This can play into any role because we are talking about everything from construction to medical. You can do this with one portfolio company and expand.”
If you are thinking about bolting-on a company to your existing business, or you want to know more about this strategy, contact The Firm.