When growing through mergers and acquisitions, there are generally two distinct types of acquisitions: The platform acquisition and subsequent one-off acquisitions. When a company expands into a new market, the expansion often comes in the form of a platform acquisition. The company entering the new market usually targets an existing business with an already sizeable base of operations which then becomes the platform from which to launch further expansion.
The term platform acquisition originates from the private equity world where platform investments are very common. In the context of private equity, a platform acquisition refers to the initial acquisition a private equity group makes to enter an industry with the intent to then roll up, or acquire, other smaller companies in an industry.
What Does a Platform Acquisition Look Like?
Because these companies are effectively launch platforms, there are certain criteria that buyers look for when seeking out a platform acquisition. Generally, platform acquisitions tend to have the following characteristics:
- Market Leaders — a platform company tends to be a top player in their respective geographic or functional niche. They may not be the largest players in the industry, but within their sphere of influence they are normally market leaders in terms of sales, brand, client relations, locations, etc.
- Management Experience — a platform company tends to have an experienced management team that can continue to manage day-to-day operations after an acquisition. Unlike major multi-billion dollar acquisitions that are followed by massive layoffs and cost-cutting (which often get featured in the press), the retention of senior management and key employees is an important consideration in a platform acquisition.
- Multiple Locations and SOPs — By their very definition, platform companies operate across a base of multiple locations within their region. These companies tend to have established SOPs (standard operating procedures) and business procedures to manage business across multiple locations that are leveraged to drive further growth.
How Is a Platform Acquisition Different from Other Acquisitions?
Perhaps the most defining characteristic of a platform acquisition is the valuation of the business. Since most platform companies are considered industry leaders with established SOPs and an experienced management team, there is often a substantial increase in price that a buyer is willing to pay.
While the platform acquisition may be a higher cost acquisition, buyers often average down the total cost to enter the market by subsequently pursing one-off acquisitions. These smaller acquisitions can be completed at a much lower relative cost. This is often referred to as a “roll up” strategy, where an initial premium is paid to acquire a platform, and then subsequent smaller, and generally lower cost, acquisitions are made.
But beware: Willingness to pay does not always transfer into proceeds for the seller. I’ve seen deals where platforms go for less than what a one-off acquisition would go for. I’ve also seen smaller companies sell for a significantly higher relative price as a result of a professionally managed sell side process. In the absence of a professionally managed process, a buyer likely will not feel compelled to offer full value, regardless of how attractive the business.
Why Does it Matter?
One of the best ways to increase your valuation is to become a platform acquisition target. You don’t have to be the biggest or best in the industry — just in your sphere of influence. Platforms attract higher prices because they generally deliver greater value to an acquirer through established management teams, business processes and other intangibles relative to multiple smaller targets. They also offer greater opportunities to leverage cost synergies across a wider sales base to improve overall profitability to the buyer.
If you think you might already be a platform and you’re contemplating your next steps, let’s talk. As a platform, you have many attractive options ranging from a sale, to private equity investment, to further growth. If you think private equity is right for you, there are multiple equity groups I have spoken to that are very eager to invest into the automotive aftermarket, for example.
Even if you’re not sure you’re a platform yet, I’d still like to hear from you. What sort of challenges are you facing? What successes have you had? You may be surprised at how close you are to becoming a platform.