September 6, 2017 by John Clausen, Michael Rose

A quick guide to platform acquisitions

When growing through mergers and acquisitions, there are generally two distinct types of acquisitions: (1) the platform acquisition and (2) subsequent one-off acquisitions. When a company expands into a new market, the expansion often comes in the form of a platform acquisition, the initial acquisition that a private equity group makes to enter an industry with the intent to roll up (or acquire) other companies in an industry. (One-off acquisitions consist of companies within an industry in which the buyer already operates.) The acquiring company entering the new market usually seeks a business with an already sizeable operations base, which then becomes the platform from which to launch further expansion. The term “platform acquisition” originates from the private equity sector, where platform investments are very common.

What does a platform acquisition look like?

Because platform-acquired companies are effectively launch platforms, there are certain criteria that buyers look for. Platform acquisitions tend to have the following characteristics:

Market leaders – Platform companies tend to be top players in their respective geographic or functional niche. They may not be the largest players in the industry, but within their region or niche, they are market leaders in terms of sales, brand, client relations, locations, etc.

Management experience –  A platform company has an experienced management team that can continue to manage day-to-day operations after an acquisition. Unlike major acquisitions that are followed by massive layoffs and cost-cutting (which often gets reported in the press), the retention of senior management and key employees is an important consideration in a platform acquisition.

Multiple locations and SOPs –  By definition, platform companies operate across a base of multiple locations within their region. These companies have established Standard Operating Procedures (SOPs) and business procedures to manage business across multiple locations that are leveraged to drive further growth.

How is a platform acquisition different?

Perhaps the defining characteristic of a platform acquisition is the valuation of the business. Since most platform companies are 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 pursuing one-off acquisitions. These smaller acquisitions are often referred to as a “roll up” strategy, where an initial premium is paid to acquire a platform followed by smaller, generally lower cost acquisitions.

Willingness to pay does not always transfer into proceeds for the seller. Deals vary and platforms can go for less than a one-off acquisition. Also, smaller companies can 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.

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 the biggest or best within your sphere of influence. Platforms attract higher prices because they 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 for the buyer.

John Clausen, CPA, CMA, Acc. Dir., CMC, CM&AA, and Michael Rose, B.Math, MBA, are partners at Collins Barrow Durham LLP.