Add-On Acquisitions: Valuation, Common Pitfalls, and ROI

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 build and buy strategy. Today add-ons comprise about 61% of private equity acquisitions, up from 49% in 2012.

PE firms seek add-ons 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.

Our new ebook discusses the basics of add-on acquisitions and their valuation relative to platform companies. It also covers five ways add-ons boost ROI and five common pitfalls that can derail add-ons.

5 Ways Add-Ons Boost ROI

1. Multiple Arbitrage

Growing the size of a company can automatically incur multiple expansion, leading to higher valuations and exit multiples, and ultimately ROI. Since these benefits are market-driven and not operational, the company cannot realize them until it raises capital or sells itself. Multiple expansion precipitates higher valuation which affects cheaper costs of debt and equity capital. Reducing the cost of capital, the price of investing, naturally boosts ROI, and so too does selling a company for a greater price than otherwise warranted before taking advantage of multiple arbitrage.

2. Cost Cutting

For more, download the full ebook: An Introduction to Add-On Acquisitions.