What is a platform acquisition? Understanding the different types of business acquisitions.
March 15, 2023 ⋅ 11 min read
There are lots of reasons people and companies acquire businesses. Individual buyers often called “searchers”, may be looking for a career change and they believe buying a business is better than starting something from scratch.
Both individuals and private equity-type funds may acquire a company with the goal of growing it and then selling it for more money in a few years. A “platform” acquisition strategy is an approach, usually taken by private equity funds or seasoned searchers, where they initially acquire one business with the goal of buying other similar businesses and combining them. While the acquirer will try to grow the business they buy, a part of their strategy may also be to grow through additional acquisitions.
If your company checks certain boxes, it may be a great opportunity for a private equity investor to buy it as the “platform” for other acquisitions. If that’s the case, you’ll most likely command a higher valuation than a similar business in your industry.
If a private equity firm is looking to buy your company as an “add-on” for their platform acquisition strategy, that too will impact the way that they’re thinking about your valuation. Read on to understand more about platform acquisitions and how to think about them if you’re considering a sale of your business.
What is a Platform Company?
I run a platform company, a dog daycare, that I acquired with a group of investors, and we’re actively growing through add-on acquisitions. So what does that look like exactly?
When I bought my first dog daycare, I wanted to buy a business that had enough of a framework that we could grow it, but that we didn’t have to rethink every aspect of the business. The company we ended up buying had great branding and marketing, a solid customer base, a decent reputation in our local community, and a set of standard operating procedures I could build on. With that, we were able to more quickly focus on growth rather than having to lay the foundation for the entire business.
Similarly, we inherited a great staff and a solid team of managers. That meant we could immediately start growing the company rather than having to build out the team necessary to run that single location. It was already humming, and we just needed to pour gasoline on the fire.
Now, when we go out and look for new companies to acquire, we’re less focused on finding businesses that have many of the things we already do well. Instead, we’re looking primarily for locations in interesting geographics, with good customer bases, and some staff. We know how to do everything else at the “platform” level.
Characteristics of a Platform Company
Platform companies operate at a level of sophistication that means they can absorb additional businesses with relative ease. They’re generally market leaders nationally or in their geography, and they have the brand, operating procedures, and staff to handle the growth that usually comes with “add-on” acquisitions.
How Platform Companies Work
Platform companies usually operate with some centralized staff, technology, and procedures, and a team of people that help integrate newly acquired companies.
At my dog daycare company, we have employees and expenses at the general and administrative level. These resources are focused on growing the platform and don’t necessarily work full-time at any of the individual businesses we’ve acquired. We do have team members, resources, and expenses that operate at the individual level with support at the platform level.
When we buy a new company and add it to our existing business, the general and administrative team initially goes in, onboards the new company, helps bring the staff up to our standards, and converts the acquisition into a company that looks like the other businesses we’ve acquired.
Not all platform companies work that way. Some buy new companies and operate them more as independent businesses. Facebook is perhaps one of the largest platform companies in the world. Over the last decade, they’ve acquired competitors like Instagram and Whatsapp.
These products have remained independent, with their own brands and features. In the background, Facebook has slowly integrated the technology that supports Facebook's core products and those of Instagram and Whatsapp. Similarly, the teams that once worked independently all now work for Facebook, and employees often jump between working on Facebook’s core products and those at Instagram and Whatsapp.
Additionally, the sum of Facebook, Instagram, and Whatsapp is far more valuable than each of those individual products and companies would be independently. Facebook, as the platform, has done a lot of work to both buy and integrate these companies into one entity.
Private equity investors generally accumulate companies under a platform with the goal of selling to a larger investor or company. The work they do to acquire and integrate multiple companies creates a larger valuation than if those individual companies were bought or sold independently.
Usually, the larger and more mature the business, the higher the multiple on net income a buyer will pay. What many platform investors are doing is called “multiple arbitrage”. If they buy 10 small companies for 2X cash flow, they can likely sell the entire new company for 5-10X cash flow to a buyer that doesn’t want to do all the work of acquiring and integrating the smaller firms.
What is a Platform Acquisition?
When a private equity investor is eyeing a new market opportunity, they will often look to acquire a platform company as the foundation of their growth. Say, for example, the investor believes that plumbing companies in the South East represent a great investment opportunity. Instead of trying to buy lots of small plumbing companies across the region, they will look to buy one of the market leaders there, with a robust business, healthy revenues, a strong management team, a large staff, and a decent customer base.
That initial platform acquisition will then act as the springboard for acquiring the smaller companies. They will leverage the operating procedures and the management team from the first acquisition to help grow the additional companies they eventually acquire.
The private equity investor may pay 4X net income for that first large plumbing company. If they acquire multiple smaller companies for 2-3X net income, they could sell the entire collection of plumbing companies at a later stage for much more, meaning the moment they buy a company for 2X, its value to the platform almost doubles in the long term.
What are the 3 Types of Acquisition?
When a buyer acquires a “platform” company, they’re usually looking for a mature business they can grow through additional acquisitions. As such, companies that could be considered platform acquisitions by institutional buyers generally command higher valuations. Platform company sales are usually multi-million dollar deals.
When we were looking to enter the dog daycare market, we considered starting our own business from scratch. Instead, we found an operating company that had already built out something similar to what we wanted to create. That gave us a headstart on growth, and we were willing to pay more because they had a great brand, good market penetration, systems, and a team we could build upon.
Most buyers will understand that they may pay more for the initial “platform” company, but long term they will be able to translate that purchase price into value with more affordable “tuck-in” and “bolt-on” acquisitions.
A tuck-in acquisition is when a platform company acquires a much smaller business, usually to grow its customer base, revenue, and/or geographic reach. The platform company is usually uninterested in much of the operating procedures of the company, the brand, and the management team - instead they will be evaluating whether or not the customers and revenue can easily be “tucked in” to the platform’s existing business.
When we look to buy additional dog daycares, we’re often looking for “tuck-ins”. We rebrand the businesses we buy, often put in our own trained managers, update their operating procedures, and invest heavily into updating the facilities. Similarly, a large plumbing company buying a smaller, family-owned plumbing business with a few employees would be thinking about it as a “tuck-in”.
Bolt-on acquisitions sit between a platform acquisition and a tuck-in. These are usually bigger companies that have management teams, operating procedures, and strong revenues. The platform company acquires them as a means of growing, but unlike a tuck-in, the bolt-on often operates semi-autonomously. They may keep their brand and their entire team and receive minimal support from the platform company. Usually, to offset some costs, they will leverage the legal, accounting, and back-office teams provided by the platform company. Facebook buying Instagram and Whatsapp would be considered “bolt-on” acquisitions.
We have yet to do a “bolt-on” acquisition, but for us that would look like going into a new geography and buying a company with multiple locations. It would be a great way for us to expand our business, but we’d ideally be looking for a business that could operate without us. We’d offset some cost by providing some of that back office support, but we ideally wouldn’t need to fully change the way the company is run.
How Does a Platform Acquisition Differ From Other Acquisitions?
If you’re exploring the sale of your business, it’s important to understand whether or not you’re being acquired as a “platform” a “bolt-on” or a “tuck-in”. If a private equity buyer is putting you into one of those boxes, it will impact your purchase price.
Platforms and bolt-ons likely command the highest prices, as they generally have more stable revenues, and they require less work by the acquirer to operate post-acquisition.
Tuck-ins are valued primarily on their revenue and how that will impact the growth of the platform company. Again, what’s interesting about platform acquisitions is if a private equity firm buys a platform company for 4x their cashflow and a tuck-in for 2x, the value of the tuck-in doubles once it is “tucked in” because that cashflow becomes a part of the platforms financials post-acquisition.
What is an Example of a Platform Acquisition?
If you’re interested in learning more about what a “platform” company pursuing a roll-up strategy looks like, check out @RegZeller on Twitter. He runs CaneKast, a network of local manufacturing companies, and shares regularly about what his journey “rolling up” these companies is like.
Because he is focused on buying a very specific type of business that he can add to his existing portfolio of companies, he can value these businesses quickly. He’s also used to talking to sellers about the industry. He is one of the more knowledgeable buyers in the market.
Should You Use a Business Broker?
Working with a business broker can help you understand whether or not you’re a target for a platform acquisition, a tuck-in, or a bolt-on. Similarly, good brokers will have relationships with private equity buyers that are looking for all three types of businesses to buy.
To learn more, read our breakdown of ways to work with a business broker.
There are plenty of pros to working with a business broker when exploring the sale of your business. They can help you market to the types of buyers discussed in this article. They’ll save you time by making the sales process far more efficient. They can often help you think through the tax implications that occur when you sell a business. Above all, they’ll have sold other businesses, and help you during the entire sales process, often maximizing the purchase price.
If you’ve sold a business before, have relationships with the types of private equity funds mentioned in this article, or you’re choosing to sell your business to a friend or family member, hiring a business broker may be a waste of money. Brokers are paid a commission that is often quite high, so if you feel comfortable selling your business without a broker, you’ll save a significant amount of money doing it on your own or with other advisors that aren’t paid a commission on the sale.
If you want a better understanding of how business buyers will view your company in the context of platform acquisitions, Baton can help. Baton provides business owners with a free, data-backed business valuation estimate, along with personalized feedback to help enhance their small business’ value. You can track your business’ value over time and build a business sale plan of action using our tools. What’s more, we have a network of vetted partners (which includes brokers), and buyers (from individual searchers to PE firms) to help grow or sell your business. We give transparent information about various partners, ultimately giving power back to small business owners.