Add-on acquisitions are on the rise, and it doesn’t look like they’re slowing down.
Axial, a private deal network platform, recently took a look at add-on acquisition trends. The results are promising, especially for those in the lower middle market.
If you need a reminder on what add-on acquisitions are and how they differ from other acquisition types, make sure to read my post: Types of Acquisitions Part II.
Here are the facts:
- Add-on acquisitions have been growing in popularity since the early 2000s, from 43.2% of US PE deals in 2002 to 71.7% in 2020. That’s a 65% increase in under 20 years (as seen in the chart below).
- This growth has been incredibly steady, despite decades of economic changes and multiple financial crises.
- Add-on projects on the Axial platform have grown an average of 55% per year since 2015. 2021 is set to have the highest total number of new add-on projects on the platform ever.1
What is going on underneath this consistent growth?
These numbers and their consistency are encouraging for those companies that would position well as an add-on, but it’s important to understand what is causing this growth, and whether it is likely to continue. When Axial’s writers took a look at the trends, they found two major contributing factors:
1. Rising asset prices:
On top of historically high EBITDA multiples2, a recent survey of private capital fund managers showed that 91% of respondents expect there to be a significant hike in asset prices over the next 6 months.3 Increased willingness to invest after an uncertain year, especially in industries that have proved their stability like payments, IT services, and vertical software, contributes to the increased valuations and competition. PE firms are therefore becoming more and more interested in inorganic growth strategies, such as add-on acquisitions, to remain competitive.
2. Multiple arbitrage:
This idea revolves around the fact that larger companies usually demand larger EBIDTA multiples than smaller companies. The strategy essentially involves acquiring multiple smaller, cheaper companies in order to increase the net sale value of an investment in a more cost effective way. This is one of the most popular strategies used by PE firms to counteract rising asset prices, and equates to more demand for companies with $5-100M in revenue.
What does this mean for you?
If you’re considering selling your small to mid-sized company in the next few years, this is great news. With these trends leading to more and more interest in add-on acquisitions (as the numbers prove), companies of this size are gaining interest from PE firms like never before. Investors seem to be feeling confident in putting their money into these strategies after a volatile year, and it should mean more opportunities and favorable valuations for those in the lower middle market. All you need to do is make sure you’re ready.
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