If you want to sell your company, be sure that it is viewed as a platform company by private equity groups. PEGs commonly view an acquisition in a new industry or space as a “platform” company. That is, they intend for the company to grow organically and have add-on or tuck-in acquisitions to create synergies. At the time of the acquisition of a platform, the PEG does not have an existing portfolio company to combine with it that would yield synergies. You want that platform company to be yours.
Platform companies stand in contrast to “add-on” or “tuck-in” acquisitions where synergies to an existing portfolio company are believed to exist. Estimates vary across sources, but add-ons constitute roughly 40-50% of PE buyout activity, making it critical for business owners who are thinking of taking a private equity investment to understand some of the strategic implications of both views. Add-on and tuck-in acquisitions are usually considerably smaller companies so as to not dilute the culture of the platform. Add-ons and tuck-ins are acquired for lower EBITDA multiples. Think 3x.
In academia, Platform companies are those that involve not only one company’s technology or service but also an ecosystem of complements to it that are usually produced by a variety of businesses. As a result, becoming a platform leader requires different business and technology strategies than those needed to launch a successful stand-alone product. There are two fundamental approaches to building platform leadership – “coring” and “tipping.” If you really want to make a lot of money, position yourself as a platform company that uses a coring or tipping strategy.
“Coring” is using a set of techniques to create a platform by making a technology “core” to a particular technological system and market. When pursuing a coring strategy, would-be platform leaders think about issues such as how to make it easy for third parties to provide add-ons to the technology and how to encourage third-party companies to create complementary innovations. Examples of successful coring include Google in Internet search and Qualcomm in wireless technology. “Tipping” is the set of activities that helps a company “tip” a market toward its platform rather than some other potential one. Examples of tipping include Linux’s growth in the market for Web server operating systems. Another tipping strategy is for a company to bundle features from an adjacent market into its existing platform. This is referred to as “tipping across markets.”
In common usage of the term, PEGs conisder platform companies to be those which have sufficient economies of scale, and talent acquisition, talent management, and succession planning capabilities upon which it can effieciently add add-on or tuck-in acquisitions. PEGs seek to acquire companies that they can grow or improve (or both) with a view toward eventual sale. In terms of growth, the financial sponsor will usually acquire a platform company in a particular industry and then seek to add additional companies to the platform through acquisition. These add-ons may be competitors of the original platform company or may be businesses with some link to it, but they will be added with the goal of increasing the overall revenues and earnings of the platform investment.
PEGs spend a great deal of time developing strategic plans and an investment case for a new platform to determine why they are buying a business and how they will generate an attractive return. This analysis is usually even more comprehensive for businesses that are new to a PEG. For add-on acquisitions, PEGs sometimes lean more on the expertise of its relevant portfolio company’s management to determine the fit, synergies and strategic benefits of a transaction. That is why the talent acquisition, talent management and succession planning are so important.
For new platforms, PEGs require that the company not only be self-sustaining, but be scaleable. The ability to grow the company is the rationale behind the deal, and it defines how the PEG will create value through things like capital infusions, operating partners and future add-on acquisitions. The PEG seeks avenues of growth to maximize value of the investment. For new platforms, PEGs focus on issues including industry attractiveness, the opportunities for growth, the self-sufficiency and scalability of the target, and and whether the PEG can add value in the acquisitions process.
To be self-sufficient and scaleable, the target must be able to prosper without any one individual. Customers must be “owned’ by the company, not one person, and certainly not the current owner. Critical processes must be mapped, and the organization must be in a highly efficient.
If you are a business owner, ensure that you have created a company that can prosper without you, that is self-sustaining, and has the talent in place to take it to the next level without you. That is your path to greatest wealth.
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