Private Equity (PE) Firms Approach Acquisitions

Private equity (PE) firms approach acquisitions—whether as platform investments or add-on acquisitions—with distinct criteria, as the objectives for each type of acquisition differ. Here’s what PE firms typically evaluate:

Platform Acquisitions

A platform acquisition is an initial investment in a particular industry or niche, serving as the foundation for subsequent add-on acquisitions.

Key Criteria:

1. Market Position and Scalability
   • A strong competitive position or a unique value proposition within a fragmented or high-growth market.
   • A scalable business model with opportunities for organic growth or operational improvement.
2. Industry Characteristics
   • Favorable industry dynamics: long-term growth trends, limited cyclicality, and barriers to entry.
   • Fragmented industry structure that supports roll-up strategies (ideal for future add-ons).
3. Management Team
   • Strong and experienced leadership willing to remain involved or provide a smooth transition if replaced.
   • Open to collaboration with the PE firm on strategic initiatives.
4. Financial Performance
   • Consistent and predictable cash flows.
   • Attractive EBITDA margins with room for improvement via operational efficiencies or cost reduction.
   • Moderate leverage to avoid financial distress risk in the early stages of investment.
5. Valuation and Deal Terms
   • Reasonable purchase price with potential for multiple arbitrage.
   • Alignment with the firm’s investment thesis and return targets.
6. Strategic Fit
   • Compatibility with the PE firm’s expertise and network.
   • Opportunities for value creation through operational improvements, geographic expansion, or complementary acquisitions.

Add-On Acquisitions

Add-ons are smaller acquisitions that enhance the platform company’s value by expanding its capabilities, customer base, or market reach.

Key Criteria:

1. Strategic Alignment
   • Complementary products, services, or technology that enhance the platform’s core offering.
   • Expansion into new geographic markets or customer segments.
   • Synergies that can reduce costs or increase revenue.
2. Cultural Fit
   • A compatible corporate culture that integrates smoothly with the platform company.
   • The willingness of key personnel to collaborate or transition effectively.
3. Size and Valuation
   • Smaller relative to the platform company, ensuring the integration process does not overwhelm the platform.
   • Attractive valuation to leverage economies of scale or bolster the platform’s overall financial performance.
4. Operational Synergies
   • Opportunities to achieve cost savings or efficiency improvements (e.g., combining sales channels, eliminating redundancies).
   • Integration of complementary capabilities, such as R&D, distribution, or branding.
5. Ease of Integration
   • Minimal disruption to the existing operations of the platform.
   • Systems, processes, or technologies that align easily with the platform.
6. Incremental Value Creation
   • Immediate accretive impact on EBITDA and cash flow.
   • Bolstering the platform’s strategic position for a future exit.

Common Factors Across Both Acquisition Types:

• Exit Potential: Clear pathways to realize value through an eventual sale, IPO, or other exit strategy.
• Risk Mitigation: Low-risk exposure to macroeconomic, regulatory, or operational threats.
• Due Diligence: Thorough evaluation of financials, legal, operational, and market risks to ensure alignment with investment goals.

By identifying these factors, PE firms maximize the potential for both near-term profitability and long-term value creation.

By Todd Vandegrift

Managing Partner @ EdgeWork Capital