By Bruce Teichman
Executive Vice President & Partner
We’ve all heard the terms, or most of them – platforms, add-ons, tuck-ins and bolt-ons. We may have even wondered if they were all the same or not. In this post, we want to clearly define and distinguish them.
Let’s start with the big kahuna – the platform company. In the MSP space, a platform company comes into being when a private equity (PE) firm or other deep-pocketed entity decides to enter the MSP market with a plan to aggregate like companies along service and solution lines, and often geography as well. The platform is not only the first investment, but is literally the foundation to build the overall growth strategy. It therefore has to have significant revenue, EBITDA and a high level of operational maturity, along with a seasoned management team, able to support further acquired growth.
The platform company then goes back to the MSP market to find additional capabilities, services, products or geographical reach needed to dominate the particular landscape they’re focused on. These “add-ons” are smaller companies, often missing a key ingredient for success – a seasoned executive team, or the ability to digest other organizations or the financial means to buy additional market share, but they are otherwise well aligned with the platform.
PE firms select add-on companies when they are executing on a “roll-up” strategy for growth. Rather than depend solely on organic growth, the roll-up approach focuses on adding smaller companies to a platform operation. In most cases, the add-on company is attractive to the platform entity because it offers services or technologies that are complementary to the platform’s holdings. Frequently, the platform company targets smaller companies, many that are still in the hands of founders, with specific products or services that are needed to round out the platform’s offering. In other cases, the add-on entity may enable the platform company’s extension of, or expansion into, a geography. Often, the add-on company has been focused on building its customer base – not its financial or administrative capabilities – which makes for less redundancy in the two organizations.
When it comes to revenue, capabilities and/or geography, these smaller companies are either peaking or at their peak. Usually founder-owned and operated, tuck-ins generally have very little infrastructure and a single CEO with little or no leadership team. In most cases, it is a lack of capital or management expertise that is holding the tuck-in at its peak. For a tuck-in, the platform is acquiring “more of the same,” and the tuck-ins brand will get subsumed into the acquirer’s organization.
PE firms and strategic buyers find tuck-ins attractive because they immediately improve the larger entities’ revenue and market reach under the same brand, while allowing for the most consolidation opportunities within the operation itself.
Often somewhat larger than a tuck-in, the other type of add-on is a bolt-on. These MSPs will have a good degree of operational maturity. In most cases, bolt-ons are acquired to fill a missing strategic capability, and not just for the revenue they bring with them. Additionally, these more specialized companies can be valuable to a larger platform company for their personnel – usually both seasoned executives and IT talent with specialized expertise.
Often, bolt-ons enjoy positive reputations in the industry and can be owners of a valuable brand. For these reasons, bolt-ons, which often are operated at an arm’s length from the platform company, do maintain their identities.
Don’t Forget Tweeners
In addition to those four commonly heard terms, we have seen a new, lesser known moniker – the tweener. In most cases, tweener companies have the potential, over time, to grow into a platform company. Sometimes, that potential is real but more often than not is a dream latched on to by the founder/owner. In the latter case, we have seen tweeners miss a prime window of M&A by holding on to the often false belief that “I’ll be worth more later.”
As you can see, there is not a clear cut, dominate reason why platform companies acquire other MSP add-ons. While their motivations may vary, add-ons with well tenured customers and employees and formalized processes can bring in a more financially attractive offer because there is less for the acquiring company to do to see the benefits of that acquired growth. The quality of the add-on being acquired is always more important than whatever its current status is –bolt-on, tuck-in or tweener. No matter which two kinds of companies are coming together, success always comes down to a good strategic fit.