In mergers and acquisitions, there are two distinct forms of acquisitions: platform acquisitions and one-off acquisitions. Companies expanding into new markets often seek platform acquisitions. They target an existing business with a sizable base. This acts as a platform to launch further expansion.
The term originates in the world of private equity, where it refers to the acquisition a group makes to enter an industry with the intention of acquiring other smaller entities in the industry.
How Does a Platform Acquisition Look?
Because the acquired business is a launch platform, buyers seek very specific criteria:
- Leaders in the industry: Platform companies should be top players in their functional or geographic niche. They might not be the largest actors, but they should be client, brand, relationship, or location leaders within their niche.
- Experience with management: Platform companies tend to boast experienced management teams which can continue to manage the daily operations following an acquisition. Unlike large acquisitions, which typically lead to big layoffs and cost-cutting measures, retaining senior staff is an important goal in most platform acquisitions.
- More than one location and SOP: Platform companies should extend across a base of multiple locations within a region. They should have well-established standard operating procedures (SOPs), as well as procedures that manage the business across multiple locations. This drives future growth.
How Platform Acquisitions Differ From Other Acquisitions
A business valuation may be the defining characteristic of a platform acquisition. Most platform companies are industry leaders boasting established SOPs and a skilled management team. This greatly increases the price the buyer is willing to play.
This acquisition is often pricier, but buyers may leverage down the total cost of entering the market by later purchasing one-off acquisitions. These smaller purchases offer much lower costs. This strategy, which is sometimes called a “roll-up,” involves the payment of an initial premium, followed by later smaller and lower-cost acquisitions.
Proceed with caution, because being willing to pay doesn’t always mean profits for the seller. Platforms may go for less than a one-off acquisition would sell for. Smaller companies may sell at significantly higher prices thanks to a well-managed sale process. Without professional guidance, a buyer may not offer full value, even to a very attractive platform company.
Why These Transactions Matter for Sellers
Sellers wishing to increase their value can become platform acquisition options. You don’t have to be the best or biggest. You just need a strong sphere of influence. Platforms garner higher sales prices because they offer better value to an acquirer via their skilled management teams, established processes, and other intangibles. They also provide greater opportunities to leverage synergies of cost across the sales base, thereby improving profitability to the acquirer.
Becoming a platform company is a great opportunity for profit, but it requires work. No matter how skilled an owner is at running the business, selling it is a different undertaking altogether. You need professional M&A management on your side to maximize value, and to entice a buyer who is willing to pay top dollar for what your company can offer.