Bolt on Acquisitions: How Big / Small ?

January 31, 2019

by a searcher from University of Dallas in Houston, TX, USA

I would love to hear from folks who have done a bolt or two on about the successes and failures they have had. General data available in the marketplace has been somewhat unhelpful on this subject. There appear to be ample attractive options in the marketplace for large and small deals, but what are the pitfalls or things that have worked particularly well for firms as they look to start 'dating' again.

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Reply by a searcher
from Northwestern University in Los Gatos, CA, USA

We've done 3 bolt-ons in 2 years. All of them were <1/3 the size of our business business at the time of closing. These are businesses we definitely would not have purchased to get into the game, as they would have been too small, and probably too small for many other buyers as well. They are much easier to finance and to close quickly as a result. We like the accretion in valuation multiple and synergies we get from smaller add-ons. The sellers also usually like the prospect of handing off to a fully-functioning organization with more opportunities for employees. They are also more comfortable carrying back a large note with a larger purchaser than they might be with a smaller or first-time purchaser. Operationally, integration is pretty easy and smooth, and doesn't pose a risk of propelling us to a size that can't handle our current business structure and processes.

We've looked at larger add-ons that were our size or bigger and it's a lot harder to make the numbers work, harder to finance, harder to hold onto equity, harder and riskier to integrate. We still look at larger ones, but fit, financing, and integration planning become a lot more important!

Reply by an investor
from Harvard University in 1113 Spruce St, Boulder, CO 80302, USA

I can attempt an answer on bolt on acquisitions purely from the standpoint of tech acqusitions because that is what we do. As I look at our track record going back nearly 20 years in tech, most (but not all) of our biggest hits were in companies that completed one or more acquisitions during our hold period. This is due to the nature of tech acquisitions where you are often buying customers and key personnel and migrating customers to the platform technology. Thus you end up with considerable savings not having to maintain two platforms along with some administrative savings. Some general rules (1) we don't typically make any bolt ons during the 1st year of ownership (2) we prefer to finance with debt but equity sometimes is necessary (3) we pay a lower EBITDA multiple than for the platform and thereby "average down" the purchase price (4) the platform including the management dynamics and coverage and the technology stability must be secure prior to adding on. We will often go quite small with bolt-ons as little as $250,000 of EBITDA.

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