Glossary · Deals

What is an add-on acquisition?

An add-on is a smaller company that a private equity-owned company buys to grow, folded into the platform company the firm already holds.

In practice

Add-ons usually appear in buy-and-build strategies, often in fragmented sectors, and are typically paid for with a mix of fund equity, cash from the platform and acquisition debt. Financing is often arranged in advance through a delayed-draw term loan or an accordion. Add-ons are sometimes confused with a platform deal, which is the first acquisition, and the fund’s LPA may cap follow-on investment.

An example

Round numbers, not a real fund

Say a firm owns a $200 million-revenue software business and buys a $20 million-revenue rival. The rival joins the existing business as an add-on.

Why it matters

Buying several add-ons is how many buyout firms build bigger companies, and a way to spread the cost of a high entry price.

In the news

Related terms

Platform companyA platform is the first company a private equity firm buys in a sector, meant to be built up, often through add-on acquisitions.
Leveraged buyoutA leveraged buyout, or LBO, buys a company using mostly borrowed money, with the company’s own assets and cash flow backing the debt.
Enterprise valueEnterprise value is the price of a whole business: the value of its equity plus its net debt, typically. It is what a buyer pays for the company, debt included.
EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization, a measure of a company’s operating profit. Buyouts are often priced as a multiple of it.
Carve-outA carve-out is the purchase of a division or business unit from a larger company, which then becomes a standalone company.

The terms, in the news each morning.

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