Platform companies, also called platform acquisitions, are key steps in a private equity firm’s expansion into a new industry.
The firm will first target a large, established business in the industry. From there, it will strategically acquire multiple smaller businesses, using them to expand its reach within the industry.
Platform acquisitions don’t just benefit the private equity firm — they also have surprising benefits for owners of smaller companies. Here’s a quick primer on platform companies and how they work.
How Does a Platform Acquisition Work?
Breaking into a new industry can be tough, especially if you start by opening a new business. Private equity firms skip that step. Instead, a private equity firm will start by acquiring an established, successful business in the field.
When selecting a company to purchase, private equity firms generally look for a few characteristics:
- Status as a Market Leader: For the best chance at success in the given industry, equity firms will typically target companies that stand out — even if it’s just within a certain geographical location or in a very specific market niche
- A Strong Management Team: When equity firms acquire platform companies, they typically want to keep the existing higher-level employees to ensure the company’s continued success and improve the business practices of new acquisitions
- Multiple Locations: A business with multiple locations has already expanded its reach, and equity firms can build on that with further acquisitions
- Established Standard Operating Procedures: When expanding the platform company, the equity firm can simply apply these operating procedures to new acquisitions
After the purchase, the platform company serves as a kind of home base for the firm within the industry. The private equity firm will usually then expand that business through bolt-on purchases (also called roll-up purchases or roll-up acquisitions).
Bolt-on purchases are different from another kind of acquisition called a tuck-in acquisition. With a bolt-on acquisition, the newly purchased smaller company will usually keep its name and identity. With a tuck-in acquisition, the smaller company is completely absorbed into the larger platform company.
Why Would an Investment Firm Acquire a Platform Company?
When private equity companies purchase a platform company and begin to expand into a new industry, they aren’t doing so with the intent of keeping the company forever. Instead, platform acquisition is a long-game investment strategy. It takes a significant amount of time, but it can generate a massive profit.
In a nutshell, equity companies buy and expand platform companies in hopes of eventually selling the expanded company to an even larger investor. Selling the companies as a conglomerate is almost always more profitable than selling each one separately.
For example, suppose that a private equity company wants to break into the fitness industry. The company might start by purchasing a regional chain of gyms.
As it purchases other, smaller gyms, it will use the management expertise and existing operating procedures of the first acquisition to improve each of the smaller gyms. It will also invest money in smaller gyms to increase their value.
When the company finally sells the expanded network of gyms, it will have created a profitable business venture that runs smoothly. This type of purchase is an attractive one for larger investors, so the equity company will be able to turn a significant profit.
How Platform Companies Can Impact Business Owners
At first, the idea of a larger company buying up smaller companies might not sound that advantageous to owners of small businesses. However, as a platform expands and acquires multiple smaller companies, those companies can see some surprising benefits.
For one, platform companies will usually invest significant capital in the new company soon after purchase. After all, the whole point of the acquisition is to increase the total platform’s valuation.
But money isn’t the only investment that platform companies put into smaller companies. After the acquisition, the equity firm will continue to focus on growing the newly acquired business.
The newly purchased business will reap several benefits from the platform:
- Experience in sales and marketing
- Experienced professional management
- Financial acumen
- Standardized, organized operational procedures
In many cases, these smaller acquisitions retain their company name. That makes the acquisition more appealing to many small business owners, especially those who have built their businesses from the ground up.
In many cases, an acquisition ends up as a win-win situation: The platform company expands its reach and total value, and the smaller business receives valuable funding and mentorship.
Platform Companies Add Value
Being acquired by a platform company can transform a smaller business for the better. And for the platform company, each new acquisition has the potential to bring in new customers, expand the company’s market reach, and increase the value of the platform as a whole.
On its own, the acquisition of a single small business might not seem like much. But when a firm repeats that process many times over, the result is an expansive, highly organized company that multiplies its value over time.
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