With buy and build strategies being so popular, I want to discuss what other PE managers think about the add-on component of your value add.
Do add-ons work regardless of your fund size? When will it be less effective (threashold)? How do you guys think about the bought CAGR in revenue and EBITDA, do you pad yourselves on the back or know that inherently is unsustainable?
Please discuss and appreciate all the inputs!
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The strategies I’ve seen with the greatest returns (just observation) are ones where you take a small business that is founder operated, diffuse the founders expertise through the organization while phasing them out so the company doesn’t depend on them, build out departments that aren’t necessarily there or running properly (sales, marketing, finance) and go from flying by sight to flying by instrument in general. To the extent that you can make introductions, replace or add on to the management team, and acquire companies to improve the product (such as expand into logical adjacencies to provide a comprehensive product rather than point solution), all the better. You will likely need a management team with vested ownership interest, and to make sure they actually understand what that means and what the payday looks like the end. The downside risk is that these companies see declining ebitda in year 1 and 2 frequently due to significant investment required upfront. Eventually these make good sales and often to strategics; the strategic would not have acquired it pre-professiinalization because they are just too much work and , potentially, likely too small.
Please comment on my post to critique this response and help me learn about things I may be missing, misunderstanding, or things you want me to expand on.