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What Is a Platform Company in Private Equity?

Jeff Baxter Jr.

Sellers Seller Articles Seller FAQ

If you’re planning to sell a business doing more than $1M in EBITDA, then you may have considered selling to a private equity group. You may have even been approached by a private equity group looking to purchase your company as one of its “platforms.” If that term doesn't resonate with you, don’t worry.  

In this blog, we'll describe what a platform company is, discuss the pros and cons of being a platform company in private equity, and explain how mergers and acquisitions are used to grow them.   

What Is a Platform Company?  

Reduced Private Equity Fund

A platform is a company that is purchased by a private equity group who intends to grow that company using capital from limited partners (or investors). The private equity group will then grow the platform by using it to acquire other companies, or “add-ons,” in a related industry.  

Once it has bought up other companies and increased its value, the platform is then sold. Once it's sold, the limited partners who pledged capital to the original purchase of the company receive a return on their investment. 

Simply put, the purpose of a platform company is rapid growth. The singular goal of a private equity group is to provide the max amount of return to its partners, which can only be done by growing its platforms. 

There are several ways that a platform can be grown, whether it’s organic or through mergers and acquisitions, although mergers and acquisitions far outperform organic growth.   

Platform Mergers and Acquisitions  

Mergers and Acquisitions refer to a platform company’s ability to absorb or expand into other businesses in order to fill strategic needs, increase density in a current operating area, or expand the geography of operating areas (sometimes all three).

Each of these allow a platform company to grow in both scale and earnings, providing a higher Internal Rate of Return (IRR) for its investors.   

Growing a company organically is certainly possible, but it takes much longer than growing through mergers and acquisitions, which is why acquiring new companies through a platform is such a lucrative strategy for generating returns. 

Strategic Needs  

One of the best ways that a private equity group can grow a platform is through acquiring businesses that fulfill its strategic needs. Strategic expansion is all about acquiring other businesses that don’t do exactly what your business does, but are in a related field that could be advantageous to the platform company.   

For example, if you own a medical company, private equity may use your company as a platform to acquire a manufacturer of certain medical equipment like imaging parts. This acquisition would fulfill the needs of technicians within your medical company who are servicing the imaging equipment.   

This can also create opportunities for the platform to expand even further by acquiring businesses that lend themselves to the functions of the imaging parts company, and so on.   

Increased Density

Another way for a platform company to grow is by increasing the density of their operations in a given geographical location.  

For example, if you own a roofing company that serves a 100-mile radius, there is likely a lot of competition within that radius. Your employees are also having to spend a lot of time on the road going back and forth to jobs, which is an expense in and of itself.  

If your roofing company becomes a platform in private equity, it can start to buy up other roofers in the area, which will decrease the competition, the amount of time your employees spend on the road, and the wear and tear on your vehicles.   

By doing this, your roofing company would exponentially increase its value, and the good news is that it doesn’t have to stop there. 

Geographic Expansion  

A platform company can also grow by simply expanding its existing service area. Using the previous example of a roofing company, once you’ve packed out a particular service area, you can start to expand beyond that radius into new territory by acquiring the predominant roofers in those areas.  

As you can imagine, this kind of expansion is a much more efficient way for private equity to increase your business’s earnings. The beautiful part about this is that the private equity group needs your expertise to make it happen, whereas you need their capital. Teamwork makes the dream work! 

Pros of Being a Platform Company  

Now that you know a little more about how a platform business works, let’s take a look at some pros of becoming a platform company in private equity.  

Perhaps the biggest positive that comes from being bought as a platform company is that you will have the option to roll over part of the purchase price into the company and take a second, possibly even larger payday when the business sells again in three to seven years.    

Private equity groups can grow and sell businesses for 4+ times the original purchase price. For example, let’s say a private equity group approaches you to buy your company as a platform. You are doing 2 million in EBITDA, and sell for a 5X multiple, giving you a purchase price of $10 million.

You decide to pocket $8 million and roll over the remaining $2 million into the new acquirer’s company. You stay on as CEO for the next 6 years, during which time the private equity group’s money combined with your industry expertise raises the purchase price to $40 million.   

Since you own 20% of the company (remember your $2 million investment), you will have earned an additional $8 million upon the second sale.   

You could have accepted the original offer of $10 million and walked away, but since you continued to run the company with a private equity group financing it, you now exit six years later with $18 million in hand ($10 million original sale - $2 million rollover + $10 million second sale = $18 million).  

Almost doubling the original purchase price in 6 years doesn’t sound too bad, does it?  

Another pro to being bought as a platform company is that you could have the opportunity to step into a larger role within the organization that buys your company. Since the buyer realizes that your industry experience helped them to grow the business, they see your value, and will probably like to continue working with you.

This could lead to some pretty substantial paydays in the future.  

Cons of Being a Platform Company 

Although being bought as a platform company has lots of upside, there are some drawbacks to consider. Most of these drawbacks, however, depend entirely on what your goals are after a sale.  

One potential downside to becoming a platform is that you will lose your majority stake in the company, and therefore your ability to control operations the way you always have. If you’re sentimental about the way things have always been done, and would have a problem staying on while operations change substantially, then becoming a platform probably isn’t in your best interest.  

Something else to consider is that the small-business feel that you may have grown accustomed to will undoubtedly change to a more corporate atmosphere. Processes and procedures will become more systemized as a result, so if this doesn’t sound like an appealing environment for you, then you may want to go in a different direction when it’s time to sell.  

Deciding on a Buyer 

Now that you know more about platform companies and private equity, you will have a better idea of what to expect if you are approached by a financial buyer.  

It all boils down to what your goals are after selling. If you’re nearing retirement and would prefer to walk away after a sale, or if you’ll have a problem with adhering to a private equity group’s new set of standards and operations, then becoming a platform may not be for you.  

If your goals are more financially based and you don’t mind sticking with the business for 3-7 years after selling, then it could be a great opportunity for you.   

At MidStreet, we’ve worked with several business owners who have sold to private equity groups, so we know what to expect if one is interested in turning your business into a platform.  

If you’d like to learn more about selling to private equity, or have any other questions, contact us today! 

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