Following completion of a platform deal, focus quickly switches to growth, and in particular, bolt-on acquisitions.

We have advised 30 private equity (PE) sponsors and their platform businesses on more than 70 bolt-on transactions in the last 24 months. From this experience we have developed real insight into what works well in practice, both in relation to deal process and key deal terms.

Insights 

Executing successful bolt-on transactions brings different challenges depending on the business, its sector, shareholder base and personalities. No two deals are the same, but from our experience an awareness of the following will contribute to a smoother deal process and will allow the benefits of a bolt-on acquisition to be realised more effectively.

Deal management

The acquisition process and subsequent integration requires significant time and attention from management, which diverts focus from the core business.

Companies and PE sponsors should give thought to resourcing considerations ahead of embarking on a deal process and ensure there is sufficient resource in place to ensure that one person (typically the CFO) does not become overburdened. A clear deal management strategy is required. Who will lead the deals – sponsor or company? If both will be involved, how will decision making and reporting be organised to avoid duplication? If the company, does the management team have the necessary experience, or should this be augmented? At what stage should the PE sponsor be involved and is any formal investment committee sign off required?

It is also important for those involved to be clear on any fund or bank drawdown requirements (both process and timing) to avoid this becoming a last-minute issue. Getting this right has a huge impact on the efficient execution of deals.

Target management incentivisation

It is important from the outset to identify key players in the target business and have early conversations with them. Seventy per cent of bolt on transactions we advised on in the past year or so utilised an earn out (most commonly linked to revenue rather than EBITDA growth) to incentivise the management shareholders of the target (and also to bridge valuation gaps). It is much less common to award topco equity to management of bolt-on targets, unless the target is particularly large or strategically important.

If the intention is to bring any of the target’s management team into the topco equity structure this should be thought through at an early stage. Discussions around management reinvest, sweet equity allocation and other management equity terms add complexity, distract selling shareholders and can confuse those unfamiliar with these concepts.

It will also be important to consider the likely requirement for an HMRC-compliant valuation of any equity awarded and the potential need for separate management counsel. 

Pricing mechanics

Certainty as to pricing and the avoidance of post-completion disputes is key on all acquisitions, but particularly for bolt-on transactions where selling shareholders are retained in the business.

Seventy-five per cent of the acquisitions we have advised on in the last year or so have utilised a locked box mechanism. In circumstances where a target’s accounts are not sufficient to allow a locked box mechanism, we would recommend working with the sell side to prepare such accounts as part of the deal process, rather than kicking the issue down the road by using completion accounts. However carefully crafted, it is rare for completion accounts process to go smoothly, and disputes are not uncommon, which diverts attention away from integrating the target business and achieving growth.

Completion accounts may be preferable in certain circumstances, however – for example, in smaller businesses with a high concentration of physical stock or in cross-border transactions where locked box is not a familiar concept. In these situations, consider the preparation of example accounts prior to completion to use as the foundation of the completion accounts and to anchor the relevant accounting policies. Also consider a retention of an element of the consideration until the completion accounts are finalised.

Diligence, warranties and W&I

If a platform business is to undertake a series of bolt-on acquisitions, a streamlined diligence process is essential to avoid transactions becoming bogged down. Underpinning diligence should be a clear deal thesis, and this must be communicated to all involved: is a particular piece of software key? Is the transaction an acqui-hire? What are the post-completion intentions for the business?  This will inform and focus all diligence and negotiating workstreams.

Diligence providers should be similarly briefed and deal teams should be clear which operational areas of the platform business need to be involved and to what extent in diligence – will they carry out certain aspects of diligence themselves or will they review and feed into specialist third-party diligence e.g. technical or commercial?

Adequate diligence is a precursor to W&I insurance. It is therefore key to identify at an early stage if W&I insurance will be used in a particular deal as reworking diligence to facilitate W&I insurance is inefficient and costly. Whilst W&I insurance is widely available even for smaller deals at generally keen rates, we have found that it is less frequently used in bolt-on transactions than the traditional construct of selling shareholders standing behind the warranties financially.

Given that warranties and the accompanying exclusions and limitations are often one of the most heavily negotiated aspects of a transaction, we anticipate W&I insurance becoming more prevalent in two scenarios: (1) for frequent buyers who can develop a stapled warranty and W&I insurance package allowing more streamlined deal execution; and (2) to preserve relationships with the target’s shareholders in situations where they are to be retained in the management of the business. 

Competition clearance

By its nature, bolt-on M&A activity brings with it competition considerations and regulators have been increasing their scrutiny of deals. It is important to give thought to this at an early stage, particularly in light of the recent changes to the UK regime – if a clearance is required, this will have implications for timing and other areas.

We are increasingly seeing clients go down the more informal ‘briefing paper’ route – whereby a party can set out why they do not consider a transaction to be anti-competitive. This is a quicker and more cost-effective route than a full clearance application.  

Conclusion

As an effective way for companies to grow strategically, enter new markets and enhance their competitive position, bolt-on M&A activity will continue to be a key source of growth for the private equity market. 

At Burness Paull, we understand the importance of effective transaction management in executing this strategy seamlessly. Our expertise ensures proactive and pragmatic advice tailored to your objectives and culture, positioning you for success. 

We thrive when working with innovative PE sponsors and acquisitive portfolio companies. Please do get in touch to discuss how we can help you with your bolt-on strategy. 

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