Consulting 2.0: The Optimal Solution for Right-Sized Commercial Due Diligence and Post Merger Integration in Add-On Deals
The private equity landscape has evolved, with add-on deals becoming increasingly prevalent in recent, tumultuous markets because they add additional revenue and EBITDA. Also called tuck-ins, bolt-ons, or roll-ups, this type of deal is a relatively easy way to deploy capital and add value to a portfolio company by acquiring and integrating similar or complementary smaller companies, bringing value through accelerated growth and operational efficiencies. In 2022, PitchBook data indicated that add-ons comprised 77% of all private equity buyout deals in the U.S. Smaller, quicker-hit add-on deals benefit from a more cost-effective solution for diligence and integration.
Bain & Company refers to repeated add-ons as a “buy-and-build” strategy. Meaning, there’s a well positioned platform company at the core, and an explicit strategy to add on many more lower-multiple acquisitions, bringing down the overall average cost of acquisition, putting the investment into a good position at exit.
Buy-and-build is a popular strategy to achieve multiple arbitrage – the ability to increase value by tucking in add-on acquisitions at lower multiples, rapidly building value without needing to make many (or any) operational improvements.
The challenge is, many platform deals started in a more favorable economic environment, and now, the math isn’t mathing like it did a few years ago. Multiple arbitrage is harder to come by in today’s market, thanks to interest rate spikes putting pressure on asset prices. Platforms that aren’t complete are worth less today than when they started, and sponsors are having a much harder time funding opportunistic acquisitions to meet growth projections. Deals that depended on multiple arbitrage alone to generate returns are sucking wind and might need to reevaluate their strategic foundation.
As Bain & Company noted in 2024’s Global Private Equity Report, data suggests that the uncompleted platform deals comprise a substantial share of the market. Today, buy-and-build platform deals (add-ons representing the fourth or greater acquisition by a single platform company) account for 50% of the global add-on activity. In 2003, they made up 21% of all add-on deals, and in 2019, buy-and-build acquisitions comprised 30% of add-on deals.
What does this mean? It means investors put a lot of emphasis on buy-and-build deals in recent years, but there are a lot of uncompleted platform deals that are having a harder time generating acceptable returns, and great exits now are going to require a focus on organic growth and margin improvements.
Commercial Due Diligence for Add-On Deals: A Consulting 2.0 Approach
In the context of add-ons, commercial due diligence should be nimble and “right-sized” to meet the typically fast turnaround required. Coupled with current financial pressures, it can be difficult for a private equity firm to justify spending $300 to $600K+ with a traditional consulting firm to get CDD done when the PE firm already has an understanding of the business from their existing platform investment. This is where the flexibility and fit-to-purpose nature of Consulting 2.0 comes into play.
At this stage, the deal’s overarching investment thesis is set. Market position, growth potential and strategic fit is all established. With add-on CDD, the focus is on ensuring the add-on aligns with the platform’s growth strategy and operational efficiencies. Add-on diligence scrutinizes the local market dynamics, customer satisfaction of the target asset, integration process, cultural fit, and the specific contributions to the platform’s strategic objectives
This work often looks like:
- Customer calls of the target company to understand customer base
- Competitive landscape assessments
- Target market sizing
- Consumer trends
- Financial modeling
- Etc.
As an example, on Catalant’s platform, we recently completed a project with a globally-focused PE firm. They were looking at an add-on deal for a platform portfolio company in the medical affairs space in pharmaceuticals. They needed a Catalant Expert to come in to source and conduct customer calls. They had a target list, but needed an Expert with healthcare experience to develop questions, identify the right customers, and conduct the interviews.
Here’s an example of feedback from a different add-on diligence project:
We engaged [The Catalant Expert] on an extremely quick-burn CDD assignment and he knocked it out of the park. He wasted no time getting up to speed and delivering impactful insights and high-quality deliverables that exceeded top-tier consulting reports. He needed little to no direction and knew exactly what we needed; he listened to our key questions and delivered targeted responses that we could use directly in our investment memos. Beyond that, he was flexible, reliable, and extremely easy to work with.
– Operating Partner, $200B AUM PE Firm
Post-Merger Integration: Consulting 2.0 Leads to Seamless Execution
On the post-merger integration side, the ability to plug in specific resources quickly as needed is crucial. Buy-and-build add-on acquisitions have the added complexity of integrating multiple businesses into the platform company, and in today’s market, face the added pressure of needing to achieve optimization goals quickly. Even if the targets are similar businesses, there are always nuanced differences in each company’s organizational culture and systems and processes. Failure to integrate well poses an even greater risk to an eventual successful exit.
Consultants with deep operations, industry, and post-merger integration expertise are valuable at this stage, where industry-specific technologies or processes may be required for operational and IT system integrations, strategic realignment, and cultural integration. In add-ons, internal and external communication strategies to manage stakeholder expectations and to ensure continuity in customer and supplier relationships are vital for success. The focus is on facilitating a smooth transition that maximizes value creation from the acquisition.
As an example, on Catalant’s platform, we recently completed a project with a highly acquisitive PE-backed learning company. It needed support codifying and documenting the post-merger process into a playbook for its corporate development, acquisition, and integration teams. The Catalant Expert worked with those stakeholders to define the vision and guiding principles to carry forward, and then developed and rolled out a playbook and toolbox to integrate future acquisitions, including a new governance process for managing decision making and accountability. She trained key people throughout the organization on how to use and follow the playbook and toolkit, including developing an internal readiness scorecard. For those that scored low, she developed a roadmap to improve readiness of those receivers.
Here’s an example of feedback from a different integration project:
I have thoroughly enjoyed working with [the Catalant Expert] on our acquisition integration efforts and would hire him again in a heartbeat. He has a unique ability to operate at multiple levels within the organization. [He] can talk strategy with the C-level executives and our private equity partners, but he’s equally willing and able to roll up his sleeves and dive into things like financial analysis and task management as needed. He fit in immediately with our core integration team. In our particular case, he had incredibly relevant prior experience integrating professional services firms. [He] came armed with a robust playbook that we together were able to tweak to our particular circumstances….I can’t tell you how many people in our organization called me after their first conversation with [him] to tell me how impressed they were with his capabilities and his immediate understanding of our company and what we were facing in terms of acquisition integration
– Chief Commercial Officer at $100M PE-backed portfolio company
Conclusion
The rise of add-on deals in private equity demands a new consulting model that is flexible and cost efficient. Consulting 2.0, with Catalant at its forefront, represents this new wave of consulting excellence. By leveraging Catalant’s robust platform and vast network of independent consultants, subject matter experts, and operators, private equity firms are equipped to navigate the complexities of today’s market, ensuring the successful execution of add-on strategies from due diligence through integration to successful exit.
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Welcome to the Era Catalant Calls Consulting 2.0
It’s a modern, digitally-enabled approach to solving complex business problems, giving leaders (even those outside of the C-suite) direct access through a technology platform to the expertise of business professionals who have the skills required to drop in on demand and execute strategic work. It’s no longer sufficient to throw smart, but inexperienced, people onto a complex problem. Digital connectedness, combined with the rapid migration of top talent into freelance consulting, allows business leaders to find someone who’s already solved their exact problems before.