There are a few sources on this subject: ^[redacted]‌ was interviewed here: https://www.searchfunder.com/article/viewarticle/1897; ^[redacted]‌’s interview is here: https://www.searchfunder.com/article/viewarticle/1146. ^[redacted]‌a has talked about B2B acquisitions here: https://www.searchfunder.com/article/viewarticle/2545. I hope others chime in on this thread too.

We've done 3 bolt-ons in 2 years. All of them were <1/3 the size of our business business at the time of closing. These are businesses we definitely would not have purchased to get into the game, as they would have been too small, and probably too small for many other buyers as well. They are much easier to finance and to close quickly as a result. We like the accretion in valuation multiple and synergies we get from smaller add-ons. The sellers also usually like the prospect of handing off to a fully-functioning organization with more opportunities for employees. They are also more comfortable carrying back a large note with a larger purchaser than they might be with a smaller or first-time purchaser. Operationally, integration is pretty easy and smooth, and doesn't pose a risk of propelling us to a size that can't handle our current business structure and processes.

We've looked at larger add-ons that were our size or bigger and it's a lot harder to make the numbers work, harder to finance, harder to hold onto equity, harder and riskier to integrate. We still look at larger ones, but fit, financing, and integration planning become a lot more important!

I can attempt an answer on bolt on acquisitions purely from the standpoint of tech acqusitions because that is what we do. As I look at our track record going back nearly 20 years in tech, most (but not all) of our biggest hits were in companies that completed one or more acquisitions during our hold period. This is due to the nature of tech acquisitions where you are often buying customers and key personnel and migrating customers to the platform technology. Thus you end up with considerable savings not having to maintain two platforms along with some administrative savings. Some general rules (1) we don't typically make any bolt ons during the 1st year of ownership (2) we prefer to finance with debt but equity sometimes is necessary (3) we pay a lower EBITDA multiple than for the platform and thereby "average down" the purchase price (4) the platform including the management dynamics and coverage and the technology stability must be secure prior to adding on. We will often go quite small with bolt-ons as little as $250,000 of EBITDA.

Hey Ian. I think you and I have spoken offline on this before but happy to talk about about my experiences with add ons/tucks ins. I agree with Craig and Nick's views above as well! Good stuff.

As an executive in a previous business services operating company, we did a bolt-on acquisition of a small competitor that was 1/10 our size. Once the deal was papered, we put together a crack team of our best people to convert the customer base to our platform. The integration took almost 100% of their capacity for 6 months. If the acquisition had been 3-5 times larger, I think the integration time would have been about the same with the same investment of talent/time. In hindsight, even though we got a great price on the acquisition, the opportunity cost was too high. We should have passed on that deal and looked for a much larger target for acquisition that would have made a larger impact on our valuation.

Reach out to Varun Charnai in London - they are in the business of consolidating the UK kindergarten market and bolt-on M&A is their main growth path. He may have helpful advice for you

Do you have an operating company already or still searching?

A lot of the same fundamentals of search apply for acquisitions (how sticky is revenue, how concentrated is customer base, how good is the team and who will be kept in transition).

Additional items to look into for an acquisition:
-Does the product sell to same buyer (easier) or different buyer in same company? Or open TAM in a new market?
-Is it competitor takeout or consolidation? Or is it additional products to sell to your base?
-The costs of an acquisition (deal time, integration time, legal fees, etc) aren't that much different for a small vs a large acquisition so all things being equal makes sense to go as large as you think you can absorb and finance.

I'd say always go for 1/2 (or less) the size of the original business to improve chances of success. Merger of equals tend to be very complex, including issues with ego and post-merger integration (such as which of both ways of doing business should prevail)

We just completed a 1/2 size acquisition and it was a little rough as their internal processes were not well defined, (one reason they were getting out).

On the flip side, with that completed, we are currently working on a 10x acquisition. Opposite end of the spectrum size-wise but it will actually be easier as the client-facing products and services are very complementary and the teams, internal processes and procedures all fit together seamlessly.

In other words, the soft-dollar cost/impact of transition is at least as much of a consideration as the actual purchase price.