Many private equity firms today find that employing a bolt-on strategy delivers a competitive advantage when bidding against other buyout firms and companies for assets, and they continue to solicit bolt-on opportunities for their platform companies.
In years past, a single bolt-on acquisition was the standard. However, the current market has witnessed increasing frequency of PE firms acquiring two, three and four bolt-ons to bulk up their platform portfolio companies in hopes of eventually achieving the best exit price possible. Many PE firms are adopting the bolt-on approach as they realize how much of the more robust middle market has already been rolled up.
When considering a bolt-on strategy, the capability to carry out that strategy efficiently is essential. Human resources service providers can help PE firms standardize HR across their portfolio companies, as well as within their own organizations. This can help firms reduce costs and risk, while freeing management to focus on business strategy and execution.
Advantages of HR Outsourcing and Scalable Infrastructure
Outsourcing HR functions makes a great deal of sense in the M&A arena, as it allows PE firms to enjoy economies of scale in terms of HR systems and functions. Whether a PE firm is buying or selling, working with an HR company that can implement a scalable HR infrastructure can:
- Facilitate selling at a higher multiple
- Deliver value to a buyer with HR infrastructure already in place
- Yield value to a buyer by helping to mitigate risk associated with HR-related compliance
- Provide readiness for a buyer’s due diligence
As a result, the evaluation and integration of bolt-ons becomes a structured process that can be modeled, executed, repeated and systematically improved over time, especially as the platform company becomes more adept at navigating the challenges of bolt-ons. This approach allows the platform company’s management team to concentrate on running the company while exercising oversight and making key decisions related to the evaluation and integration of each bolt-on acquisition.
Jason Brown, a partner with Victory Park Capital, has experienced the advantages of HR outsourcing with M&A, including the benefits for management. “We actually made a decision to outsource our entire accounting, entire HR function and our entire IT functions, which I think to a lot of people might sound rather extreme,” Brown says. “But it has allowed us to flex up and down when we need to. We found that outsourcing these functions has allowed us to expand up and down and focus on things that drive revenue for us.”
Without a doubt, the execution of mergers and acquisitions presents complex challenges. Timing is critical, with small windows to conduct due diligence and communicate any changes to employees, shareholders and customers. Then there’s the actual work of merging two organizations, which comes with each bolt-on.
Incorporating a scalable HR infrastructure streamlines the complexities that are inherent to the business and helps PE firms and their portfolio companies better manage costs and risks to facilitate the best exit price.
This article originally appeared in the November/December 2018 issue of Middle Market Growth. Find it in the MMG archive.
Nate Olsen has nearly 20 years of experience in the professional employer organization industry. He provides leadership, guidance and alignment of Insperity’s business development function in the United States. For more information, please call 866-814-6817 or visit insperity.com/acg.