Add-On Acquisition

How an add-on is executed

The buyer is the platform or one of its subsidiaries. Approval normally runs through the platform's board and the sponsor's investment committee. Funding comes from some mix of incremental debt under the platform's credit agreement (an incremental or delayed-draw facility, subject to leverage tests), the platform's cash, seller financing such as vendor notes, deferred consideration or an earnout, the seller rolling part of its proceeds into platform equity, and new equity from the fund and co-investors. Diligence is often narrower than for the platform, with emphasis on quality of earnings, customer overlap and integration cost.

Bolt-on and tuck-in

The two terms are often used interchangeably. Where a distinction is made, a tuck-in is a small business absorbed fully into the platform's operations, and a bolt-on is a business that keeps more of its own identity, such as a new product line or region. Usage varies between sponsors and lenders, so the terms carry no fixed size threshold.

Why add-ons are often bought at lower multiples

Small companies often sell at lower EV/EBITDA multiples than larger ones: they have fewer potential buyers, more dependence on founders and key customers, less reliable reporting and less access to capital. If the combined business is later valued at the larger platform's multiple, part of the gain comes from the multiple difference alone. This multiple arbitrage is central to buy-and-build, where a worked example sets it out. It holds only if the combined business really is worth the higher multiple at exit.

Leverage creep and add-back inflation

Debt-funded add-ons raise leverage unless the acquired EBITDA comes with equity or is bought cheaply enough. Credit agreements usually allow leverage to be tested on pro forma adjusted EBITDA, which includes the acquired company's earnings and often expected cost savings that have not yet been achieved. Generous add-backs make reported leverage look stable while leverage on actual earnings rises. Lenders limit this through caps on add-backs and time limits for realising savings; LPs and buyers at exit should rebuild leverage on achieved EBITDA.

Integration and pricing risk

Add-on programmes fail through integration (systems, culture, loss of customers or key staff), through overpaying as competition for small targets rises, through management overload, and through diligence gaps in businesses with weak records. Competition authorities can look at a run of small purchases in one local market even when no single deal would raise concern on its own. In the US, an add-on that meets the premerger notification thresholds of the Hart-Scott-Rodino Act cannot close, unless an exemption applies, until both parties have notified the Federal Trade Commission and the Antitrust Division of the Department of Justice and the waiting period has expired. The size thresholds are adjusted every year. A sponsor's value bridge should show acquired EBITDA separately from organic growth, so that bought earnings are not presented as operational improvement.

Worked examples

Examples are illustrative; figures are not market data.

Not the same as

• Platform Investment: The platform is the fund's original acquisition; the add-on is bought later by the platform.
• Follow-On Reserves: A follow-on investment, funded from a fund's follow-on reserves, is further financing of an existing portfolio company by its investors; an add-on is that company's acquisition of a different business.
• Buy-and-Build: Buy-and-build is the strategy made up of a platform and a series of add-ons.

How it is classified

• Classify as an add-on when the buyer is an existing sponsor-backed portfolio company and the target is combined with or held under it.
• If the fund buys a company directly as a stand-alone investment, classify it as a new portfolio company (or a new platform), even in the same sector.
• Classify a merger of two portfolio companies held by different funds of the same sponsor as a cross-fund transaction, not an ordinary add-on.

Common mistakes

• Counting add-ons as new portfolio companies or new fund investments.
• Presenting acquired EBITDA as organic growth or operational improvement.
• Reading pro forma adjusted leverage as actual leverage.
• Assuming multiple arbitrage is automatic; it depends on the exit multiple and on integration actually happening.
• Ignoring earn-outs and deferred consideration when measuring the price paid for an add-on.

Edge cases

• When the fund injects new equity to fund an add-on, its cost basis in the platform rises; multiple on invested capital (MOIC) and IRR must include the injection as a dated outflow.
• A large add-on can be bigger than the platform (a transformational acquisition); the combined business may then need new financing.
• If an add-on target is owned by another fund of the same sponsor, the transaction is a cross-fund deal with conflicts that typically require review by the fund's LPAC.

Sources

1. 15 U.S.C. 18a - Premerger notification and waiting period. U.S. Congress (US Code via LII), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). 15 U.S.C. 18a(a), (a)(2), (b)(1)(A) — supports: No acquisition within the section's scope, except as exempted under 18a(c), until both persons file notification with the FTC and the Assistant Attorney General in charge of the DOJ Antitrust Division and the waiting period has expired; size thresholds adjusted and published for each fiscal year

• Platform Investment
• Adjusted EBITDA
• Debt-to-EBITDA (Leverage Multiple)
• Earnout
• Quality of Earnings (QoE)
• Buy-and-Build