casemark/evaluating-platform-acquisition-targets

Evaluating Platform Acquisition Targets

When To Use

• Screening a potential platform acquisition for a PE fund or family office
• Comparing multiple platform candidates within a target sub-sector
• Preparing an investment committee memo on a platform opportunity
• Assessing whether a company can serve as the anchor for a buy-and-build strategy
• Re-evaluating an existing portfolio company's viability as a roll-up platform

Inputs To Gather

• Company financials: Trailing 3-year P&L, balance sheet, cash flow statement; TTM EBITDA with addbacks schedule
• Industry context: Market size, growth rate, fragmentation level, competitive landscape map
• Management details: Org chart, tenure of key executives, equity rollover expectations, post-close role commitments
• Customer data: Revenue concentration (top 10 customers as % of revenue), contract terms, churn/retention metrics, recurring vs. project-based mix
• Add-on pipeline: List of potential bolt-on targets with estimated size, geography, and strategic rationale
• Deal parameters: Indicative valuation range, proposed capital structure, sponsor equity check size, expected hold period

Workflow

1. Confirm thesis and screening criteria — Define the investment thesis driving the platform search (e.g., fragmented HVAC services, specialty chemicals distribution). Establish hard filters: minimum EBITDA floor, geography, end-market exposure, and deal size range.

2. Assess industry positioning

   • Map the target's market share relative to top 5 competitors
   • Evaluate barriers to entry: regulatory licenses, customer switching costs, proprietary technology, scale advantages
   • Identify secular tailwinds or headwinds (demographic shifts, regulatory trends, technology disruption) [VERIFY: industry-specific regulatory drivers]
   • Score fragmentation opportunity: number of sub-scale competitors available as add-ons

3. Analyze financial profile

   • Normalize EBITDA: strip out owner compensation, one-time items, related-party transactions; document each addback with supporting evidence
   • Evaluate margin trajectory: gross margin stability, SG&A leverage potential, capex intensity (maintenance vs. growth)
   • Stress-test revenue durability: recurring revenue percentage, backlog visibility, contract renewal rates
   • Assess working capital dynamics: DSO, DIO, DPO trends; flag seasonal cash flow swings

4. Evaluate management and organizational readiness

   • Gauge CEO/founder willingness to partner with institutional capital and accept governance changes
   • Assess depth of second-tier management: can the business operate if one or two key people depart?
   • Identify functional gaps that need immediate hiring post-close (CFO upgrade, VP of M&A, HR leader)
   • Evaluate existing systems infrastructure: ERP, CRM, financial reporting cadence — can it absorb bolt-ons without major overhaul?

5. Size the add-on runway

   • Build a target universe: count of actionable acquisition candidates within the defined geography and service line
   • Estimate typical add-on valuation multiples vs. platform entry multiple (quantify the multiple arbitrage)
   • Assess integration complexity per add-on: shared back-office feasibility, brand consolidation, cross-sell potential
   • Model cumulative EBITDA build from organic growth plus a realistic add-on cadence (e.g., 2–3 tuck-ins per year)

6. Construct risk matrix

   • Customer concentration risk (any single customer >15% of revenue is a flag)
   • Key-person dependency
   • Regulatory or environmental exposure [VERIFY: applicable federal/state regulations for target industry]
   • Technology obsolescence or disruption risk
   • Integration execution risk at projected acquisition pace

7. Synthesize scoring and recommendation

   • Score the target across five dimensions: industry attractiveness, financial quality, management strength, organic growth potential, and add-on runway (use a 1–5 scale for each)
   • Calculate a composite weighted score aligned to fund strategy priorities
   • Provide a clear proceed / pass / conditional-proceed recommendation with rationale

Output

Produce a Platform Evaluation Report containing:

• Executive summary: One-paragraph investment thesis with composite score and recommendation
• Industry overview: Market size, growth, fragmentation, and competitive positioning
• Financial summary: Normalized EBITDA bridge, margin analysis, revenue quality assessment
• Management assessment: Key personnel evaluation, organizational gaps, governance readiness
• Add-on opportunity map: Target universe size, representative bolt-on profiles, projected EBITDA build
• Risk matrix: Ranked risks with proposed mitigants
• Appendix: Detailed addback schedule, comparable transaction multiples, and source data references

Quality Checks

• Every EBITDA addback is individually substantiated — no blanket "management adjustments" without line-item support
• Revenue concentration and customer data are sourced from actuals, not management estimates alone; mark unsourced figures with [VERIFY]
• Add-on target count is grounded in identifiable companies, not top-down market math
• Composite scoring weights are explicitly stated and tied to the fund's stated strategy
• Regulatory and environmental risks reference specific statutes or regulatory bodies [VERIFY: jurisdiction-specific requirements]
• Report distinguishes clearly between confirmed data, management representations, and analyst assumptions
• Recommendation includes conditions or diligence items that must be resolved before advancing to LOI