A Guide to Tuck-In Acquisitions and Bolt-On Acquisitions

As a business owner, it’s important to implement the right strategies in order to increase the value of your business. Bolt-on acquisitions are one important strategy that’s growing in popularity among business owners. 

In this article, we cover everything you need to know about bolt-on acquisitions, including:

• What a bolt-on acquisition is and why companies are utilizing this smart acquisition strategy 
• The difference between bolt-on and tuck-in acquisitions
• The benefits of bolt-on acquisitions 
• How to navigate the potential risks of bolt-on acquisitions 

What is a bolt-on acquisition?

A bolt-on acquisition occurs when a larger company strategically acquires a smaller company. This type of business strategy is typically employed by private equity funds. While these kinds of acquisitions can boost revenue for the acquiring company, usually the reasons behind bolt-on acquisitions are more than just added volume and share gain. 

You’d probably recognize many of the results of bolt-on acquisitions in your daily life. For instance, when you go to your local liquor store to grab a six pack for the weekend, it seems like you have quite a bit of brand variety to choose from: Budweiser, Corona, Stella Artois, Michelob Ultra, and Bud Light, just to name a few. 

All of those brands were once their own entity before they were acquired in bolt-on acquisitions. Now, they’re divisions of Anheuser-Busch InBev SA/NV, the world’s largest beer company. 

Bolt-on acquisitions aren’t a new business strategy—Coca-Cola acquired Minute Made all the way back in 1960. However, the bolt-on acquisition strategy has been gaining traction in the business world in recent years.  

From 2010 to 2019, there was almost a 150 percent increase in bolt-on acquisitions in North America. The impact of the COVID-19 pandemic only accelerated this growth. In the first two quarters of 2020, bolt-on acquisitions accounted for over 70 percent of all company buyouts. 

Why do companies undertake bolt-on acquisitions? 

There are a number of reasons why a company may decide to pursue a bolt-on acquisition, including: 

• Expansion into a niche that the acquiring company doesn’t serve yet
• Growth through already developed product lines and recognized brand names
• The addition of new products while avoiding the costs usually associated with the research and development process 
• Growth into new geographical locations
• The gain of new customers or an expansion of a current customer base
• Improving a competitive position in the marketplace 
• Adding a complimentary brand that is distinct from the current business model 

Bolt-on versus tuck-in acquisitions

At first glance, tuck-in acquisitions seem nearly identical to bolt-on acquisitions. There are slight differences, however, that you should be aware of. 

What are the similarities between bolt-on and tuck-in acquisitions? 

There are many similarities between a bolt-on and tuck-in acquisition. In each instance, a larger company acquires a smaller company. 

Both types of acquisitions are opportunities for the acquiring company to grow its resources or product offering without incurring the typical costs associated with developing a new division or product from scratch. 

In terms of merger strategies, both tuck-in and bolt-on acquisitions are generally low-risk options. 

What are the differences between bolt-on and tuck-in acquisitions? 

Many of the differences between bolt-on and tuck-in acquisitions boil down to what happens to the smaller, acquired company after the deal is complete. 

When a larger company acquires a smaller company via a tuck-in acquisition, its intent is often to add resources to its existing business model. Tuck-in acquisitions allow a larger company to strengthen its place in the competitive market while reducing the cost of company growth. Most tuck-in acquisitions involve companies that share the same niche market, with the smaller company bringing the added value of a new product or different process. 

After a tuck-in acquisition, the smaller company that the larger company acquired no longer retains its original branding or structure. Most of the time, the larger company phases out the branding and structure of the smaller company. 

Companies that acquire smaller companies via a bolt-on acquisition often have similar motivations. However, the acquired company might retain its branding and structure because the acquiring company doesn’t absorb it entirely. Even if the acquired company operates under a new name, it might operate as a new department or division within the larger company. 

Benefits of bolt-on acquisitions 

There are many benefits involved with a bolt-on acquisition. Some of the main advantages include:

• Opportunities for geographical expansion 
• More product offerings
• Accelerated growth through acquisitions

New market opportunities 

Often stimes, bolt-on acquisitions are great opportunities for geographical location expansion. For instance, a larger company on the East Coast of the United States might acquire a smaller company in California, creating a business presence in a part of the country where they previously had no presence. 

This type of growth can foster opportunities to meet new clients, build different business relationships, discover new customers, hire new employees, and identify new opportunities for growing the value of a company. 

More product offerings

When a company acquires another company via a bolt-on acquisition, it often has the opportunity to offer more products. The acquired company may have a well-known product (or products) or perhaps multiple products in development, with the final stages of product launch happening post-acquisition. 

Offering more products attracts new customers to the newly expanded business and can increase the value of the overall company. Another benefit to bolt-on acquisitions is that these products can benefit the company without incurring the costs of developing the products from scratch. 

Growing faster than would be possible organically 

The growth an acquiring company can experience after a bolt-on acquisition deal closes is tremendous—and occurs at a much quicker pace than the organic growth of the acquiring company. 

This growth increases the value of the company, which in turn turns up the dial on investment opportunities. Growth in the financial metrics of a business can also increase interest from potential investors. 

Risks of a bolt-on acquisition 

Although bolt-on acquisitions are generally a low-risk business strategy, there are some risks involved. The risks associated with bolt-on acquisitions are similar to risks that business owners can experience with any type of merger, including:

• Losing sight of the company’s identity
• Miscommunication surrounding merger details for employees and customers
• A poor customer experience post-acquisition 

Losing sight of the company’s identity 

Rapid growth for a company can be beneficial, but a risk involved with growing quickly can be losing sight of the company’s identity. This can especially be the case for bolt-on acquisitions that are outside the company’s niche market. 

Miscommunication and conflict with employees 

There are many different issues to address within a company during a bolt-on acquisition, especially if the acquisition includes employees from the acquired company joining the larger company team. 

Differences in pay, geographical territory conflicts for sales teams, and changes in duties and responsibilities are all topics that need to be part of ongoing conversations during an acquisition process. 

If the smaller company that bolts onto the acquiring company has employees who are transitioning into roles in the new company, it’s important to be aware of the company culture that was their experience up until this point. 

For example, perhaps the acquired company featured a typical start-up environment with flexible hours and remote work opportunities. If the acquiring company culture is more rigid, with the expectation of employees working 9-5 in a traditional office, there might be tension for the newly acquired employees. 

Ongoing conversations can help address the potential risk of loss of vision or value for the company as a whole. 

Obvious pain points for the customer experience after the acquisition 

The last risk that we’ll mention here when it comes to bolt-on acquisition is the customer experience. This is especially true if the company acquired during the bolt-on process is an online business. 

What will the acquisition look like practically for customers interacting with the larger company post-acquisition? Will there be any obvious rough edges that show in the customer experience? 

Businesses acquiring another company through a bolt-on acquisition can remedy this risk by spending time mapping out expectations and thinking about what the customer experience will look like after the acquisition is complete.

Acquiring a business through a bolt-on acquisition requires using the right information to make smart business decisions. Conducting due diligence and being aware of growth trends are both important things to take into consideration to make sure the acquisition is a smart business move. 

Experienced business brokers can help you minimize the risks associated with acquiring a business, as well as maximize the benefits of a bolt-on acquisition. 

Regardless of whether you want to acquire a company next month or next year, visiting with a business Advisor at Quiet Light can provide insight to help you grow your business with confidence and clarity.