At Private Market Labs, we love to dissect interesting data about the small business acquisitions space, and we hope to be sharing some data of our own very soon. An excellent work of data analysis came out very recently: our friends from the HoldCoConference shared the results of their first survey of holding companies, and the results were fascinating. Make sure to download the full report here.
The survey captured ideas and opinions of over 100 holdco representatives. These holdcos, defined by their adoption of an acquisition strategy where they purchase multiple companies to gain economies of scale through shared resources and services, paint a dynamic and representative picture of the world of holding companies.
The survey notes that “holdco” is a self-descriptive term, rather than a technical one, and respondents spanned a relatively wide range of sizes and acquisition strategies. Here are some of our top takeaways from the survey data:
Examining Growth: Development Stages, Strategies, and Evolving Trends
One angle to analyze the survey is as a snapshot of holdcos in different stages of development. The survey respondents ranged from 1 portfolio company to more than 12, with a skew towards smaller holding companies.
According to the survey, as holding companies grow, they are more likely to pursue strategies that involve holding periods of more than 10 years, are more likely to hire operators (as opposed to using the existing team as leadership for a new acquisition), are more likely to pursue larger deals, and tend to have a broader geographic reach.
Taken in the aggregate, these trends reflect how holdcos evolve over time. Given the fact that most holdcos are looking to acquire strategically and hold their companies for long periods of time (even at the smallest stages), we can anticipate the next strategic moves for holding companies as time progresses. This is valuable information for buyers building long-term plans for their acquisitions, as well as for service providers figuring out how to best manage relationships with holdco owners.
Comparative Insights into Holdco and Other Search Fund Acquisitions
The earliest holdco acquisitions look a lot like most other search funds (including self-funded searches). Aspiring buyers just getting started with the search process can look at $100M+ holdcos and see a level of scale and success that feels unattainable. However, most of the earliest holdco acquisitions look like typical search fund acquisitions. For early-stage holdcos with less than $10M in annual revenue, about a third of total transaction volume was funded through SBA loans, about half were geographically focused, and about 80% had less than $1M of EBITDA.
When we compare this data to the results of the Search Invest Group Self-Funded Search Study, which we wrote about in January 2023, the early portfolio companies of the surveyed holdcos were surprisingly smaller. Only 54% of acquisitions tracked by the Self-Funded Search Study had less than $1M of EBITDA. However, when it comes to financing, a larger proportion of self-funded searchers used SBA loans (58%) than the early-stage holdcos.
Holdco Financing Strategies and Acquisition Choices are Correlated
Overall, the holdcos surveyed used a variety of capital structures to fund acquisitions. However, holding companies with the longest time horizons tended to have a higher proportion of outside investors (25%) than the remainder of the sample (21%). This suggests that owners were able to find equity providers with aligned interests for a longer-term strategy. Holdcos with outside capital were also more likely to pursue safer acquisitions. The survey noted that holdcos with equity investors were less likely (48%) to purchase turnaround deals (aka companies needing substantial help) than the broader population (54%).
Finally, as holdcos grow, their financing strategy also evolves. Larger holdcos (particularly over the $100M revenue mark) had virtually eliminated the SBA as a financing option, opting for conventional loans instead.
Additionally, larger holding companies (and particularly those pursuing rollup strategies within a single industry) were substantially more likely to spin up new companies from within existing service lines rather than acquire an additional outside business as their scale and cash flow make this process easier.
Embracing Small Deals: How Operators Leverage Size for Success
Small deals are viable for holdco operators. While the Traditional and Self-Funded search methods tend to emphasize size as a way to reduce risk in single small business acquisitions, holdcos from the survey were notably more open to purchasing companies typically considered to be too small for other search methods.
This is potentially because holdcos build scale and reduce risk through the additive cash flow from multiple acquisitions rather than the strength of one company’s performance. Although we noted above that 80% of companies acquired by holdcos had EBITDA under $1M, further breakdown within this group is also interesting.
Just under 25% of holdcos with more than $100M in revenue set their EBITDA minimums at $500K. Additionally, around 10% of the largest holdcos had a minimum acquisition EBITDA of under $250K.
Holding Companies Owners are Bullish about the Future
Holdco owners from the survey had positive outlooks for their businesses in 2023, with 89% expecting revenue growth and more than 60% projecting revenue growth of more than 10%. When asked about their biggest worries, less than 14% reported that rising interest rates were their top concern, potentially reflecting optimism that the federal reserve will slow or halt interest rate hikes this year.
However, the largest fear among participants may be a downstream result from the current economic environment. Just under 60% reported that the potential for a recession in the latter part of the year was their largest concern in the near term.
Overall searchers looking to build a longstanding legacy should take heed of this survey. It shows that starting and growing a holding company may be more attainable than previously expected and that the scale that comes with careful deployment of capital into numerous small businesses can lead to long-term positive results. We thank the HoldCoConference team for putting together such an interesting study!