You can increase your chances of selling your company by helping private equity groups (PEG) see it as a platform company. An acquisition in a new industry can serve as a platform that organically grows or that creates new synergies. Here’s how to be a platform.

The Difference Between a Platform Company and Add-On and Tuck-In Acquisitions
Add-ons are about half of private equity buyout, which means that businesses can benefit from being seen as both add-ons and platforms. Platform companies offer an ecosystem of synergies, while add-ons tend to launch a single successful product. Both add-ons and tuck-ins are acquired for lower EBITDA multiples instead of high multiples.

There are two ways to build platform leadership—coring and tipping. If you want to make plenty of money, the key is to position yourself as a platform that uses a tipping or coring strategy.

Tipping and Coring
Coring involves creating a platform by creating a technological core in a system or market. When pursuing this strategy, it’s important to think about how to make it easy for third-parties to provide add-ons to the technology, and how to encourage complementary innovations. Successful coring examples include Google in search and Qualcomm in wireless.

Tipping tips a market toward a company’s platform rather than another potential. Examples include Linux’s growth in web server operating systems. Another option is for a business to bundle features from a similar market into its platform.

Platform Acquisitions
PEGS see platform companies as those with economies of scale, talent management, talent acquisition, and succession planning capabilities to which it can add. PEGs seek companies they can improve or grow, then eventually sell. The financial sponsor usually acquires a platform in an industry, then adds additional companies through other acquisitions. They night be competitors or businesses with a link, but the ultimate goal is to increase value.

PEGs spend substantial time and effort creating strategic buying plans and investment cases for a new acquisition. This helps them determine why they are buying a business and how they will get a return on the investment. For businesses new to a PEG, the analysis is even more comprehensive. PEG’s may lean more on the expertise of the portfolio company’s management when making an add-on acquisition. This is why talent management, succession planning, and similar factors are so important.

PEGs typically want new platforms to be both self-sustaining and scalable. The ability of the company to grow is the primary reason for the deal. It determines how the PEG will value the company. PEGs will look at factors like attractiveness, self-sufficiency, scalability, and whether the PEG can add value.

Scalable, self-sufficient ventures are profitable without a specific person. The company, not an owner or a salesperson, must “own” customers and contracts.

Valuing a Platform
Owners must build companies that can succeed without them. This is your path to the most significant wealth.

Enterprise value hinges on tangible assets far less than it once did. We’re in a knowledge era now, where intellectual capital matters. Tangible assets do still matter, though. When a PEG looks at a company, they talk to the bank. Commercial banks require tangible assets for risky loans.

There are two key metrics: probability of default (PD) and loss given default (LD). The product of these metrics is the expected value of the loan loss—a figure for which the bank must reserve capital. Without tangible assets, LD is 100% of the loan outstanding if a default occurs. So for banks to offer a loan, the risk must be minimal.

This means that if tangible assets are a small fraction of purchase price, the PEG may not be able to get much financing, and must look to the costlier non-bank cash flow loan market. Or they must use their 25% required rate of return equity. Strategic large investors are not put off by this constraint. They have a higher credit rating and better long term cash flow projections.

Transaction and market multiples matter, but discounted cash flow is king. DCF highlights soft stuff such as company culture and intellectual capital. EBITDA may vastly underrate the real value of a company, so looking at it can be misleading.

Platform companies can be valuable acquisitions. You must first thoroughly evaluate your business to arrive at an accurate estimate of value. Seek opportunities to develop the business as a platform. Create a self-sustaining and scalable business that appeals to investors, in doing so you will be much more likely to build a platform company thereby maximizing your final exit price.