What is a Founding Partner?
Founding partner is typically a term used to designate the shareholder or shareholders of one of the first companies acquired by an equity-backed platform company. The usual procedure is for the platform company to first purchase a large firm with a solid infrastructure and strong management team, with bolt-on acquisitions made later on down the road. The shareholders that acquired stock in the original, large company are referred to as founding partners because they were with the entity first, before mergers and acquisitions occurred and stock prices changed.
Roll-Ups and Bolt-On Acquisitions
To get a better notion of what a founding partner is, it’s important to understand the terms “roll-up” and “bolt-on.” A roll-up, essentially, is the formation of a larger company by multiple, smaller companies. Also known as consolidation, it typically occurs in a fragmented market space where several smaller companies are in competition, with none of them possessing adequate means to dominate the marketplace alone.
Most of the time, there is one larger company that plays a key role in the marketplace. This company, usually working in conjunction with a private equity firm, is the first in the roll-up, with other smaller companies selling the same or related goods and services being acquired later.
Bolt-on acquisitions are then added to the larger platform company and used to expand its presence in, or domination of, the marketplace. In many cases, the private equity firm that began the consolidation chooses companies with complementary goods and services to bolt-on to their major company and the smaller companies that have already been consolidated with it. The bolt-on acquisitions are typically small businesses that have limited capacity to grow on their own, but that can offer technology or geographical diversification to the platform company.
Expanding on Founding Partners
During the roll-up process, it’s important for shareholders to get in at the ground level of a roll-up. Being on board early during the process means that founding partners purchased the stock at the original share price. Shareholders of bolt-on companies, because they join later, typically receive stock shares at significantly higher prices as the company grows and stock prices rise.
The higher stock valuation generally occurs when the roll-up process goes smoothly and the private equity firm responsible for the roll-up revalues the share prices higher as the marketplace becomes more successfully dominated by the platform company. It also means that founding partners usually see less dilution to the valuation of their own stock. As each acquisition is finalized and the company performs more transactions, fewer stocks with a higher value are needed with each deal.
One additional note to be aware of is that, along with the perks of better stock valuation, many founding partners are able to take positions on the management team during the roll-up process. Sometimes, founding partners go on to fill board seats for the platform company. Ultimately, being a founding partner of a firm proves to be fruitful, both financially and in terms of placement and responsibility within the company.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: