Both debt and equity Capital Providers have been making significant investments in company roll-up strategies across a wide range of industries, sectors and valuation ranges. These can be strategic as well as, increasingly, sponsored roll-ups – ie: roll up strategies which have been “sponsored” by a person or team that has identified a fragmented industry or sector that is expected to have multiple sub-scale sellers that can be aggregated into a larger, more valuable company from being more sustainable given more scale as well as increased efficiencies due to scale and reduced redundancies.
Company roll-ups are expected to remain robust based upon the dynamics in family run businesses (see Family Business – Sale or Capital: 5 Steps to Highest Valuation) and the expectation that there will be many businesses that do not become inherited by the next generation but get sold or closed instead. Most of these family run businesses are in industries and sectors where they can benefit from consolidation, scale, pricing power and increased operations.
The theory behind roll-ups is compelling. Quickly build a scaled company that leads to a successful exit at a significantly higher valuation than the invested amount. Not surprisingly, the reality of executing the plan is harder than it looks and depends upon a number of important factors.
Company Roll Up Strategies
|Team Track Record: There are usually nuances about a business sector and business scale that makes it more difficult to be successful if there is no one on the team with a track record in the business plan. Best practice is to have people who have a track record in the sector combined with people who have a successful track record acquiring companies.||Ensure team has right skills including sector as well as acquisition|
|Pipeline of Acquisitions: The fundamental characteristic of the Roll Up strategy is to merge multiple companies into a larger company through acquisition. If there is not a clear path to acquisitions, it makes it more difficult to execute the growth plan in a time period that is attractive to Capital Providers.
One common assumption for successful roll-up strategies is that valuation multiples for the acquisitions are lower than the exit valuation multiple of a larger company. There it is important to understand the exit strategy to ensure the acquisitions are done in a manner that accretes value. For example, if sector valuations are based upon EBITDA, buy EBITDA as cheaply as possible through the acquisitions and exit at the higher sector EBITDA valuation standard.
|Identify acquisition pipeline– preferably some with LOIs, and understand acquisition valuations as they relate to exit valuations|
|Seller Psychology: One of the most difficult aspects of buying privately owned businesses is that the seller does not usually have experience being a seller. They are not necessarily familiar with market valuations, structures and, at any point, can change their mind about their willingness to sell. This information mismatch is what makes it possible to buy businesses at attractive valuations, But it can also, be the reason that an acquisition falls apart, even when it “makes sense” from a market perspective.||Assess seller commitment and alignment to sale early in the process|
|Governance: Governance of the ongoing company is integral to successfully building value. The leadership needs to be clear about their capabilities as well as about their strategy. Since roll-ups are a high growth strategy, clearly defined investor, board and leadership roles that integrate into decision making will be integral to helping employees understand and execute high growth plans.||Implement strong governance practices and communicate to employees effectively|
|Alignment of Interest: Since the rolled-up company will be comprised of multiple companies – all of whom must integrate, even if its only a small part of the operations, alignment of interest of all leadership including those who will continue as leaders as well as former leaders of acquisition companies is crucial to ultimate success. One of the best practices for alignment are using forms of stock to keep everyone focused on company valuation.||Ensure alignment of interest that focuses on increasing equity valuation|
|Funding Sources and Costs; Since there will be multiple rounds of acquisitions with multiple rounds of raised capital (usually both debt and equity) an important aspect of the capital raise is for there to be reasonable terms at each raise such that the terms do not hinder future capital investment.||Structure capital to complete the strategy in order to avoid funding constraints|
|Integration/Maintain Trackable KPIs: It is usually assumed that part of the roll up strategy will include integration of some activates – leveraging sales forces, consolidating back offices, consolidating operations, reducing leadership overhead. These strategies usually are easier said than done since they usually entail changing some operating procedures and mean that employees must be trained in new methodologies. One strategy is to make these changes in the backend so that they minimize their effect on employees. Or, if the integration requires changing employee behavior, a clear roadmap for the changes will help ensure success. In addition, these integration benefits need to be careful tracked through relevant key performance indicators (“KPIs”) to maximize the outcomes of the roll-up strategy.||Clear KPIs are needed to obtain changing operational maximum benefit and success|
A successfully executed roll-up strategy can be very rewarding for all involved including for the Capital Providers. Roll-up companies offer the Capital Provider a chance to have a high growth company in traditional industries at significantly lower valuations than larger company standard valuations creating an opportunity for enhanced returns.
Deer Isle Group
Founded in 2007, Deer Isle Group empowers Capital Seekers with the right tools to ensure transparent, smooth, and efficient capital sourcing. Since our founding, we have successfully transacted over $5 billion in capital for companies and funds in a wide variety of security types, sectors, and geographies. Deer Isle provides innovative unbundled capital sourcing capabilities, expertise, and guidance that are customizable depending upon capital seeker requirements. These include a proprietary technology that offers Capital Seekers “direct issuance” capabilities to curated set of potential Capital Providers from a universe of 10,000+ institutional capital sources and “as needed” strategic capital consulting to prepare for a capital raise/M&A, as well as closing expertise/guidance for completing a successful capital raise/M&A.