What Is A Roll-Up?
I’ve been involved in various types of roll-ups over the years; from designing aggregated platforms in various spaces to representing companies and more. In this episode, I’ll walk you through roll-ups and everything they entail.
What is a roll-up? The term roll-up refers to an investor buying different companies to consolidate them into a single entity. Let’s break it down; roll-up is basically the concept of somebody coming into a particular space and industry and buying up a lot of companies to join them into a mega-company. Roll-ups are often in two parts: investors who acquire companies and own them forever and investors who acquire companies and add something to the outfit.
Back in the 80s, this company merger strategy was more popular, but it was associated with bad experiences, as many ended up not making any significant profit. That theme is making a comeback and roll ups should be approached with caution. They won’t work for everyone, each situation needs to be analyzed in particular. If roll ups are the right choice for your company, they can be very profitable.
Why People Do Roll-Ups
Investors decide to buy companies in the industry and merge them for many reasons. The primary aim is to reduce costs. Other reasons could be to improve the resale value or make the company stronger than its initial condition. However, many factors affect the success of a roll-up. A significant risk factor is market unpredictability that could affect the bottom line, multiple overcharges, cultural fits, and failure in cost reduction.
Now, let’s move on to why roll-up might benefit you.
What Would Be The Benefits Of A Roll-Up?
It has a high failure rate, if not managed in the right way. When companies merge and the system is centralized, it is possible to reduce overall cost, streamline personnel and combine company systems for efficient and consistent production. When done right, it fosters efficiency, making the company more profitable. It also increases the business valuation by multiples as it acquires greater scale.
One of the important components to ensure a good roll-up is the value creation proposal. If the roll-up does not improve the company, there may be no multiple arbitrages in value creation. Besides maximizing value, the company must also pay attention to whether the roll-up will increase EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
The bigger the company, the higher the multiples. Roll-ups give companies better recognition, more exposure, and access to new markets. Every company wants these. Who doesn’t?
These are the things a company can achieve by developing and executing a successful roll-up strategy. It is possible to increase the profit margin of all the companies involved. A roll-up could also bring more to the table beyond the basics if it is invested in bringing professional management, creating systems to improve fragmented companies, and launching more product sales.
Aggregation In Roll-Ups
Roll-up companies are also called aggregators. There’s a lot of aggregation roll-ups going on in the tech and financial services space. If you favor the entrepreneur operator model, odds are you’ll enter any roll-up aggregation opportunity as the seller, which is much more likely to be in your field.
This scenario is more likely because that’s what you know; you’ve seen the opportunities there and you know the players. I’m not saying you can’t identify opportunities in an industry that you don’t have experience in. Of course, you can! After all, you’re a brilliant entrepreneur! I’m just saying I’ve seen roll-ups work more when it’s private equity money coming in — identifying the space and hiring the right people.
It also works when it’s an entrepreneur from the industry with experience in the business sector they are investing in. They seize this opportunity because they’ve figured out a way to do it better. The higher the industry fragmentation, the better, since the number of targets becomes higher too.
Aggregation has proven to be more successful in industries that are less efficient. This includes industries where an innovative solution could be applied to make operations more efficient or where there’s a gap between the best and the rest. If you’re jumping on this roll-up opportunity, your target should be companies from industries where there’s a dearth of professional management. You will thrive by recognizing chaos and potential for improvement.
I’ve also seen roll-ups work effectively because the roll-ups bring more to the table. It may be professional management that would help boost the company’s growth. Roll-ups perform better when the owner can be replaced by someone more qualified to adapt the new legal policies.
At the time of negotiation, be aware that the company in the roll-up must pay a lower multiple than the projected IPO valuation multiple and also less than the average trading multiple.
The acquisition process should be in the smallest details and cover all the years of execution. The longer it takes to close the deal, the easier it is for the seller to give up. The idea is to close the deal within 30 days.
Remember to do your due diligence if you’re on the selling side. You need to do due diligence on the:
- Model — you need to know what the model is. Do you think you would be happy with this model going forward?
- Management style — can they pull off the roll-up?
- Risk management — you need to look at the market and assess your chances of success.
- Potential for improvement — as an example, the multiples.
- Past roll-up — check the history and success rate. If you’re among their earliest businesses, you have more leverage to negotiate a better deal.
Corey Kupfer is an expert strategist, negotiator, and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author, and professional speaker. He is deeply passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.
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