Is a Corporate Roll-Up Strategy Right for You?

February 8th, 2018

We hear terms and phrases like “industry consolidation plays” or “spoke and wheel models” tossed around all the time by investment bankers and private equity firms as they approach business owners about the future of their businesses. However, few ever really explain what these processes truly entail and how they will benefit the business and its owner. Today, we outline the corporate roll-up process for business owners and clarify what they can expect as the buyer in this process.

A corporate roll-up strategy is broadly defined as a process in which investors (other business owners, private equity groups, or venture capital firms) acquire multiple smaller companies in a specific market segment with the goal of combining the companies into a new company (“NewCo”) that takes advantage of economies of scale and, more than likely, will eventually be worth significantly more on a combined basis than the sum of its parts. One of the most notorious roll-up entrepreneurs is Harry “Wayne” Huizenga who was known for his relatively aggressive approach to acquisitions. Huizenga utilized a roll-up strategy across multiple industries, including, but not limited to; waste removal (Waste Management), auto dealerships (AutoNation), movie rental stores (Blockbuster), and many more. While not everyone needs to be as aggressive as Huizenga with their roll-up strategies (roughly 133 companies acquired by Waste Management) they should see the benefits of removing competition and eliminating excess expenses.

So what’s the first step in the process? Generally speaking, you, as the owner/investor, need to determine that you are willing to spend the resources (time and money) on making multiple acquisitions and merging the entities. Once you’ve committed to the idea of the process, then the real fun begins.

While going down concurrent paths, we recommend owners/investors determine their source of funding, acquisition integration strategy, and select a transaction advisory team. Now that last one may sound a bit self-serving, but we assure you a good transaction advisor is very important to the process. Breaking things down a step further, here is what you are looking at:

  • Funding can come from any number of sources such as your own cash holdings, debt financing, equity stakes in the NewCo, bringing on a third-party investor, or some hybrid approach. At this point, you want to understand how much your business can realistically spend on an acquisition without stretching your cash flow to its limits, and you may consult with your advisors and bankers to develop and refine these analyses.
  • Integrating the transaction takes time and patience, and should be broken into steps. As transaction advisors, we will support your efforts to develop this plan of action to ensure you get the most out of the acquisition, though putting it into action is really on you. That said, here is a three-step approach to the integration process:
    1. Merge the financial reporting into a single entity and try not to do too much else. This takes serious restraint, but combining cultures and processes too soon can be a major disruption to the business and negatively affect employee and client retention. As such, you will want to give things some time to settle before making more noticeable changes.
    2. Next, combine all the back-office functions across the two companies like payroll, bookkeeping, insurance, and so on. In some cases, you may even have to eliminate duplicative positions which can be tough, but is essential to making the acquisition profitable.
    3. Lastly, bring the front office functions such as general operations, sales and marketing, branding, and other highly visible, client facing groups together. While you don’t want to do this too soon, you also don’t want to push the process off for too long either – especially if the two firms have different cultures. When pushed off for too long, you may start to see a divide form between the two groups that makes things more difficult.
  • Selecting the right transaction advisor is critical. You want to identify someone that has the connections within a given market to open doors for you in the acquisition process, experience negotiating and evaluating transactions, and is willing to go to bat for you and handle some of the difficult negotiations. One of the last things you want is for a new employee or partner to have a negative view of you from the transaction process, so your transaction advisor should serve as the one receiving any and all disdain.

The next phase is to formally begin the roll-up strategy process. Typically, this comes back to your transaction advisor since they likely have a database filled with companies to contact on your behalf. This also serves the benefit of keeping your desire to make an acquisition quiet until the potential seller indicates that they have an interest in moving forward with the sale of their business. At this point, your transaction advisors experience and knowledge should be coming through as they assist in the support of the analysis, valuation, negotiation, and other aspects of the transaction process that gets you to the finish line.

Lastly, the roll-up strategy process will continue at the rate that you can handle integrating a transaction given your operational and financial constraints, and won’t really end until you indicate a desire to sell what you’ve created or simply grow organically into the foreseeable future. For many owners/investors, the process takes two-to-three years to see a return on your investment from a given acquisition. Therefore, you need to plan your exit strategy accordingly if the goal is to make a significant number of acquisitions before eventually exiting the industry as well.

Please contact a member of our transaction advisory team if you have any questions about a roll-up strategy from the perspective of either a buyer or seller. You can contact us using hq@kaulkin.com.

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