A Simple Guide To Industry Roll-Up Acquisitions

When done successfully, industry roll-up acquisitions can dramatically grow and strengthen your business. In this post, we break down what an industry roll-up is, why companies pursue it, and what makes it an effective (and sometimes risky) business strategy.

What Is an Industry Roll-Up Acquisition?

In an industry roll-up acquisition of companies, a buyer acquires multiple companies in a series of one-at-a-time transactions in a specific industry or service, particularly one that is starting to mature. The acquired companies are then "rolled up" into a master company. The result is often a much more competitive business than any of the original pieces could have been on their own.

Below are the basic steps of a roll-up acquisition:

• Identify a Fragmented Industry. Roll-ups work best in industries filled with many small or regional players, with no single dominant leader. These markets often suffer from inconsistent pricing, operational inefficiencies, and limited brand recognition, which means there is plenty of upside for consolidation.
• Acquire a "Platform" Company. The acquiring firm usually starts by being or buying a strong, stable company to serve as the model for the Platform. This business becomes the operational format and often becomes the trade name under which wider marketing efforts under a unified banner are made and into which all future acquisitions and their operations and marketing efforts are integrated.
• Add More Companies ("Add-Ons"). The next phase focuses on buying competitors, complementary businesses, or regional players. The acquiring company is best structured as a holding company with publicly traded stock, or with a plan to be a publicly traded stock company through reverse merger or an IPO. The holding company is the acquirer of all of the companies in the roll-up, including the initial company and the acquired small or regional players. These acquired companies are often purchased with a package of cash, stock in the holding company and low-priced long term options with annualized vesting.
• Standardize and Integrate. After each acquisition, the holding company works to unify systems, branding, operations, and leadership. This reduces redundancy and drives efficiency and branded marketing.
• Scale and Grow Valuation. The combined company becomes larger, more profitable, and more attractive to buyers.

Benefits of an Industry Roll Up

Industry roll-ups offer several compelling benefits. For the company initiating the roll up, the strategy enables rapid expansion that organic growth generally can't match. By acquiring competitors, a company strengthens its market power, increases efficiency, and typically commands a higher valuation.

There are also advantages for owner-sellers of the individual companies being rolled up. The owners are able to realize cash and stock capital gains from the initial sale, and additional wage and stock/option gains over time as the combined businesses efficiencies increase revenues and profits, while the value of their stock in the parent company increases over time. There are also retirement, insurance and health care insurance efficiencies, as well as a basis for rewarding and retaining valuable employees, while removing redundant employees and functions. This lowers operating costs and increases profits. These acquired businesses benefit from advertising and greater name recognition, economies of scale from additional revenue streams they share in, improved employee and management benefits, geographic expansion of the brand name, and the ability to further cashout when the former owners are ready to retire.

Some industries are better suited for roll-ups, including:

• Dental and medical practices
• IT managed service providers
• HVAC, plumbing, and home services
• Funeral homes
• Real estate brokerages
• Specialty manufacturing
• Independent schools teaching skills and services, tutorial services and hobby stores

Risks of an Industry Roll Up

Of course, no business strategy is without risks. Common pitfalls include:

• Integration headaches (i.e., clashing corporate cultures, incompatible IT infrastructure, and poor communication)
• Overpaying for acquisitions
• Losing key employees or customers during consolidation
• High debt loads (many roll-ups are too heavily leveraged)

These risks can often be effectively managed through strong leadership and a comprehensive integration plan.

Tips for Businesses Pursing Industry Roll Ups

When contemplating an industry roll up, proper planning sets the stage for success. A buyer of the roll-up companies needs some or all of these key elements to convince owners to enter their industry roll-up:

1. Clear Strategic Vision is most important to convince a seller that the roll-up brings important advantages of scale, synergy, efficiency and market growth.
2. Credibility can be demonstrated by success in previous businesses or acquisitions, industry experience, and financial strength.
3. A Value Proposition that provides clear benefits to the seller, such as operational synergies, growth opportunities, favorable terms, and an endgame for those looking to retire.
4. An Efficient Deal process that is straightforward and easy to understand.
5. A Cultural Fit with alignment of values and company culture to ease integration concerns.
6. Trust and Transparency by open lines of communication to build confidence in the buyer's intentions and process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.