I recently wrote about how
to set your strategies around mergers and acquisitions, but I wanted to go
into more detail about one type of M&A strategy: the roll-up. A roll-up is when you plan to buy multiple
businesses within one industry. And,
there are many potentials ways to implement a rollup, which I will detail
herein.
ROLL-UP STRATEGIES
You need to figure out exactly what your goal is from the
roll-up, much more than simply growing revenues and market share. For example, you may be rolling up
geographies for an expanded footprint of boots on the ground: taking you from
Chicago alone, into New York, Los Angeles and Miami too. Or, you could be rolling up products: taking you from a one product company (e.g.,
search marketing agency) to a multiple product company (e.g., adding email marketing,
digital advertising and social media marketing). Or, you could be rolling up industries to
sell into: adding automotive, retail and
consumer products, to your original insurance focused business. Or, you could be rolling up talent: if your marketing driven business is able to
add a strong sales team or strong technology development team into your
arsenal. Whatever is most needed for your business, and positions you for long
term success when you are done.
ROLL-UP FINANCING
One way you can finance a roll-up is simply using your
company’s equity as a currency. For
example, you own 100% of one business today, but you might own 25% of the
company, after four businesses are rolled-up, with the shareholders of the
other businesses owning the other 75%. Although
most sellers like to see some cash at the time of sale. The other way to finance a roll-up is by
finding a private equity fund to help you with the needed cash, with the fund
making an investment in your company.
Not all private equity funds do roll-ups, so you need to find the funds
that prefer roll-up strategies in your industry (and can guide you through the
typical pitfalls to avoid, which they have learned over the years). And, assume the fund will not be financing
the roll-up entirely with equity, so make sure the rolled-up businesses will
have at least $3MM of cash flow with which to pay any debt-related payments
which may be involved.
ROLL-UP INTEGRATION
My number one mantra from a roll-up of businesses is to “Do
No Harm”!! Do not try to fully-integrate
these businesses day one, given the various personalities, company cultures and
skillsets involved. I try to think of it
in three sequential phases: (1) phase one is simply rolling-up the financials
into one entity, keeping the businesses largely running the same as they were
before the deal; (2) phase two is integrating all the back-office functions
across all companies (e.g., payroll, insurance, overhead); and (3) phase three
is integrating the front-office functions (e.g., cross-selling products,
cross-training sales teams, centralized brand).
Don’t try to do it all at once, as it will most likely not work out, as
planned, and could result in disgruntled staff quitting and revenues falling
far short of plan. Phase it in over a
couple years.
ROLL-UP PITFALLS
There are a lot of potential
pitfalls with any single M&A transaction, which I won’t repeat
here. But, when you are rolling-up multiple
M&A transactions, the opportunities for pitfalls are multiplied and
compounded. For example, merging two
company cultures is hard enough, yet alone merging ten company cultures. And, although the growth is exciting, the employees
may not like the combined Newco company ,as compared to how things used to be
at the stand-alone Oldco company. So,
get ahead of those issues and start pre-selling the future vision and culture
across the organizations from day one, and make sure each company is involved
in the creation of whatever plans are discussed. And, often times, small businesses are
dependent on their founders, so make sure they are locked-up as employees of
Newco for some mutually agreeable transition period (e.g., at least one year),
to ensure a smooth transition and limited impact to revenues post transaction.
ROLL-UP ECONOMICS
I have previously talked about shooting for 1+1=4 economics
from M&A transactions. For example,
two complementary products, selling into two different industries, gives two
$10MM revenue businesses the chance to get to $40MM together, after they start
cross-selling their products into the other company’s clients. But, those economics don’t hold up when only
rolling-up geographies, as example, where 1+1=2 in a best case scenario of
nothing going wrong. And, as we learned,
the opportunity for things to go wrong is quite high. So, build in cushions into your combined
company revenue plans. Perhaps build in
a 50% haircut on the target company’s revenues when building your models and
negotiating your deals (giving the seller an earn-out if things go to plan, but
not overpaying if they don’t).
SUMMARY
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