September 30, 2022
Adam Hoeksema
According to PitchBook Data there were 3,168 roll up acquisitions totaling $323.4 billion in 2020 alone and 2021 had a similar, if not even faster pace. With hundreds of billions of dollars at stake each year, the roll up strategy has become a great opportunity for both buyers and sellers of small businesses. In this article I want to highlight the following:
- What is a roll up acquisition?
- Why is the roll up acquisition strategy popular?
- What is a platform company as it relates to roll up acquisitions?
- Private equity and the roll up strategy
- How does a roll up acquisition work?
- Financial modeling for a roll up strategy
- Rolling up multiple franchise units
Throughout the article I will also be referencing and sharing screenshots of our Roll Up Acquisition Financial Model Template. This template makes it easy to add in multiple acquisitions over time and model consolidated financials for the combined companies.
What is a roll up acquisition?
A roll up acquisition is the process of acquiring a number of smaller companies in the same industry to create a single larger company. Roll up acquisitions are also often referred to as bolt on acquisitions or add on acquisitions.
How does a add on acquisition work?
In a roll up acquisition the buyer will typically have an established business with a high performing business model that will then acquire other similar businesses and merge them into the existing business which is often called the platform business. The combined businesses will then share best practices, share services and share buying power to get the best deals on products and services.
Why is the bolt on acquisition strategy popular?
There are a number of reasons why the roll up acquisition strategy has become quite popular in recent years including:
- Economies of Scale
- Shared Back Office
- Geographic Expansion
- Faster Growth
Let's dive into each:
Economies of Scale
Many of the advantages of the roll up strategy can probably be included in the concept of economies of scale. Let’s take a dental office roll up as an example. If you are rolling up dental offices and you are buying new equipment for 50 dental offices you are going to be able to get a volume discount on that new equipment when compared to the price for the equipment for a single office. This same concept will apply throughout the business. You will likely save money on a per unit basis on many of your product and service needs which allows the combined companies to cut prices below their competitors, or simply generate additional profit.
Shared Back Office
A shared back office or corporate office is another example of the benefits of a roll up. With 50 dental clinics you can have a shared insurance billing department, a shared collections department, shared scheduling department, accounting department, marketing department etc. These shared services allow the combined companies to lower the cost for each service per unit when compared to a standalone dental clinic.
Geographic Expansion
A add on acquisition strategy can be used to help a company expand geographically through acquisition instead of needing to start a brand new unit of the business with no customers in a new geography. If you operate a plumbing business in 3 cities it might be easier to acquire an existing plumbing business in a 4th city that already has a customer list, contracts, and employees in place rather than starting from scratch.
Faster Growth
Finally, private equity companies have loved using the roll up acquisition approach because it allows them to grow their platform business faster. By acquiring existing small businesses that are already profitable the PE firm can immediately recognize the benefits for increased profitability and cash flow for the parent organization. This article hits on why this is a popular strategy to ramp up growth quickly.
What is a platform company in private equity?
We mentioned that PE firms will use a roll up strategy to ramp up the growth of the platform company, so let’s define that a bit more. A platform company, as it relates to roll up acquisitions, is the company that each smaller unit will get merged into. Perhaps you are an entrepreneur and you are looking to roll up your competitors, in which case your existing business is the platform company that others will merge into. But when it is a private equity firm implementing the roll up strategy, they won’t have an existing platform company to start with, so let’s dive into how roll ups and private equity work together.
A platform company in private equity is an established business that is often used by private equity firms as an acquisition vehicle for further investments. The platform company provides an operating base from which additional acquisitions can be integrated quickly. The platform company is often the first and largest investment in an investment portfolio, providing the foundation for future investments to achieve economies of scale and synergies. Platform companies often specialize in one or more particular industries, allowing them to remain current on trends in that sector and quickly capitalize on new opportunities. At the same time, platform companies can often increase the businesses’ market presence, its capabilities for acquiring additional businesses, and its capacity to make future acquisitions more easily. The platform company also permits private equity investors to access the greater long-term potential of a particular sector or industry. The long-term goal of private equity firms is to build a platform that could ultimately be sold to maximize returns.
Private equity and the roll up strategy
According to MarketWatch the top 25 PE firms were sitting on over half a trillion dollars in uninvested funds in late 2021. These private equity firms are charged with investing these dollars to earn a return for their partners. With that much cash on the sidelines they need a way to put those dollars to work quickly and show a return on their investment.
Roll up acquisitions are a popular investment strategy for these firms because it allows them to put the capital to work quickly as they buy up many existing businesses. If they were to use the funds to help a single company grow organically they just wouldn’t be able to put enough capital to work efficiently and quickly. Additionally, it could take time for new investments to start adding to the overall profitability and cash flow of the firm, so acquiring and rolling up multiple businesses that are already profitable can provide positive cash flow immediately.
Search fund Roll Up Acquisitions
In addition to private equity there has also been a trend in search funds utilizing a roll up acquisition strategy. Search funds will acquire an initial platform company and then incrementally roll up additional units. I wrote a detailed article on how to start a search fund to acquire a business.
Financial modeling for a roll up strategy
There are clearly a number of financial advantages for the combined company in a roll up strategy, but trying to create a financial model that can demonstrate the consolidated result of the combined companies along with the timing of the acquisitions and financing can be quite tricky.
I recorded a demo of how to use our template for a roll up acquisition below:
Whether you are using our template or building your own financial model there are a number of things you will want to make sure to model.
Add in Individual Acquisition Details for Each Business Acquired
The model allows you to enter multiple businesses that you plan to acquire. It also allows you to enter in assumptions for purchasing multiple business units at once, so for example if your platform company is acquiring vet clinics and you acquire a chain of 10 of them, you can enter in that transaction all in a single line in our model.
Add Timing and Debt Financing Details for each Business Acquired
You can also control the timing of each acquisition as well as include details about debt used for each unit acquired.
Add Business Unit Level Revenue and Cost of Goods Sold
Next you can build in monthly revenue and unit specific expenses for each unit.
Add Operating Expenses
You will want to be able to add in operating expenses as a percentage of revenue, a fixed cost, or on a per unit basis. For example, you will want to be able to model local marketing costs on a per unit basis.
Consolidated Pro Forma for a Roll Up
Once you have all of your assumptions entered, you will need to be able to produce a consolidated set of financial projections. You can see some examples of what that should look like below:
Consolidated Pro Forma Income Statement
If you need any help customizing a financial model for your specific roll up opportunity, check out our custom financial projection services.
Rolling up multiple franchise units
One more topic I wanted to hit on is that individual franchisees can use a roll up acquisition strategy to buy up multiple franchise units. These could be the same franchise, or some owners will buy multiple units of multiple different franchises. So you could have someone that buys 10 Subway units and 10 Jimmy John’s units. This type of roll up can still benefit from many of the advantages of a roll up like shared back office services. Our multi unit business financial model template will also be quite helpful in modeling out a multi unit franchise operation.
Summary
In summary, I think there is a lot of opportunity for strategic buyers to roll up small businesses and with that comes some financial modeling complexity. Our hope is to help you avoid the need for high priced financial modelers by creating tools and educational content that will help you do this work on your own. If you have any questions or suggestions for us, please contact us today!
