Buying strategy: executing a small business roll up

A roll-up acquisition, or a "roll-up," is a business acquisition strategy in which a company buys multiple smaller companies in the same industry or related industries to consolidate them into a larger, more efficient, and more competitive entity. 

The goal of a roll-up strategy is to ultimately sell the group of companies for more than they’re worth individually. That premium comes from creating synergies, economies of scale, and operational efficiencies by combining the resources and negotiating power of the acquired companies. 

Roll-up acquisitions are particularly well-suited for industries that have fragmentation, are in diverse geographies, or operate in niche markets. This fragmentation allows an entrepreneur to stitch together a number of smaller firms.

Popular Industries for Small Business Roll-ups

Some of the more popular industries for roll-up strategies include:

1. Healthcare: The healthcare industry, including sectors like dental practices, veterinary clinics, and senior care facilities, is frequently targeted for roll-up acquisitions due to its fragmentation and the demand for quality care services.

2. Collision Repair: Many firms are executing roll-ups for collision repair. By consolidating individual repair shops, the combined firm can better negotiate with auto insurers and receive better per-job rates.

3. HVAC Repair & Maintenance: There is a rush of buyers entering the HVAC business to roll up smaller contractors. Many hope that by reaching a bigger size, they will unlock private equity interest and be able to sell at a higher multiple than an individual business will go for.

4. Manufacturing and Distribution: Industries involving manufacturing and distribution, such as industrial equipment manufacturing or wholesale distribution, may pursue roll-up strategies to optimize supply chains and execute “land-and-expand” sales approaches with the existing customer base.

Various Roll-up Strategies

Roll-up acquisitions can involve various strategies depending on the specific goals and circumstances of the acquiring company and the industry in which it operates. 

Horizontal Integration

Horizontal Integration involves acquiring companies that operate in the same industry or provide similar products or services. The goal is to consolidate competitors and gain a larger market share. For example, a roll-up in the restaurant industry might acquire multiple local restaurants to create a regional or national chain.

Vertical Integration

In the vertical integration approach, a company acquires businesses along its supply chain or distribution network. Vertical integration can lead to cost savings through economies of scale, increased control over the supply chain, and enhanced efficiency. For instance, a manufacturing company might acquire suppliers or distributors to streamline operations.

Cross-selling

Some roll-up acquisitions focus on diversifying their product or service offerings by acquiring companies that complement their existing offerings. This strategy allows the acquiring company to cross-sell products or services to a broader customer base. For example, a technology company might acquire a software company with a complementary product to expand its software suite.

Geographic or Market Expansion

Acquiring companies may target new geographic markets or regions to expand their reach. This strategy can be effective in industries where there are untapped markets or regional differences in consumer preferences. A retail chain, for instance, might acquire local businesses to enter new markets.

Selecting a Platform Acquisition

The initial acquisition in a roll-up strategy is often referred to as a “platform acquisition.” The platform is important and selecting it depends on several factors, including the industry, market dynamics, and the specific goals of the acquiring company or investor. However, some common characteristics of an ideal initial acquisition in a platform acquisition strategy include:

1. Market Leadership: The platform business should be a market leader or have a strong competitive position within its industry. It may hold a significant market share, have a recognized brand, or offer a unique product or service.

2. Financial Stability: The platform business should have a history of financial stability and strong cash flows. It should be generating consistent revenue and profitability. A healthy financial foundation is essential for funding future add-on acquisitions and growth initiatives.

3. Complementary Industry: The platform business should operate in an industry or sector that offers opportunities for consolidation. Ideally, it should be in a fragmented industry with numerous smaller players that can be potential add-on acquisition targets.

4. Clear Growth Strategy: The platform business should have a well-defined growth strategy that can be enhanced and expanded upon by subsequent add-on acquisitions. This strategy should align with the overall vision of creating a larger, more competitive entity.

5. Strong Team: Given you'll likely want to streamline operations in future acquisitions, your first platform should have a good bench of employees who are hungry and capable of stepping into larger roles. For instance, you may want to eliminate bookkeeping or customer success roles at future acquisitions by leveraging the backoffice of your platform.

Scaling a Roll-up from 1 to N

Scaling a roll-up or platform acquisition strategy involves expanding the brand by acquiring additional businesses while maximizing the benefits of consolidation. As you scale, you can indeed gain credibility in the market, and paying with stock becomes a more attractive option. Here are some steps to scale successfully:

1. Identify Target Businesses: Continue to identify and evaluate potential target businesses that align with your strategy. These should be companies that can benefit from being part of your consolidated entity.

2. Pay in Stock: Paying for acquisitions with stock becomes more viable as your stock gains value and your credibility in the market increases. Sellers may be more willing to accept stock as a portion of the deal, especially if they see the long-term potential in your play.

3. Cross-Selling Opportunities: Leverage the diverse portfolio of businesses in your roll-up to identify cross-selling opportunities. Encourage customers of one subsidiary to explore the products or services offered by other subsidiaries within the group.

4. Brand Strategy: Continue to refine your brand strategy, which may involve consolidating acquired brands under a single umbrella brand or maintaining separate brands based on customer preferences and market positioning.

5. Diversify Offerings: Explore opportunities to diversify your product or service offerings through acquisitions that complement your existing portfolio. This can help you enter new markets or expand your customer base.

Successful Roll-up Strategies

Many well-known firms have utilized roll up acquisitions in recent years.

• The Walt Disney Company has used a roll-up strategy in the media and entertainment sector. They acquired several major entertainment companies, including Pixar, Marvel, and Lucasfilm, to expand their content offerings and franchise portfolio.

• Restaurant Brands International, the parent company of Burger King, Tim Hortons, and Popeyes Louisiana Kitchen, has employed a roll-up strategy in the fast-food industry. They have acquired these popular fast-food chains to create a larger and more diversified restaurant conglomerate.

Additionally, there are a handful of SMB roll-ups gaining speed.

• Stress-Free Auto Care is a general auto repair shop roll-up being executed by Yinon Weiss. They focus on small independent shops in Texas and California. They have over 12 shops under the brand umbrella currently.

• Benchmark Group is a holding company acquiring a number of commercial landscaping and lawncare companies throughout the Southeast. Mike Botkin is executing this roll-up strategy along with a few partners.

Regardless of your tactics, success in this buying strategy hinges on developing a playbook tailored to your target industry and being very good at operations. 

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.