Strategic Rollup: Building a Platform for M&A
One strategy for building a large, particularly competitive and capable business in a relatively short period of time is often referred to as a rollup. This strategy is one that I believe to be somewhat intriguing and uniquely effective. Although it is predominantly capital intensive, as it requires a large amount of capital to make the numerous acquisitions, it is effective when it is done properly. It is also important to note that this strategy can be damaging when it is not done properly as some of the businesses in the rollup can be lost or downsize dramatically.
Acquiring a solid platform company with an outstanding and capable management team is imperative in successfully complete a rollup. The reason the management team needs to be so capable is because when multiple acquisitions are made and handed to the team they need to have the ability to plug those companies into the current platform that already exists. It the team does not have that capacity then there will be a myriad of problems that could arise.
One benefit of building a strategic rollup is that the value of each of the companies separately is not as great as the value of each of the companies collectively. There are a number of reasons for this notion. First, when you are able to weed out many of the unnecessary overhead expenses and combine them all into a single platform, many of those expenses will go directly to the bottom line increasing the profits. The second point is that the value of a large business becomes greater simply because it is viewed as a more stable business that is less likely to fail or go bankrupt—depending on how the company is leveraged on the balance sheet of course.
We are currently working with a number of firms all over the U.S. that are pursuing the rollup strategy. Whether you represent a private equity group or are a business owner who you believe already has the right platform company for the job, we recommend you contact us at DealCapital to discuss how we can assist you in the process.
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