low value roll-up valuation/ deal model

April 18, 2023

by a searcher from United States Naval Academy in Johnson City, TN, USA

I've recently acquired a service based company. How would you go about constructing deals to roll up smaller competitors that hold little to no value outside of their customer base in an industry without much customer 'stickiness'? I'm thinking maybe as simple as a referral fee or commission for any business the owner pushes my way when they shutter the business upon retirement. I Basically need a way to get in front of the customers first when they have to look for a new supplier. There are probably more creative ways to funnel that value that I'm not thinking of. Any ideas out there? resources (white papers, podcasts, blogs, etc on the subject?)
Thanks!

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Reply by an investor
from Fort Lewis College in Denver, CO, USA

Thanks for the tag ^redacted‌. Good comments above. The only thing I would add is you say "they have little/no value" but you want access to those customers so potentially they have some value to you. Reading between the lines I think you are saying you are just unsure what that value is. I would find a low cost/risk way to test your hypotheses about what they are worth. Then you can just make a financial offer moving forward. In my mind, that would differentiate you from other "buyers" in the market for those customers who also would take them at no cost/risk. It seems to me, under that no risk to the buyer scenario they "sell" to the competitor they have known for years rather than you. Hard to scale this strategy unless you can be the obvious/logical "buyer".

Reply by a searcher
from University of Tennessee in Nashville, TN, USA

Hire them. This is a common problem in the IT Managed Services space. There are numerable solo practitioners whose EBITDA is too small to justify a sale in the minds of the owners. Sell the benefit of keeping their client base, keeping their income stream (sometimes necessary to negotiate), gaining access to resources that they do not have as an independent, and not having to worry about being an owner or about creating a succession plan. They can walk away when they want to, you can gain their customers immediately, boost your revenue, cross-sell complimentary services, and have the easiest customer transition possible.

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