Hi There !
For anyone that has pursued or is pursuing a roll-up strategy, how did you solve for dilution? For example, if the typical searcher (or pair) gets up to 30% of the company, how does an additional equity raise affect that? Is it standard to get diluted down pro-rata? Or maybe granted additional equity to maintain your percentage?
Obviously, if you can fund acquisitions organically that is ideal but in some instances where speed is important an additional equity raise may be the way the go. That said, if the searches get diluted down, that doesn't seem to incentive additional acquisitions.
Any thoughts appreciated!
Roll-up Strategy & Dilution ?
by a searcher
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We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.
As a self funded partnered search over the past few years, myself and my business partner have pursued a roll-up strategy and have had to deal with the dilution issues you've raised. We've used three methods in combination. 1) performance shares being issued to the searchers if achieving certain additional acquisition and EBIT milestones, 2) a floor in the level of dilution to the searchers and early investors 3) Multiple equity raises where the value of the business was growing before each future raise.
Each of these methods had to be explained and agreed with all shareholders and set out as part of a long term acquisition strategy. Through that period we had many discussions with investors around the reducing percentage ownership of a larger pie vs a static ownership and the benefits.
Hope that helps. If there's other suggestions for other / better / simpler ways to fairly align everyones interests in a roll-up strategy I'd love to also hear them and see if it makes sense to iterate our model.
Best Regards
Richard