Value creation in a roll-up can/should be derived from any of the following levers and ideally all of them to one degree vs another (a) multiple arbitrage where the add-ons (or even the initial transaction) are lower than your expected exit multiple. this is the riskiest of all levers and should not be part of your base case returns unless you can convincingly show that public multiples are and have consistently been higher than your entry numbers; (b) improving each business on a standalone basis. This doesn't have to be dramatic in each and every case but to the degree it can be done that is very good. i have typically found smaller companies lack certain capacities or capabilities that can be improved when more resources are provided as part of a larger entity (e.g. higher caliber teams, CRM systems etc) (c) overall cost reduction/efficiencies: this is typically the most tangible and obvious source of value creation. Purchasing improvement, headcount reduction and capacity rationalization are only 3 of the levers available; and (d) revenue synergies: complimentary offerings, cross selling and upselling are the focus areas here . As you plan your roll-up focus on identifying in as granular a manner as possible each lever and element.

Roll up pitches without an initial target under LOI are an automatic pass for many search investors given the risks involved. I see lots of pitches from searchers/entrepreneurs who want to do a roll up and assume they would just buy multiple companies in the same space and then hire mangers to run the acquired businesses while keeping most of the equity and not really being involved in the operational aspects of the business. Seems like a a very high risk in a small business context. That being said, roll ups can make a lot of sense. Probably best to find a deal that make sense on a standalone basis and run it for 1-2 years. Then start to make careful accretive acquisitions.