Roll Ups
July 07, 2021
by an investor from Universidade Católica Portuguesa - Catolica Lisbon School of Business and Economics in Lisbon, Portugal
:Looking into the space and keen to connect with other people that are focusing on it..
Any specific tools people are using for it both to screen the market/opportunities as well as post acquisition?
from Thomas A. Edison State College in Naples, FL, USA
Sales people tend to know where all the skeletons are buried with an organization. Is there an HR nightmare brewing because a VP is sleeping with a secretary, is the company cheating customers somehow and just nobody has caught on yet, does the sales dept have faith in the current products/services offered by the company, do they hate the ops/fulfillment departments because they're incompetent, etc. Most DD on the overall culture and 'cleanliness' factor of a deal can be fleshed out over a few meetings with the sales folks.
You have to have solid operations people to support you in your dealmaking endeavors. Have multiple lenders who you can fall back on to finance your deals, never hang your hat on a singular one. You never know if the credit appetite of your lender/sponsor will change and leave you hanging.
One bad apple can set your rollup ambitions back months, either with overlooked financial issues and/or operational headaches of integrating. If you want to do a deal bad enough, you'll inevitably do a bad deal. Never be afraid to walk away from a transaction, even if you've sunk $20k, 50k, even $100k into DD because trying to right a sinking ship could cost you millions.
Sellers can either be great support beams or obstinate headaches that you have to kick to the curb prematurely due to them undermining new initiatives or programs. Never be afraid of booting a founder out early, even if you have a consulting agreement/transition agreement in place if they're being counter productive. Have bullet proof noncompete clauses that prevent them from any involvement in any company that could be considered competitive for at least a couple years. I've started asking if the principals/sellers have any extended family in competitive industries and required them rep/disclose it on purchase agreements for certain situations because I've been screwed over in the past by sellers siphoning staff/clients over to another company owned by a cousin and they're getting paid $250k/yr for 'consulting' mysteriously overnight.
Don't cut corners on legal/accounting DD. That extra $10k in DD can save you millions in massive headaches down the road, and/or give you enough protection to sue the socks off someone for breaching reps/warranties that damage you post closing. Make sure you have SOLID lawyers who aren't afraid to sue, and make sure sellers know you'll litigate if they try to circumvent or breach a non compete. Lawyers are expensive but losing is even pricier.
in Manville, Lincoln, RI 02838, USA
The majority of roll-ups fail. The reason why comes down to a breakdown or lack of consideration in a few basic components.
-Management: The management team for a roll up has to be extremely well organized with very clear duties and responsibilities. They must also know which business they're in, because a roll-up is two businesses in one, not a single business. You are in the business of acquiring other companies AND operating those companies. This also comes down to the experience and knowledge of the management team in question.
-Legal team: The legal paperwork should NOT take long. You ought to have boiler plates, checklists, etc. all already built out and have your legal team, whomever they are be perfectly clear you expect exceptionally fast communication with the seller.
-Value creation: There is two parts to this, in truth. Firstly, you MUST be able to answer the question, "What do you do after you acquire this company?" before you even acquire them. If you can't think of how you would materially improve your acquired companies to create a firm greater than the sum of its pieces then there is no value. Similarly, you need to also look at the arbitrage between big firms and small firms. If a small company can be bought for very little but a bigger firm goes for a much higher multiple on the public market or sale to PE firms, then you're in luck.. The bigger this arbitrage the better. It is precisely for these reasons why a roll up is best focused on highly fragmented industries. You MUST have both. If you have one, but not the other, then you're going to run into issues later on.
-Acquisition process: this is one where a lot of people fail. You should able to go from letter of intent to closing within about 30 days with a well designed acquisition process. Rather than the messy, long winded, negotiation filled, and open process of typical M&A, this should be more like a well oiled assembly line in a roll-up operation. This is for several reasons, one of which being to make sure the seller has the least amount of time for sellers remorse. Another reason being the SPEED at which you must be able to complete deals. You are, as a consolidator, looking to do many, many deals at the same time, some at different stages. Unlike some other firms I've seen that only want to do a few per year, a roll-up firm should be able to do a few per month, at minimum. If your acquisition process is lacking, the assembly line will start to break down and get backed up. Leaving you worse off and scrambling, which is never good. Plus, once one firm is consolidating, it is typically a sign for the other large competitors to start consolidating as well to compete. If your process is better than theirs, you will prevail.
This is just a bit of what it takes for a roll-up to be executed correctly. Happy to chat and go more in depth anytime!