Selling to Private Equity

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February 10, 2024

by a searcher in Chicago, IL, USA

Hi all.

I have a question regarding roll up strategies: Is there value in simply buying 10 or more companies and then selling to private equity without having made operational improvements or implemented any standard systems. For example if I acquired ten Plumbing buisnesses each achieving $2M in EBITDA, would Prive Equity firms be interested, or would they only be interested if the businesses had similar operations and have had efficiencies implemented?

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commentor profile
Reply by a searcher
from University of Pennsylvania in Jersey City, NJ, USA
Short answer: yes but it will involve a lot of work regardless

Longer answer below

The reason PE firms are willing to pay a higher multiple for bigger businesses:

i) the investment banks transacting a $20mm EBITDA company have more interested buyers for a business than banks transacting smaller deals.

ii) benefits from scale provide a sustainable competitive advantage (e.g., revenue synergies, lower purchasing costs, lower G&A, etc)

In reality,

a) finding 10 businesses each with $2mm in EBITDA is a lot of work - those deals tend to be hairy (need to be thoughtful about EBITDA add-backs, accounting for net working capital, etc)

b) Further each business has a unique culture, and each owner is typically thinking about their legacy upon a sale: integrating several small businesses of this sort into a single integrated business with combined purchasing, back office, marketing, advertising involves non-trivial work
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Reply by a searcher
from The University of Texas at Austin in Chicago, IL, USA
There can be value in buying multiple companies that are similar or have related offerings with the intent to sell to private equity at a higher multiple. It’s commonly referred to as a “rollup strategy”. However, this cannot necessarily be successfully done in any industry. Private equity tends to look at industries that can quickly be scaled with additional financial investment and each private equity fund tends to have a narrow industry focus. I think it can be done but you need to have a good understanding of which industries and which business KPIs are attractive to private equity.
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