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One great way to grow a company is through roll-ups.
A roll-up is a powerful deal type that involves acquiring multiple smaller companies to combine them into a large entity. When properly carried out, these strategic actions can significantly increase shareholder value and set up companies for record-breaking development. In this article, we have the privilege of hearing from Sam Youssef, Founder and CEO at Valsoft Corporation, a company that has experienced explosive growth through multiple roll-ups.
“You're not acquiring just to grow. You're acquiring because you will do something with the target that will make your overall company stronger.” - Sam Youssef
Sam started as an investor who played more on the stock market. But after a few years of studying companies, his team found that the companies doing roll-ups were more accretive and valuable. They started doing their own acquisitions and have done 60 deals in the span of five years.
Executing roll-ups
Roll-ups are a great way to manage competition in crowded or fragmented markets like software companies. Sam personally found a lot of interest in the software industry due to its high predictability, low churn rate, and higher pricing power. At Valsoft Corporation, they focused on small and mid-sized companies to avoid private equities and venture capitalists.
According to Sam, there is a tremendous competitive advantage in doing roll-ups if the acquirer can manage the businesses better than before. The purpose of roll-ups should be to drive more growth or profits to the acquired businesses and improve each one.
Entering a new vertical
When entering a new vertical, acquirers must have a strong platform company with staying power and a product that has a lot of customers. Only then can an acquirer look to buy companies that have interesting customer relationships and products to bring inside a bigger customer base.
Sam’s approach is to keep most of the management teams running the businesses. They have existing relationships and can bring a lot of value to the customers.
Lessons learned
1. Earn the right to be an acquirer
Every company must earn the right to be an acquirer. If they haven't, they need to invest internally in the business to be strong enough to acquire.
2. Buy stable businesses
Buy businesses stable enough to go through an acquisition. Often, businesses will be mismanaged during the M&A process. Some team members might not adapt well to the new acquirer, and the integration process can add to the turmoil.
3. Be careful with M&A
Sam suggests that before getting into M&A, keep in mind that most M&A is destructive to shareholder value. M&A can make companies grow weaker instead of stronger, so ensure a clear purpose in doing M&A. Don't just acquire for growth. Strive for overall strength and improve the trajectory of the business.