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May 6, 2024

How to Start Executing the Roll Up Strategy in M&A

Roll ups are a great strategy for highly fragmented industries. It allows the platform company to increase its size, capabilities, and market presence through the acquisition and integration of other businesses. However, it can be challenging without a proper framework. In this article, Ivan Golubic, CFO, Corporate Development M&A at FastLap Group, shares his experience on how to start executing roll up strategy in M&A from scratch. 

“If you're just doing a roll up without differentiating yourself, it won't add much value. Back office synergies alone won't yield the maximum return on investment.” - Ivan Golubic

Setting up the roll up strategy

According to Ivan, there are 8 things that are foundational to start executing the roll up strategy;

1. Industry expertise - Surround yourself with a team of people who are industry experts, that understand what constitutes a good or bad business. This helps in efficient and proper valuation of the target company.

Industry expertise also helps build trust with potential sellers, and investors. Executing roll ups often involve dealing with private sellers, especially those whose families have built their businesses over years, sometimes generations. They are not going to hand it over to someone they don't trust.  Having that reputation and a team of experts is crucial.

2. Operating strategy - Before doing roll ups, there must be a strategy on how to become different and better owners, to maximize value out of the transaction.  Set yourself apart from previous sellers or any competitor that might undertake another roll-up strategy in the industry.

3. Capital provider - Select a capital provider that is willing to go through your ups and downs. Someone who is resilient and is able to identify your differentiating factor. 

4. Healthy Pipeline -  For PE firms, it’s all about numbers and the flow of deals. There must be a ready pipeline so when the capital arrives, you can move immediately. List down 20 to 30 potential deals because the expectations of the funnel are probably 10 to 20%.

5. Efficient M&A process - Be diligent about execution. Create a plan and stick to standard operating procedures. Following these processes will ease the burden on the team, the seller, and help plan deal cadence.

6. Good Reputation - build a reputation of being a good acquirer. When people know you as a reliable acquirer, they want to do business with you. This includes treating them fairly and taking care of the acquired people. 

7. Success metrics - Create a backward pro-forma financial statement for the last 12 months. This will show what the earnings and cash flow would have been if you owned these companies for the last 12 months. It's the only way to measure whether you're doing better or worse than what you acquired.

For private equity, there are two main concerns. First, they want to see the performance of the overall consolidated company, and the erosion of the acquired company’s EBITDA, if there’s any. 

8. Technology - It's hard to manage M&A without the right tools. Invest in tools to ensure smooth deal flow.

Valuation on roll up strategy

In roll-up strategies and in the private equity world, EBITDA is typically the main driver of all valuations. However, there are exceptions because reported EBITDA on the P&Ls of privately held companies can be misleading. This requires making EBITDA adjustments for a more accurate valuation. 

Another critical aspect of valuation in roll-ups is paying attention to EBITDA multipliers—what you buy at and the potential market you can exit at. The spread needs to be large enough to be forgiving because if it isn’t, getting the valuation right on some deals can be very challenging, especially when working with limited and sometimes anecdotal data.

Pitching to the PE firm

When pitching to the PE firm for capitalization, one of the best things to do is to talk about what is in it for them. What's in it for the investor? How can the investor get their money back? What are the numbers, the ratios? 

Everyone loves a great company, but there are countless examples of great companies that never made money and went under. For an investor, a great company or brand doesn't do everything for them.

Biggest lessons learned doing roll up strategy 

If you're starting from ground zero, it's crucial to ensure it is well-funded. Constantly seeking or begging for funding every time there is an acquisition is not ideal.  That frustrates those involved in the process, especially the sellers, and it can ruin your reputation if you're always waiting for funding. 

Additionally, be diligent during diligence and financial modeling. Dealing with private sellers often involves hidden costs. The less sophisticated the sellers, the more hidden costs there will be.

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