In a roll-up strategy, the buyer—usually a private equity fund—identifies a highly fragmented industry, which is a situation where multiple companies compete, and there is no single or small group of companies that dominates that specific industry.
Subsequently, the buyer acquires one of the most prominent industry players, the so-called platform, and starts adding smaller companies to it, generally, those that own less than 5% of the market share. After fifteen to twenty acquisitions over three to five years, the goal is to sell the rolled-up companies with an IPO or a strategic sale at ten times EBITDA, having purchased them at around five times EBITDA (acronym of Earnings Before Interest, Taxes, Depreciation, and Amortization, which evaluates the operating performance of a company).
Roll-ups are often sponsored by private equity groups, taking the financial tactic of arbitrage to the extreme, where a large-cap buyer (e.g., ten times EBITDA) purchases smaller companies (e.g., four companies that trade at five times EBITDA, per each). Hence, the private equity group targets that industry and starts buying five or ten companies a year: it is like rolling them all up into a big ball that rolls down the hill, eventually determining what we call the snowball effect.
Due to the expeditiousness and the high volume of these transactions, the buyer can neither perform custom-made acquisition agreements nor spend a lot of time on due diligence. Therefore, the acquirer employs standard contracts and standard financial structures, which also entails that the negotiation phase with the multiple sellers is almost absent. Indeed, in a roll-up tactic, the purchase price and deal structure are rigidly predefined.
For example, the purchase price might be five- or six-times EBITDA, and the private equity group presents the same offer to each seller, and since the deals tend to be relatively small, sellers are bound to align with take-it-or-leave-it offers.
To summarize, in a roll-up strategy, the goal is to add substantial value quickly through the “snowball effect” and then realize robust profits by going public or selling to a strategic buyer at ten- or twelve-times EBITDA. Accordingly, a roll-up strategy is just a different take on the time-tested business strategy of buying wholesale and selling retail. If you would like further information on business acquisition structures and options or other business matters, please contact Attorney Joshua J. Butera or Legal Intern Tommaso Ugolino at 401-824-5100 or email jbutera@pldolaw.com or tugolino@pldolaw.com.
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