Roll-Up Strategy

Article byPrakhar Gajendrakar
Edited byRashmi Kulkarni
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Roll-Up Strategy?

A Roll-up Strategy is a merger and acquisition technique in which multiple small businesses are merged to form a single company. These small businesses usually belong to the same industry, and the resultant company benefits from the merged resources, controlling operational costs and increasing profits. Bolt-on acquisitions also employ similar strategies.

Roll-Up Strategy

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A roll-up strategy is more common in industries comprising fragmented businesses, but it is possible to adopt it in every sector given enough time and resources. When multiple businesses form a larger, more significant entity, it expands geographically, effectively penetrates as many markets as possible, improves accessibility to new customers, and offers a wide range of products and services.

Key Takeaways

  • A roll-up strategy refers to acquiring multiple small businesses to form a large company that functions under the umbrella of a common parent company. Bolt-on acquisitions follow similar strategy development and execution processes.
  • It allows the merged company to reduce operating costs, leverage synergies, optimize resource utilization, improve products & services, expand markets, and boost revenue.
  • One of the key limitations is the cultural mismatch between different companies, as leadership styles are different.
  • Roll-ups take time, effort, and capital since many small companies are merged, and post-merger integration is crucial to ensure success.

Roll-Up Strategy Explained

A roll-up strategy refers to merging several companies operating on a small scale in the same sector or industry to form a large company. This is a type of merger and acquisition strategy that gives the newly formed entity a separate identity. The companies acquired are mostly small-scale and medium-sized businesses. This is primarily done to increase sales, boost revenue, grow market share, and enhance valuation. Most importantly, the merged company leverages resources incorporated in the new company from multiple companies, enjoys better market penetration and accessibility, and profits from reduced operational costs.

In a private equity roll-up strategy, companies are purchased and often rebranded under the name of the parent entity. Typically, a private equity firm handles the structuring of the small company, including management, staff, office space, and financing.

Earlier, this strategy was only used across certain industries. However, with adequate time, the right resources, and improved risk tolerance, this strategy can be devised and executed in any industry. Some of the best industries for roll-up strategy are technology services, software, insurance, medical clinics, etc.

From a customer’s perspective, a business roll-up strategy can be beneficial if handled well. It might result in customers enjoying improved products & services, low prices, and enhanced customer support. Retail investors may also find such mergers profitable. A retail investor may have purchased considerable shares of small companies. When such companies merge into a bigger corporation, their share prices and market value increase dramatically, eventually offering investors good returns.

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How To Implement?

The key steps companies take to devise and implement a roll-up strategy are discussed below.

#1 – Developing an acquisition team and strategy

The first step is to assign people, build a team, and draft a blueprint. The team includes experienced members from different departments, such as finance, accounting, marketing, legal, and IT. The process typically becomes smooth and efficient with professionals leading the merger.

#2 – Raising capital

Employing the most common forms of raising funds in a given industry is important to ensure alignment with industry best practices. Many roll-ups are backed by debt financing. A company’s equity can be offered as consideration for purchase. Private equity funds can also help raise capital to fund the roll-up strategy.

#3 – Identifying target companies

Target companies are chosen based on post-merger vision and goals. Companies usually consider a company’s growth potential, size, advantages, history, prospects, innovation levels, and profits before shortlisting it. An analysis of individual companies can help determine their strengths and weaknesses.

#4 – Concluding valuations and drafting the agreement

At this stage, companies share business data, financial information, and operations-related details with the acquiring company. The culture and management style are also evaluated. After a careful assessment of every aspect of business that is likely to impact the merged company, the final roll-up agreement is drafted to close the deal.

#5 – Undertaking due diligence for post-merger integration and change management

Due Diligence is required to check for discrepancies or inaccuracies across data, business information, and operations- and people-related input. At this stage, whether every stakeholder is on the same page is verified. Financial modeling and operational analysis are completed before the integration process begins. Whether merging operations will be complex and time-consuming depends on the merger size.

Examples

Here are two examples to facilitate further discussion.

Example #1

Suppose Felicia owns a watch company that she inherited from her family. The large business is over forty years old with a great reputation in the industry. Felicia noticed that the sales have been steadily decreasing. On analysis, she realized that the competition in the market is tough, as multiple brands dominate the market. Most of these companies are small-scale, but they have still managed to sabotage Felicia’s revenue.

Felicia decides to initiate a roll-up strategy. She raises capital through different sources and ropes in a private equity fund to buy the three smaller companies affecting her business and merge them with her company. Though the process was time-consuming, she knew it was a smart move. The post-merger company prospered, as Felicia could leverage the combined resources, reduce operating expenses, and increase market valuation.

Example #2

According to a May 2023 report, SellerX (a brand acquisition firm and e-commerce aggregator) entered into an agreement with Elevate Brands (an FBA aggregator) to capitalize on the opportunities of the aggregator business model that facilitates retail sales via e-commerce channels, particularly Amazon.

The companies planned to merge operations and acquire smaller enterprises to build a strong base for further growth and profit-making. While the deal value remained undisclosed at the time, the company was planning to pump in more funds via new investment avenues. The roll-up merger and funding were likely to gather support from venture capitalists, private equity funds, and investment firms like L Catterton, Cherry Ventures, Felix Capital, 83North, Upper90, and TRCM Fund.

Later, a June 2023 report confirmed the merger, which opened up avenues for accelerated growth by giving its clients access to 40,000 products across 80 Amazon brands. In this way, companies can leverage combined resources to offer better products and services, generate brand value, and build wealth.

Pros And Cons

In this section, let us discuss the pros and cons of roll-up strategies.

Pros

  • When multiple companies merge, the dynamics of competition change, prompting new and efficient product pricing.
  • Not all companies have adequate resources for growth. However, after a roll-up, the merged company gets access to a vast set of resources for stimulating growth.
  • Through such mergers, companies get better geographical coverage, and market penetration improves.
  • A roll-up strategy directly increases the market valuation and revenue of the company.
  • It drastically reduces operations and other costs—a key objective of businesses.

Cons

  • Post-merger mismatch and disagreement are possibilities if the smaller entities do not align well with the merged or parent company.
  • A difference in culture, management, and leadership has been observed across merged companies.
  • Financial management requires special attention when multiple companies are merged to form a large enterprise. Since this activity requires a huge capital investment, appropriate financial management and compliance with statutory regulations are crucial to avoid legal troubles and penalties.

Best Practices

Let us discuss some prominent best practices for planning and implementing a business roll-up strategy in this section.

  • Performing thorough market and industry research is crucial. It helps plan the merger well.
  • Targeting industries with low competition levels and no market leader may offer the right outcome because the complexities are reduced to some extent.
  • Before freezing a roll-up plan, gauging customer interests and preferences can help identify whether the merged company will succeed in the long run.
  • Creating value is a key objective. When big companies acquire small businesses, the scope for creating new plans and implementing new policies is vast. A roll-up must add value and improve existing products and services. It must also ensure reasonable growth. When this happens, it is safe to say their synergies benefitted every stakeholder, and the roll-up was successful. 

Frequently Asked Questions (FAQs)

1. How do we finance a roll-up strategy?

Companies employing a roll-up strategy may consider the following to acquire finance:
– Borrowing capital and funds from market sources
– Raising capital from a private equity fund
– Offering the company’s equity for acquisitions

2. What are the best industries for roll-up strategy?

The best industries for roll-up strategy are: 
– Industries with multiple small and medium-sized businesses; these firms typically present several opportunities for growth.
– When no company enjoys a monopoly in the market, such an industry is suitable for roll-ups.
– Industries with a history of consistent profits and high growth are suitable.
– Industries that harness technology for innovation, add value, and boost customer satisfaction should ideally be considered for roll-ups.

3. Can a roll-up strategy cause problems in the future?

Employing a roll-up strategy is an exception, not a rule. Hence, managing a merged firm well is crucial to ensure success. If companies focus only on concluding the deal without considering change management challenges and integration issues, problems may arise later. As funding roll-ups can be expensive, inadequate or ineffective financial management can create problems.

This article has been a guide to What Is a Roll-Up Strategy. Here, we explain the concept with examples, pros, cons, how to implement it, and best practices. You may also find some useful articles here –

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