Of course, the primary objective of an accelerated roll-up strategy is to produce accelerated rewards. By pursuing a series of rapid-fire acquisitions, a PE firm hopes to swiftly scale its investments. It does this by growing the platform company into an attractive asset much more quickly, thus accelerating its ultimate objective of either sale or public offering. Such a strategy also aligns well with the typical life cycle of PE funds, which generally have only a finite period in which to deploy the capital they raise and are under pressure to put funds to work quickly.
While accelerated roll-ups can achieve many of the benefits associated with more conventional acquisitions, including economies of scale, cost synergies, and operational efficiencies, the momentum of numerous acquisitions over a short time can also help to establish a stronger market presence, both within the target companies’ individual markets and industrywide. Such rapid market expansion further enhances the platform company’s value and attractiveness to investors.
Ultimately, the goal of an accelerated roll-up strategy is to both expedite and enhance the investors’ return. Making such an approach work requires a clear-eyed understanding of the distinct nature of accelerated roll-ups and the underlying investment thesis.
Where accelerated roll-up strategies work best
In accelerated roll-ups, the buyers’ priorities and concerns shift somewhat from those associated with more conventional acquisitions. Accurate valuation and thorough due diligence are still critical success factors, of course, but transaction speed and adherence to a tested and proven acquisition process are vital to maintain momentum. In many instances, to produce a favorable return, the investment group relies heavily on price arbitrage and momentum rather than developing synergies or building a new brand identity to challenge more established market leaders.
Because of these differences in the fundamental premise of the investment strategy, accelerated roll-ups generally work best in industries that are highly fragmented, with many small or relatively modest-size participants competing for market share, rather than industries with a few large, dominant players. Typical acquisition targets might generate annual revenues in the $5 million to $20 million range.
Some recent examples of successful accelerated roll-up strategies include:
- The rapid acquisition of numerous automotive repair, oil change, and lube shops
- Consolidation of a large number of property management businesses serving homeowners associations in scattered communities
- Serial acquisitions of many local repair and maintenance companies such as roofing and landscaping contractors
The healthcare industry also has seen a number of recent successful roll-ups, with individual medical or dental practices being absorbed by larger organizations. It should be noted, however, that healthcare-related acquisitions often involve more complex ownership structures in order to comply with state-specific corporate practice-of-medicine laws.
Accelerated roll-up strategies are most likely to involve businesses that deliver uniform or comparable types of services or products, with relatively standard back-office functions that can be readily consolidated and centrally managed. A large enough number of targets also is required to gain scale quickly.
Other important characteristics include stable earnings, relatively modest capital requirements, and a product or service with consistent and predictable customer demand. Ideally, the target companies’ repeat business will not be heavily dependent on brand or personal loyalty, but this factor can be mitigated somewhat.
Risks and red flags
The risks associated with any acquisition are intensified by the volume of transactions and speed of execution in an accelerated roll-up strategy. Murky financials, questionable valuations, and overly optimistic business plans can be especially troublesome when the success of the larger strategy depends on the ability to rapidly acquire numerous entities in a relatively short time.
In addition, certain M&A risks are particularly significant in accelerated roll-ups. For example, changes in accounting methods such as cash to accrual conversions are a common occurrence when sellers suddenly find they are acquisition targets.
Another frequent concern involves inconsistencies across the target company’s accounting, enterprise resource planning, and related business management systems. When a target company’s systems are highly unconventional or difficult to convert to the platform company’s systems, the disconnects not only complicate the initial valuation and due diligence but also can present significant stumbling blocks to the post-close integration.
These challenges can be further exacerbated if the seller is resistant to making the transition to more commonly used business systems. The corporate development team must be alert to such issues early in the process and must be prepared to call off a potentially troublesome deal before incurring extensive due diligence and legal fees.
Successful roll-up strategies and critical attributes
Because of the volume and speed of transactions, PE firms that plan to pursue accelerated roll-ups should begin by making sure they have adequate resources – in both their internal development department and their external legal and accounting advisory teams. With many deals underway simultaneously, it is important that deals close quickly to avoid bogging down the entire strategy – and to prevent delays that could cause a seller to begin looking for ways to renegotiate price or find a pretext for canceling.
In addition to a disciplined and qualified development team, companies planning to pursue accelerated roll-ups also must have a highly developed acquisition playbook. Every step of the process should be spelled out in detail, beginning with target identification and vetting. The critical characteristics of acceptable targets – size, management structures, markets, customer bases, and other key attributes – must be clearly defined in advance to avoid wasting time or resources on companies that are not good prospects.
The same concept continues to apply during the diligence process as well. Potential problems should be brought forward as quickly as possible, and bad deals should be terminated without hesitation.
This can be a difficult concept for corporate development teams to embrace. Their purpose, after all, is to close deals – not kill them. Persistence is a valuable trait, but determination and drive must be tempered with discipline, prudence, and a willingness to call a halt without hesitation when warning signs appear.
A comprehensive and consistent approach is another core competency of a successful roll-up organization. Financial reporting conventions among small businesses often vary significantly, even among companies in the same industry. In accelerated roll-up strategies, buyers must standardize all financials quickly, not only to enable accurate valuations but also to maintain critical momentum.
Done properly, such standardization can actually turn the volume and pace of accelerated roll-ups into an advantage. By restructuring disparate management systems and restating financial metrics into a consistent template, purchasers can begin to recognize recurring patterns and performance indicators that would not be apparent to companies making only a few acquisitions.
To enable this advantage, however, it is important to develop consistency and coherence in both team and approach. Although the focus in accelerated roll-up strategies is most intense during the initial valuation and due diligence phases, coordination and clear communication are essential across the entire life cycle of the acquisition including the post-closing, audit, and integration phases.
With a comprehensive, rational approach, a disciplined and experienced team, and qualified professional and advisory support, a PE firm can develop an accelerated roll-up methodology that is effective, repeatable, and scalable. Applying such a methodology in a suitable target industry can significantly enhance the company’s opportunity to build value rapidly. In addition, a track record of successful accelerated roll-up strategies can help a PE group close future deals by showing that it is capable of executing quick timelines effectively.
