Understanding Private Equity Roll-up Strategy

Today, we enter a two-week primer on strategy and roll-ups.

Zoom out and we look at what roll-ups are.

Zoom in and apply the strategy to a roll-up example.

Today, we cover:

• What are roll-ups?

• Where do they apply?

• What does it take to succeed?

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What are roll-ups?

Roll-ups are a form of a private equity strategy to buy-up small firms in an unorganized (and niche) industry to create an industry giant.

The intention is to buy businesses at low multiples to create an enterprise that can be sold at a much larger multiple (mainly due to its size and cost synergies).

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Where do they apply?

Roll-ups make sense in industries that are niche, highly cluttered and have no clear market leader.

Examples include:

• Specialty Auto Repair

• Specialty Healthcare Clinics

• Niche Vertical Software

• Pest Control

Ideally, you want a large enough addressable market but small enough niche with pricing power and sticky business.

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What does it take to succeed?

Firstly, understand the rationale behind the initial acquisition.

Why this industry?

Why this location?

What’s the runway of expansions?

What does this business have that can be built on? (Systems/Brand/Value Proposition)

Secondly, get expert opinions (people in your network that work in the industry and who specialize in supply chains, business development and operations).

Thirdly, understand the business and key metrics to track.

How can you standardize tracking?

How can you streamline it?

What is your systematic edge?

Lastly, incentivize ALL employees.

How can you make everyone feel recognized?

How can you push people and enforce replicable hiring procedures?

How is everyone in the value chain being incentivized to do what they’re doing?

Zoom out and ask two important questions:

How does this action help the customer?

How does this action help the business?

Lots of thinking required.

Not easy at all.

We dig into forming a strategy soon.

See you next week.