Think Like A PEG- Roll Up and Vertically Stack

In small business acquisitions, I often see buyers limit their thinking to the now and the short term…organic growth through the one channel their core business sits in. Organic customer and sales growth only.

But there are a couple of concepts that small businesses could apply that we see used by major corporations and private equity groups (PEGs): ROLL UP’s and VERTICAL STACKING.

ROLL UP

Roll-ups:

A roll-up, also known as a “consolidation strategy” or “buy-and-build strategy,” is a business strategy frequently employed by private equity firms to acquire and merge multiple smaller companies in the same industry or related sectors. The primary goal of a roll-up is to create a larger, more competitive entity that can benefit from economies of scale, increased market share, and improved operational efficiencies.

Roll Ups

Here’s how a roll-up typically works:

a. Acquisition: The private equity firm identifies and acquires several smaller companies within a particular industry. These companies are often considered “platform” or “foundation” companies.

b. Integration: After acquiring these companies, the private equity firm focuses on integrating them into a single, cohesive entity. This involves streamlining operations, consolidating management, optimizing supply chains, and leveraging shared resources.

c. Synergies: Roll-ups aim to realize synergies between the merged companies. Synergies can include cost savings, cross-selling opportunities, access to new markets, and improved bargaining power with suppliers.

d. Value Creation: By creating a larger and more efficient organization, the private equity firm aims to enhance the overall value of the roll-up. This can be achieved through organic growth, further acquisitions, or eventual divestment, such as selling the consolidated entity at a higher valuation.

Roll-ups are common in industries with fragmentation, where numerous small players operate, and there is potential for consolidation to drive growth and profitability.

VERTICAL STACKING

“Vertical stacking” is not a widely recognized term in private equity or business strategy. However, it could refer to a concept related to vertical integration, which is a strategy where a company expands its operations by acquiring businesses that are either upstream (suppliers) or downstream (distributors/retailers) in its supply chain.

Vertical integration can take two forms:

a. Forward Integration: This involves a company acquiring businesses in the distribution or retail stages of its supply chain. For example, a manufacturer of consumer goods might vertically stack by purchasing a retail chain that sells its products directly to consumers.

b. Backward Integration: In this case, a company acquires businesses that are upstream in its supply chain, such as suppliers or raw material producers. For instance, an automobile manufacturer might vertically stack by buying a steel production company to secure a steady supply of steel for its vehicles.

The goal of vertical stacking (vertical integration) is to gain more control over the supply chain, reduce dependency on external suppliers or distributors, capture a larger share of the value chain, and potentially improve cost efficiency and product quality.

In summary, roll-ups involve the consolidation of multiple companies in the same industry, while vertical stacking typically refers to a form of vertical integration where a company expands its operations in either the upstream or downstream segments of its supply chain. Both strategies are used to create value and competitive advantages in various industries.

Small Businesses In Tampa Bay could easily leverage these two strategies to grow profitability. Think of a landscaper who owns the nursery they source from. No markup on their plants and mulch allowing better price competition on the street and more sales while having stronger margins than a competitor or the wholesale baker who has a retail location. A prime example is the brewery that now has retail within the manufacturing location.

For more on buying and selling a business in Tampa contact TAMPA BUSINESS BROKER MICHAEL SHEA AT 321–287–0349 or email at [email protected] .