Where do Roll Up i.e. M&As Add Up?

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I told the founder don’t roll up or you will ‘roll-up’. Why?

A few days back I was talking to a founder who was talking about an opportunity to do a roll up.

Roll up is acquiring businesses like yours and adding them up.

He believed that his business will do very well after the roll up. I told the founder that I don’t think it will work in this situation. Instead, he may have to ‘roll up’ after the roll up.

Roll Ups sound very cute and mostly don’t work. Here are some situations where everyone thinks that they will easily work but they don’t:

1.?????? Any business which has a front end which has more than ~85% of total operating costs of the business. For example, restaurants – Here the profitability of the system depends on the profitability of individual units. As much as we want to believe, the common costs like accounting, sourcing etc are much more limited. If you are rolling up weak performers thinking that you will create costs advantage, most of the time you will find that there is nothing to cut.

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2.?????? Any business where the valuation increase seems to be many multiples of the cost of acquiring the business – The most interesting example I remember was during the telecom tower boom (~12-13 years back). You bought a tower at let’s say 25 lakh, dug a hole and your valuation went up by a crore. This resulted in a massive frenzy and the industry sold and bought many more towers than required. Finally, an entire industry went into coma for many years.

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3.?????? Any business where you are in the same mega industry as your roll up target – For example, you are a med-tech company wanting to do a roll up in medical device industry. I have been part of one such mega effort. And I realized only in hindsight that while pacemakers and knee joints belong to the same ‘medical device’ industry, there is actually no commonality in either the production, r&d, new product development or sales channels between the two businesses. They belong to the same industry but don’t belong to each other.

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4.?????? Any business where you seem to serving the same end customer but the sales cycle does not match – Let us say, I am running a business which is into facilities management where my sales cycle starts after the building has been built and handed over to corporate customers. Rolling up a company which was preparing the garden landscape does not make sense. Landscaping work begins much earlier and they deal with the main builder. While I am doing facilities management and dealing with end corporate customer. While it looks like same end cause, but it is not the same cause.

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It’s not an entirely lost case though.

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Where have rollups normally worked?

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1.?????? Industry segments where the unit to be rolled up is comfortably generating cash and is still available at few times of its cash. For example, there are multiple entities rolling up profitable dental clinics because the dentists want to retire. ?

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2.?????? Roll-up should result in reduction in some type of risk for the consolidated business as seen by an investor. Typically, these are concentration risks of various types - geographical, client, single business segment risk etc. Note that this type of rollup can lead to valuation improvement due to reduced risk perception rather than improved operational outcomes.

While there will always be some exceptions, founders can keep this framework in mind before pitching a roll up plan to themselves and to potential investors. Hope this helps someone.

Let me know if you found this useful. Please message me if you have any thing to say.

Note: The views are strictly personal.