roll up strategy case study

Roll-Up Strategy: A High-Growth Approach for 2024

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

A study conducted by McKinsey over the course of two decades into successful M&A set out will disappoint followers of megadeals.

Pursuing a series of smaller deals, the total value of which is relatively close to the acquiring company’s market capitalization, rather than focusing on eye-catching ‘big bang’ transactions, tends to generate far more value.

In short, the research advocated a roll-up strategy for companies considering M&A.

In this article, DealRoom takes an in-depth look at the roll-up strategy, how to execute them, and the pitfalls to avoid.

Above all, we show how, in some industries, the leaders have gained their winning position through successfully executing roll-up strategies rather than being so-called disruptors.

So while McKinsey’s research refers to an M&A roll-up strategy as ‘programmatic M&A’, a far more accurate term may be ‘pragmatic M&A’.

What is a roll-up strategy?

A roll-up strategy is a focused acquisition strategy that involves the acquisition of multiple smaller companies (sometimes referred to as ‘ bolt-on acquisitions ’).

The roll-up strategy tends to be more common in industries that are fragmented but can happen anywhere that these bolt-on acquisition opportunities present themselves.

The end goal of a roll-up strategy is a company of much larger value that is more than the sum of its parts.

Why do investors love roll-ups?

The roll-up concept is attractive to investors for its value-generating potential. This value is achieved in a number of ways:

• Economies of scale: The entity created from the roll-up strategy should enjoy economies of scale (e.g. increased buying power) well beyond any of the smaller companies that it is composed of.
• Benefits of synergies: A well-executed roll-up strategy should benefit from a range of synergies that generate value at the margins. For example, shared administration and marketing costs.
• Increased exposure: By virtue of being a bigger company, the entity created from the roll-up strategy will have increased exposure, giving it access to a larger audience and making it the focus of increased media attention.
• Access to better opportunities (including capital): Bigger companies, as a rule, tend to enjoy a liquidity premium that lowers their cost of capital and allows them to access opportunities (e.g. more acquisitions) than smaller companies can.

Importance of having a disciplined roll-up strategy

A roll-up strategy doesn’t generate value on its own.

As DealRoom is constantly at pains to emphasize, acquisitions are complex projects that require diligent project management.

This means excellent planning, ensuring cultural and operational fit, thorough due diligence , and sound deal structure for each one of the acquisitions.

By extension, when there are many acquisitions, this workload should increase. Just because the companies are smaller, it doesn’t mean that you can take shortcuts in the process.

Best practices in Roll-Up strategies

The nature of an acquisition roll-up strategy is that most strategies are implemented over a period of three to four years.

Here is what can be found amongst best practices:

In general, the more diligent about roll-up and its strategies your business is, the higher your chance of achieving a successful outcome.

That said...

Here is a detailed overview of key steps to start with when you're considering roll-up as a strategy for acquisition:

• Planning: Lots of it. Nobody should consider a roll-up strategy without planning five years ahead. At this stage, the team should be considering the maximum multiple of EBITDA that will be paid for the acquisitions, the geographies that the company is interested in, and the level of equity that it is willing to hand over to each of the acquired companies owners.
• Develop systems: This should be part of the planning process but deserves a mention of its own. It should go without saying that a mid-sized corporation needs more systems to operate successfully than would a small, local company. For example, if the manager of a recently acquired company were to abruptly up sticks and leave, how easily would the business be run in his absence? Systemization is required to ensure zero disruption in cases like this.
• Understanding the industry: Some industries benefit from scale more than others. Likewise, certain industries aren’t fragmented enough to warrant implementing an acquisition roll-up strategy. Sluggish industry growth or less-than-optimistic future prospects are also important to understand. It’s crucially important to understand the industry, its dynamics, and its future prospects.
• Due diligence : More acquisitions mean more due diligence. As a result, for any company implementing an acquisition roll-up strategy, due diligence effectively becomes a core part of the company’s operations - not unlike its finance or HR department. And as due diligence becomes bigger, the acquiring company will need to hire a bigger team to ensure that it’s being conducted with the same rigor for every single transaction.
• Careful Hiring: Closely related to due diligence is the need for the team behind the roll-out strategy to ensure management competency. The bigger the company becomes, the more difficult it becomes to manage. Does the new entity require a level of middle management or regional managers? Who is responsible for overseeing the day-to-day management of its new branches? 
• Integration : All the businesses need to be well integrated to ensure that the new entity is more than the sum of its parts. Without post-merger integration and change management, the acquirer risks being left with nothing but a group of disparate companies (and disgruntled managers and staff) on their hands. 
• Timing: There is no standard ideal time to move with a roll-up strategy. As with any acquisition strategy, if the strategy can be implemented faster, then it’s better to do it faster. But speed itself is not the issue - rather one of a range of issues. It shouldn’t come at the expense of careful consideration, thorough due diligence, the right valuations, etc. One benefit of being faster directly related to the roll-out strategy itself is that there will be less chance that target companies are aware of the strategy, and as a result, will be less likely to demand higher multiples of EBITDA to sell.

Measures to look out for

It’s easy to lose focus in a roll-out investment strategy and to allow the acquisitions to become the goal in themselves rather than just the means to a much bigger end goal.

Putting in place a range of measures (or KPIs) enables acquirers to keep their eyes on the prize.

The following are just some of those KPIs (with operational KPIs varying by industry):

• Ownership distribution
• Pre- and post- merger performance levels at each company
• Debt/equity levels at the holding company (and blended cost of debt)
• The average acquisition EBITDA multiple
• Time to close each acquisition
• Employee turnover levels
• Operational costs at holding company (should be less than that of combined firms)

Why folding companies under one umbrella isn’t simple

In a word - integration.

To use a crude example, all things being equal, integrating five companies, each with $5 million in average revenue, is easier than integrating one company with $25 million in revenue.

To fold companies under one umbrella effectively demands that the acquirer become a merger integration specialist.

And of course, there are external market issues that the acquirer has no control over, which can wreck any roll-up investment strategy, even if the integration processes have gone smoothly.

How to find the best industry for roll-ups?

In short, the best industry to implement a roll-up strategy is one where there is:

• No clear industry leader.
• Little industry consolidation.
• Returns to scale.
• Positive growth forecasts.
• Owners willing to sell.

Aspects of finding the right industry for roll-ups (and how-to)

As mentioned in the sections above, before implementing a roll-out investment strategy, it is important to understand an industry’s dynamics (nationally, if the roll-out strategy is national, and internationally, if it is international or global).

The most common proponents of roll-out strategies are private equity firms. These firms can spend up to two years at a time establishing which industries are suitable for roll-outs.

An example here is useful. Consider the dairy industry. Although most countries tend to have at least one dominant player, there will also be a number of smaller regional players making milk and selected dairy products for their local market.

Perhaps some will even have a limited export component. As a steady but usually not fast-growing industry, 

Now, if someone were to begin acquiring these companies, they would be able to offer an extended range of products (milk, powdered milk, cheese, artisan cheeses, etc.) across a much wider geographic area.

There would also be benefits of scale - for example, better bargaining power with farmers and supermarkets. The fact that the brand was now nationwide, means that it would gain stronger marketing power.

But also think of the value-adding potential of the deal. Perhaps some of the smaller dairy companies were only producing liquid milk.

What if the extra milk output could now be turned into higher-value products such as gorgonzola, camembert, or brie cheese by the new company?

Suddenly, the same inputs are generating 2x to 3x the value as before.

And you begin to see where a roll-up strategy can become so powerful when executed properly.

Why Roll-Ups fail

Silver bullets do exist in M&A , but they’re remarkably rare.

So much positive material has been written about roll-ups that it’s easy to be convinced that this is a strategy where it is impossible to fail.

That just isn’t the case.

A 2008 Harvard Business Review article states that more than two-thirds of roll-up strategies fail to create any value for investors.

The reasons for these failures usually fall under one of the following categories:

• Integration difficulties: As this article states, all things being equal, five smaller integrations usually means approximately five times the integration challenges as a company five times the size. This needs to be accounted for at the outset.
• Lack of benefits to scale: Not all industries have benefits to scale. The HBR article in the paragraph above mentions the funeral industry, where benefits to scale can only be enjoyed at a local level, and even then, they’re questionable.
• Failure to account for economic downturns: Most roll-up strategies are based on conservative economic projections, but what happens when there’s an economic collapse, such as one wrought by a global pandemic?
• Overpaying for acquisitions: In an effort to close deals faster as part of a larger strategy, acquirers may be forced to overpay. This is also an issue as target companies become aware of the roll-up strategy. Overpaying destroys value in the overall strategy, just as it does in a standard acquisition.

To paraphrase Warren Buffett, when answering a University of Florida audience about what steps they needed to take to be successful investors: ‘you don’t need to do anything really earth-shattering.

You just need to consistently do lots of small things right.

This is the logic that underpins a roll-up strategy:

Consistently make smaller value-adding acquisitions, and your company will almost certainly outperform the market over the long-term.

However, on balance, closing more deals means more pitfalls for acquirers. Anyone undertaking a roll-up strategy needs to conduct significant resources for planning, due diligence, and post-merger integrations.

DealRoom has already helped dozens of companies with their roll-out strategies. Talk to us today about how we can add value for you when looking at implementing your planned roll-out strategy.

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Private Equity Roll Up

• Peter Lynch

A private equity roll-up is the process of acquiring and merging multiple smaller businesses in the same industry into one larger consolidated company. This strategy is attractive because the market generally rewards scale with a higher valuation. More specifically, the market is generally willing to pay a higher multiple of EBITDA to acquire a larger business. This means that the sponsor (i.e., private equity firm or independent sponsor) behind the roll-up is likely to benefit from multiple arbitrage at exit.

There are additional benefits to roll-ups including economies of scale and cross-selling, but multiple arbitrage is one of the strongest value drivers. So, this post and the associated workbook will focus exclusively on value creation via multiple arbitrage. If you would like to follow along, please download the Excel workbook. Download: Private Equity Roll Up_Multiple Arbitrage_ASM (image below)

To initiate a roll-up strategy, many sponsors will first identify an ideal “platform” company with an excellent management team. This platform is generally purchased at a higher multiple of EBITDA than the smaller businesses that follow. But once an add-on acquisition has been successfully integrated, the combined platform’s earnings are valued at the higher multiple (multiple arbitrage). If that sounds a little abstract, the example that follows should provide clarity.

Private Equity Roll-Up Example: Four Acquisitions

In this post and the associated video (shorter version on TikTok ), we are going to explore how this process works by looking at four acquisitions, including a platform and three add-on acquisitions. Most roll-ups take time. A private equity firm will identify an attractive platform and then source add-on acquisition targets to create scale over the course of the hold period. To emphasize the value creation realized with multiple arbitrage, we are going to assume that all four transactions take place in chronological order on a single day. This allows us to eliminate variables like interest expense and debt amortization, which makes it easier to focus on the benefits of multiple expansion.

In the image visible below, you will see the four acquisitions required to complete this roll up, but the figures running through the model in this image only include the platform acquisition. For the platform we have a $10 million EBITDA business which was acquired for 10.0x EBITDA for a purchase price of $100 million. The three add-on acquisitions identified sum to an additional $10 million of EBTIDA, but the average EBTIDA multiple for the add-ons drops to less than half the multiple required to close on the platform (red rectangle in the image below).

One of the additional incredible benefits of a roll-up business model initiated with a healthy platform company, is that the combined scale allows the sponsor to make acquisitions with debt. In our financial model, we have included a “Max Debt Profile” equal to 50% of the combined platform’s enterprise value (see image below).

Once the add-on acquisitions are flowing through the model (see image below), it becomes easy to see how the availability of leverage under the combined platform enhances returns. With the initial investment, the capital invested is equal to the platform’s enterprise value. Once you start making acquisitions at lower multiples of EBITDA, the combined platform’s enterprise value, which is calculated with an EBITDA multiple of 10.0x, quickly exceeds the sum total of capital invested (including both equity and debt).

The benefit is further magnified if you look at equity invested and compare it to the combined platform’s equity value. Since the combined platform’s scale makes it possible to close each of the three add-on acquisitions with debt financing, this strategy generates a return of 2.0x by only taking advantage of multiple arbitrage (note: there are additional benefits to properly executed roll ups, but this post is focused exclusively on multiple arbitrage).

This example is entirely hypothetical, but this strategy is used constantly by private equity firms and independent sponsors alike. If the numbers seem astounding to you, please check out the links that follow (it might blow your mind).

Learn more about private equity transactions with ASM’s Private Equity Training course. The Private Equity Training course at ASimpleModel.com was developed by industry professionals. The content goes beyond the LBO model to explain how private equity professionals source, structure and close transactions.

Private Equity Roll-Up Success Stories:

• Billion Dollar Entrepreneur
• Thomas Murphy: $2,000 for every $1
• Acquisition Ace: Dick Heckmann

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Roll Up Strategy

A consolidation in which smaller corporations are rolled together to produce a much larger entity

Currently an investment analyst focused on the  TMT  sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a  BS  from The Tepper School of Business at Carnegie Mellon.

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to  work for Raymond James  Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars'  M&A  processes including evaluating inbound teasers/ CIMs  to identify possible acquisition targets, due diligence, constructing  financial models , corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

• What Is A Roll Up Strategy?
• Practical Example Of A Roll Up Strategy
• Steps In A Roll Up Strategy
• Why Do Investors Love Roll Up Strategy?

Why Do Roll Up Strategies Fail?

• Key Things To Consider While Executing Roll Up Strategy

How To Find The Best Industry For Roll-Ups?

• Final Thoughts

  What is a Roll Up Strategy?

Rather than focusing on eye-catching 'big bang' transactions, pursuing a series of more minor agreements with total values close to the acquiring company's market capitalization tends to yield significantly greater value.

The study recommended this strategy for corporations contemplating mergers & acquisitions (M&A).

A roll-up merger is a consolidation in which smaller corporations are rolled together to produce a much larger entity. They are sometimes pursued by investors such as private equity firms. 

They are frequently employed in new market sectors and help organizations grow and flourish. Because large companies are commonly valued higher than smaller ones, private equity firms can extract value from a sale of a new business or a floatation via an Initial Public Offer (IPO).

It can benefit the proprietors of a new firm. In exchange for their equity, the owners of the firms being merged receive cash and shares. In addition, improved access to new clients, technology, and markets can all benefit the new company's owners.

This strategy is a robust acquisition strategy that entails the acquisition of several smaller companies (sometimes known as 'bolt-on acquisitions). 

This method is more typical in fragmented industries, but it can occur anywhere that these bolt-on acquisition opportunities present themselves. 

The merged company can broaden its geographic reach to include markets previously served by smaller firms. 

In addition, it can provide a greater range of products and services than a single, smaller company. As a result, investors and shareholders profit from a vast pool of investments.

Key Takeaways

• The roll-up strategy focuses on incremental, smaller acquisitions rather than large transactions, yielding greater overall value for acquiring companies.
• Roll-up mergers offer various benefits, including increased market valuation, improved access to clients and technology, and cash/share exchanges for owners of acquired firms.
• Successful execution of the roll-up strategy involves meticulous planning, system development, industry understanding, thorough due diligence, careful hiring, integration, and well-timed implementation.
• Investors favor the roll-up strategy due to potential economies of scale, market influence, cross-selling opportunities, and improved financials, leading to increased profitability for larger merged entities.

Practical Example of a Roll Up Strategy

Assume that Company ABC manufactures computer equipment in North America. The company's revenues increased recently, but its  operational costs  increased because it sources some computer assembly accessories from other companies.

Company ABC intends to grow its operations by acquiring two minor businesses that produce some components used in its core operations.

The corporation loans $1.2 million to finance the roll-up plan and the monies are used to purchase two lesser enterprises, Company QPR and Company XYZ. 

Company QPR manufactures RAM chips, an essential component used in computer assembly by Company ABC. Its yearly revenue is around $300,000. ABC and QPR agree on an acquisition cost of $450,000.

Firm XYZ, which distributes computer accessories and has annual sales of $550,000, is the other target company. It also has a presence in Europe and Southeast Asia. ABC and XYZ agree on an acquisition price of $600,000.

Company ABC will benefit from the acquisitions of Companies QPR and XYZ by lowering operational expenses and expanding operations in Europe and Southeast Asia.

Steps in a Roll Up Strategy

The majority of acquisition roll-up methods are implemented for three to four years.

Generally, the more meticulous your company is about roll-up and its strategies, the more likely it is to achieve a good end.

That being said, when contemplating this strategy as an acquisition strategy, below is a full explanation of crucial steps to begin:

1. Planning 

There's a lot of it. But, unfortunately, nobody should think about this strategy until they plan for five years.

At this point, the team should be thinking about the maximum multiple of EBITDA that will be paid for the acquisitions, the regions that the firm is interested in, and the amount of stock it is willing to fork over to each of the acquired companies' owners.

2. Develop Systems 

This should be part of the planning process, but it is worth mentioning separately. It should go without saying that a mid-sized corporation needs more systems to function successfully than a tiny, local business.

For example, how easily would the firm be run if the manager of a recently purchased company picked up and left? Systemization is required to ensure zero disruption in cases like this.

3. Understanding The Industry 

Scale benefits certain industries more than others. Similarly, specific industries are too fragmented to justify pursuing an acquisition roll-up strategy. 

Slow industrial growth or less-than-optimistic future forecasts must also be understood. Understanding the industry, its dynamics, and its future possibilities is critical.

4. Due Diligence

More acquisitions necessitate increased due diligence. As a result, for any corporation implementing such an acquisition plan, due diligence effectively becomes a significant aspect of the company's operations, similar to its finance or human resources departments. 

And, as due diligence grows in scope, the purchasing business will need to assemble a larger staff to ensure that it is carried out with the same rigor on every transaction. 

5. Careful Hiring 

The need for the team driving the roll-out strategy to ensure managerial competency is closely tied to due diligence. The larger the company, the more difficult it is to manage.

Is a level of middle management or regional managers required for the new entity? For example, who is in charge of managing the day-to-day operations of the company's new branches?

6. Integration 

All businesses must be well integrated to ensure that the new organization is more than the sum of its parts. 

Without post- merger integration and change management, the acquirer risks being left with a collection of separate enterprises (as well as angry managers and employees).

There is no single best time to implement this strategy. As with any acquisition plan, it is preferable if the strategy can be done faster. However, speed is only one of several concerns. 

It should not come at the expense of rigorous thought, complete due diligence, appropriate appraisals, etc.

One advantage of being faster and directly tied to the roll-out strategy is that target companies will be less likely to be aware of the strategy and, as a result, will be less likely to seek greater multiples of EBITDA to sell.

Why do Investors love Roll Up Strategy?

Larger companies are frequently more successful than smaller ones and can dominate the industries in which they operate. This is because they provide a broader selection of products or services, may achieve economies of scale , and benefit from increased brand awareness. Consider Apple and Microsoft, for example.

In contrast to marketplaces with a few prominent players, markets with many smaller enterprises operating in specific niches are more fragmented. The restaurant and furniture industries are two examples. 

This fragmentation can present an opportunity for investors who perceive the potential for 'rolling up' various companies to form a larger one, resulting in higher profits and enhanced value.

Here are some unique advantages of such mergers:

1. Economies of Scale

One perceived benefit of this merger is that it allows a company to achieve economies of scale by being more efficient, distributing its production expenses across larger quantities, lowering unit costs, and becoming more lucrative.

A business (PQR Pvt. Ltd.) could conduct a series of 'vertical' mergers and acquire several smaller companies that manufacture products critical to its supply chain. It can save money and consolidate its operations by acquiring these companies. 

Alternatively, PQR Pvt. Ltd. can seek a 'horizontal' merger, which acquires many small companies operating in the same sector but in distinct markets, possibly in different countries. 

It can reduce expenses while getting access to new markets by achieving economies of scale.

2. Market Influence 

By acquiring companies, a company can considerably grow its market share . Suppose it makes enough acquisitions to grow its size substantially. In that case, it has the potential to become the dominant player, allowing it to raise prices and thus profits while also cutting expenses through economies of scale.

Because it is now large and powerful, it can negotiate better terms with suppliers, negotiating lower pricing as it purchases larger amounts. It may also be easier to obtain financing on more favorable terms because it is a lower-risk venture.

3. Cross-selling

A company can scale without having to recruit these clients via its marketing efforts by increasing its access to new customers or increasing the quantity or types of products it sells to existing customers.

4. Better Financials

Sometimes a new, merged firm will enhance its financial position by acquiring smaller ones. It may have a better price-to-earnings ratio or a greater overall value than before despite making no changes to its operation. 

These mergers can be incredibly lucrative, but they are also extremely risky. Here are some of the major drawbacks:

1. Integration Problems

Mergers and acquisitions are complex deals that necessitate much negotiation and paperwork. In addition, companies that are bought frequently have completely diverse cultures, leadership styles, and business models.

When executives conflict, integration can stall, and making the necessary modifications to capitalize on the merger can be time-consuming.

Furthermore, leadership changes can result in a decline in morale, the loss of talent, and a drop in productivity. To ensure success, the new organization must find a means to bring teams together.

2. Mismatches In Merged Companies 

Sometimes the companies being merged are sufficiently distinct that a successful merger proves impossible. For example, perhaps the companies' processes or assets are so dissimilar that economies of scale are difficult to achieve. 

Customers may also want to buy locally. For example, shoppers may purchase a car from a local dealership rather than a large and distant consolidated firm.

3. Financials 

Mergers can help organizations improve their finances. However, because these better financials are not linked to any actual improvement in the firm's financial status but rather to the possibility for improvement, if the company fails to capitalize on the roll-up, its value might quickly deflate.

Furthermore, a corporation may require substantial financing to complete its roll-up and will be required to service this debt, putting additional strain on its financial condition.

It may also have a poorer credit rating , which can lead to harsher financial circumstances, and the combination of these two elements can swiftly lead to financial difficulties.

If the new firm utilizes equity rather than debt to finance the transaction, it may face problems such as loss of influence over decision-making and dilution of founder interests.

Key Things to Consider While Executing Roll Up Strategy

If you're considering this merger, one of the first things to evaluate is if you understand the market segment you're targeting. The most effective roll-ups have occurred in fragmented industries with few strong companies. 

When market conditions shift, highly regulated industries can provide appealing pickings. Covid-19, for example, has given rise to the establishment of small businesses delivering testing and track-and-trace technology. Smaller enterprises in this area may benefit from a successful roll-up merger. 

The second factor in evaluating is if you have a proven formula for maximizing the value of the merger. Finally, you'll need a strategy for integrating personnel, management structures, assets, sales channels, and information technology.

  As with franchise firms, a tried and tested process-driven approach is the best assurance of success. To maximize your prospects, you'll need a lot of organizational discipline.

Third, do you have the necessary funding to complete the transaction? Or, if you're contemplating an IPO to fund it, have you considered the added complexity and regulatory scrutiny involved after the IPO? 

This raises an important question: how should we finance our roll-up?

One of the most challenging aspects of implementing this approach is funding. You can use your company's cash, incur more debt, or seek money from private or public equity. In any case, you'll probably need more money than you have. The private equity market is the most popular source of funding.

If you choose private equity to fund your roll-up, you should work with a firm specializing in such transactions. Such mergers need more capital and can be more complex, so you'll need an experienced team.

Another option for funding this strategy is to give up some of the company's equity as part of the transaction. While your company's share price may fall, you may still make money overall.

As stated in the preceding sections, understanding an industry's dynamics is critical before implementing a roll-up investment strategy (nationally, if the roll-out strategy is national, and internationally, if it is international or global).

Private equity firms are the most common supporters of these strategies. These companies can spend up to two years determining which industries are suitable for this strategy.

An example is provided here. Take the dairy business, for example. Although most countries have at least one dominating operator, there will be several smaller regional companies producing milk and selecting dairy products for their domestic market.

Some may even have a small export component as a solid but not necessarily a fast-growing industry.

If these enterprises were to be acquired, they would be able to offer a broader range of products (milk, powdered milk, cheese, artisan cheeses, and so on) throughout a much larger geographic area.

There would also be scale advantages, such as greater bargaining power with farmers and supermarkets. Because the brand was now available nationwide, it would have more marketing power. Consider the deal's potential for value addition as well. 

Some of the smaller dairy companies may have solely produced liquid milk. What if the new company could turn the extra milk output into higher-value products like gorgonzola, camembert, or brie cheese?

Suddenly, the identical inputs produce 2x to 3x the value. And you can see how, when done correctly, this method may be highly effective.

The prime industries for this strategy could be:

1. Industries with no clear leader or that are fragmented

Industries without a key leader, the top 3-5 companies accounting for less than 40% of market share, are primed for disruption and takeover. 

These industries are frequently populated by "mom and pop" firms that can be willing targets.

2. Industries associated with necessities/basic requirements 

Porta-potties, medical clinics, dentist offices, and garbage management are some of the most common industries where this approach has been used. 

The argument is straightforward: people will always require these commodities and services, which span a vast geographical profile. Indeed, medical facility roll-ups have grown in popularity over the previous decade.

3. Industries that are simpler to comprehend 

Because the ultimate goal is speedy integration into the acquirer's portfolio to produce value, these are best suited to less complex enterprises.

Final Thoughts 

The decision to use this method, like other M&A activities, must be founded on a robust, evidence-based plan. As each purchase in the roll-up progresses through the deal cycle, smooth integration becomes more difficult, but it remains critical to the strategy's success and value creation.

'You don't need to do anything truly earth-shattering,' Warren Buffett said to a University of Florida audience when asked what measures they needed to take to be great investors.

You need to do a lot of simple things correctly regularly.

This is the logic that underpins this strategy:

Make modest value-adding purchases consistently, and your company will almost surely beat the market in the long run.

On the whole, closing more purchases means greater pitfalls for acquirers. Anyone pursuing a roll-up approach must devote substantial resources to preparation, due diligence, and post-merger integrations.

Everything You Need To Master M&A Modeling

To Help you Thrive in the Most Prestigious Jobs on Wall Street.

Researched and authored by Kavya Sharma | Linkedin

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Mergers and Acquisitions , Strategic Advisory

Three key ingredients for a successful roll-up strategy.

Over the last several months, we’ve talked to numerous businesses contemplating roll-up strategies.   These businesses represent a wide cross section of industries ranging from industrial manufacturing, financial services, and medical services to IT software and services.   We expect add-on and roll-up activity to be a large piece of the overall M&A pie in 2020 and 2021.

While not every private equity backed platform is a “roll-up”, an integral part of how private equity adds value to their platform investments is to help drive “add-on” acquisitions.  And yes, the  cash war chest in PE continues to build, so capital is abundant for the right opportunities.

This leads us to share a few high-level observations regarding what are the key ingredients to execute a successful roll-up strategy.

1.  The most successful roll-ups target large, yet highly fragmented industries with no real dominant players.   Interestingly, often times these emerging market opportunities result from new and increasingly onerous government regulations as illustrated by the following examples.

For instance, the FDA’s passing of The Drug Quality and Safety Act, which now mandates requirements for drug serialization and track and trace, has spawned an entirely new market opportunity and ecosystem of players.   This market is maturing rapidly and will likely see several financial and strategic roll-up entrants, so stay tuned and/or let me know your take.

Another example is the increased contamination control testing regulations that followed the deaths of several Framingham-based New England Compounding Center clients due to meningitis infections.   The increasingly onerous compliance requirements that followed this travesty created a significant market opportunity for a dominant player to roll-up the highly fragmented and regionally focused contamination control services industry.

2. The consolidator needs to have a proven operational formula that can be applied to acquired companies in order to create value.   Simply put, how do you drive more meaningful growth and profitability than those acquired companies have been able to do so independently? There’s been much research demonstrating that the best acquirers are those that do a volume of deals, and the “operational formula”, along with the organizational discipline that comes with experience, is a key factor in their success.

3.  The platform needs a disciplined and proven approach to finding, evaluating and integrating targets.   Being a disciplined buyer is easier said than done but can be boiled down to FOCUS.  Getting roll-ups right boils down to finding the right industry dynamics and market opportunity; developing, testing and perfecting the right operating plan; and finally, bringing a disciplined and focused approach to finding, evaluating and integrating targets.

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Successful consolidators tend to share a number of attributes, such as advance research and preparation. Developing an effective consolidation strategy requires taking the time to investigate the target sector and understanding both the available monetization opportunities as well as the applicable regulatory framework. It is equally important to identify other value enhancing measures, such as talent acquisition, improved management efficiencies, technological improvements, advancements and cost savings.

A successful consolidation strategy also respects legacy constraints that are unique to an acquired business as well as those that are industry wide. Founders may be more inclined to sell to a PE firm if the purchaser can demonstrate a record of respecting the needs of customers, employees and the regulatory realities in which a business operates. Founders often want to know that an acquiring PE firm will not compromise years of hard work through short-term cost cutting rather than on building long-term value. Such concerns from founders are more acute in cases where the purchase price includes an earn-out component.

Understand the regulatory issues

PE firms need a comprehensive understanding of statutory or regulatory rules that may restrict the ownership or operation of one or more businesses prior to deploying a consolidation strategy.

Regulations in certain industries may limit how revenue is distributed — making a roll-up acquisition strategy less economically feasible or mandating the adoption of a less-than-optimal deal structure. Ownership restrictions may require the adoption of different ownership structures, such as a limited partnership or contractual joint venture rather than the use of a corporation. Corporate structures may require the use of a dual class share structure ( e.g. , voting and non-voting shares), which may limit the ability to effect transformational change. Alternatively, a purchaser may seek to accomplish a synthetic acquisition by entering into one or more contracts that result in a purchase of economic attributes.

Ontario’s veterinary industry is a useful example of the foregoing constraints and considerations. PE firms are permitted to hold a financial interest in veterinary practices in the province; however, PE firms cannot hold equity interests. Consolidating veterinary practices would require, among other things, entering into management agreements, premises and equipment leases and/or debt arrangements in order to execute such a strategy. Industry roll-ups financed by acquisition debt may also need to adhere to industry-specific financial ratios and operational covenants.

Planning for exit

Exits generally involve considering how and when the owners/founders will depart and when the PE firm itself will exit its investment.

Exits by current owners or founders require consideration during the initial acquisition stage by the PE firm. Will the owners or founders enter into a phased transaction by selling portions of their equity or will the transaction consist of a complete sale with an earn-out and post-closing consulting, employment or transitional services agreement? The PE firm will need to determine how long the contractual arrangement will remain in place if the owners or founders remain involved post-acquisition. If applicable law requires that operators obtain and maintain specific qualifications or certifications ( e.g. , you cannot operate dental practices without dentists), consider adopting appropriate compensation mechanisms — such as equity participation plans — early in the process to incent key persons to remain. Compensation, however, is often not sufficient to retain entrepreneurial founders for various reasons, including reduced autonomy, lender and investor restrictions and a loss of operational control. As a result, cultural fit is often an intangible driver of success in the acquisitions market. 

A consolidation plan can shrink the size of the purchaser market in terms of a PE firm exit by reducing the number of purchasers as well as affecting valuations. PE firms may wish to position the consolidated entities for sale well before it plans to exit to provide additional time to source a qualified purchaser.

Keeping an eye on the prize

Competition for desirable assets in specific sectors is intensifying as a growing number of PE firms pursue industry consolidation as an acquisition strategy. Investors may be at risk of paying untenable multiples as well as potentially exhausting a specific market. PE firms may be able to mitigate these risks by strengthening their operational capacity through enhanced talent development, customer acquisition and satisfaction, technical investment and responding to disruption with agility.

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• Keys to Ensuring a Successful Roll-Up

About CR3 Partners, LLC

CR3 Partners, LLC is a national turnaround and performance improvement firm that assists, guides, and collaborates with management teams and their constituents facing any sort of transition, opportunity, stress, or distress. Carmen Barrett is a Director based in CR3 Partners’ Dallas office.

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Execution of Roll-Up Acquisition Strategy in Healthcare Industry

• Location: Nationwide
• Sectors: Health Insurance, Employee Benefits, Health Plan Administration
• Ownership: Private
• Situation Type: Buy-Side Advisory

Company Overview:

The Company is one of the largest providers of fully insured medical insurance in the U.S. and is the market leader in its core geographic market.

The Company approached Brookline with a desire to pursue growth through acquisitions, particularly outside its core geographic market. While the Company is the market leading health insurer in its geographic area, the underlying population is not growing, so the Company's leadership was actively seeking alternative opportunities to increase membership and revenue. The Company is also seeing a shift away from fully insured medical insurance to self-funded health insurance plans. With self-funded plans, companies self-insure up to a certain amount and outsource the administration of the health plan to a third party administrator, or TPA. Observing these trends, the Company's executives recognized an opportunity to grow by acquiring the companies (TPAs) that are providing these administration services.

Brookline's Solution:

Brookline recognized that the Company provides such comprehensive administrative solutions to its health insurance customers, it is just as much a TPA as it is a health insurer. Additionally, the Company is far better at administering health plans than most of the independent TPAs in the market. Brookline crafted a strategy that would allow the Company to acquire or "roll up" TPAs across the U.S., thereby leveraging a core competency (health plan administration), diversifying its business away from fully insured medical insurance customers, adding membership and tapping into new geographies. Brookline developed an acquisition criteria, identified attractive prospects, contacted those prospects, evaluated the opportunities, negotiated terms, quarterbacked due diligence and assisted in closing the transactions.

Brookline has advised the Company in its program that has acquired ten independent TPAs in 8 states including FL, GA, LA, MS, NC, PA, TX and WI in the first 36 months and is seeking additional acquisition opportunities in new geographic markets including the Midwest and Northeast. Throughout the process, the Company has become the most prolific acquirer of TPAs in the U.S. and has developed a reputation for being the "go to" acquirer of TPAs in the healthcare industry in the U.S. Brookline assisted the Company by strategically deploying excess capital in a way that created significant value, increasing membership and revenue, diversifying its revenue base and tapping into new sectors and geographies.

Roll Up Acquisition Strategy Financial Modeling + Template

September 30, 2022

Adam Hoeksema

According to PitchBook Data there were 3,168 roll up acquisitions totaling $323.4 billion in 2020 alone and 2021 had a similar, if not even faster pace. With hundreds of billions of dollars at stake each year, the roll up strategy has become a great opportunity for both buyers and sellers of small businesses.  In this article I want to highlight the following:

What is a roll up acquisition?

• Why is the roll up acquisition strategy popular?
• What is a platform company as it relates to roll up acquisitions?

Private equity and the roll up strategy

• How does a roll up acquisition work? 

Financial modeling for a roll up strategy

Rolling up multiple franchise units.

Throughout the article I will also be referencing and sharing screenshots of our Roll Up Acquisition Financial Model Template .  This template makes it easy to add in multiple acquisitions over time and model consolidated financials for the combined companies. 

A roll up acquisition is the process of acquiring a number of smaller companies in the same industry to create a single larger company.  Roll up acquisitions are also often referred to as bolt on acquisitions or add on acquisitions.  

How does a add on acquisition work?

In a roll up acquisition the buyer will typically have an established business with a high performing business model that will then acquire other similar businesses and merge them into the existing business which is often called the platform business.  The combined businesses will then share best practices, share services and share buying power to get the best deals on products and services.   

Why is the bolt on acquisition strategy popular?

There are a number of reasons why the roll up acquisition strategy has become quite popular in recent years including:

Economies of Scale

• Shared Back Office
• Geographic Expansion
• Faster Growth

Let's dive into each:

Many of the advantages of the roll up strategy can probably be included in the concept of economies of scale.  Let’s take a dental office roll up as an example.  If you are rolling up dental offices and you are buying new equipment for 50 dental offices you are going to be able to get a volume discount on that new equipment when compared to the price for the equipment for a single office.  This same concept will apply throughout the business.  You will likely save money on a per unit basis on many of your product and service needs which allows the combined companies to cut prices below their competitors, or simply generate additional profit.    

Shared Back Office  

A shared back office or corporate office is another example of the benefits of a roll up.  With 50 dental clinics you can have a shared insurance billing department, a shared collections department, shared scheduling department, accounting department, marketing department etc.  These shared services allow the combined companies to lower the cost for each service per unit when compared to a standalone dental clinic. 

Geographic Expansion  

A add on acquisition strategy can be used to help a company expand geographically through acquisition instead of needing to start a brand new unit of the business with no customers in a new geography.  If you operate a plumbing business in 3 cities it might be easier to acquire an existing plumbing business in a 4th city that already has a customer list, contracts, and employees in place rather than starting from scratch.   

Faster Growth 

Finally, private equity companies have loved using the roll up acquisition approach because it allows them to grow their platform business faster.  By acquiring existing small businesses that are already profitable the PE firm can immediately recognize the benefits for increased profitability and cash flow for the parent organization.  This article hits on why this is a popular strategy to ramp up growth quickly.  

What is a platform company in private equity? 

We mentioned that PE firms will use a roll up strategy to ramp up the growth of the platform company, so let’s define that a bit more.  A platform company, as it relates to roll up acquisitions, is the company that each smaller unit will get merged into.  Perhaps you are an entrepreneur and you are looking to roll up your competitors, in which case your existing business is the platform company that others will merge into.  But when it is a private equity firm implementing the roll up strategy, they won’t have an existing platform company to start with, so let’s dive into how roll ups and private equity work together. 

A platform company in private equity is an established business that is often used by private equity firms as an acquisition vehicle for further investments. The platform company provides an operating base from which additional acquisitions can be integrated quickly. The platform company is often the first and largest investment in an investment portfolio, providing the foundation for future investments to achieve economies of scale and synergies. Platform companies often specialize in one or more particular industries, allowing them to remain current on trends in that sector and quickly capitalize on new opportunities. At the same time, platform companies can often increase the businesses’ market presence, its capabilities for acquiring additional businesses, and its capacity to make future acquisitions more easily. The platform company also permits private equity investors to access the greater long-term potential of a particular sector or industry. The long-term goal of private equity firms is to build a platform that could ultimately be sold to maximize returns.

According to MarketWatch the top 25 PE firms were sitting on over half a trillion dollars in uninvested funds in late 2021. These private equity firms are charged with investing these dollars to earn a return for their partners.  With that much cash on the sidelines they need a way to put those dollars to work quickly and show a return on their investment.  

Roll up acquisitions are a popular investment strategy for these firms because it allows them to put the capital to work quickly as they buy up many existing businesses.  If they were to use the funds to help a single company grow organically they just wouldn’t be able to put enough capital to work efficiently and quickly.  Additionally, it could take time for new investments to start adding to the overall profitability and cash flow of the firm, so acquiring and rolling up multiple businesses that are already profitable can provide positive cash flow immediately.  

Search fund Roll Up Acquisitions

In addition to private equity there has also been a trend in search funds utilizing a roll up acquisition strategy. Search funds will acquire an initial platform company and then incrementally roll up additional units. I wrote a detailed article on how to start a search fund to acquire a business.

There are clearly a number of financial advantages for the combined company in a roll up strategy, but trying to create a financial model that can demonstrate the consolidated result of the combined companies along with the timing of the acquisitions and financing can be quite tricky.

I recorded a demo of how to use our template for a roll up acquisition below:

Whether you are using our template or building your own financial model there are a number of things you will want to make sure to model.  

Add in Individual Acquisition Details for Each Business Acquired

The model allows you to enter multiple businesses that you plan to acquire.  It also allows you to enter in assumptions for purchasing multiple business units at once, so for example if your platform company is acquiring vet clinics and you acquire a chain of 10 of them, you can enter in that transaction all in a single line in our model. 

Add Timing and Debt Financing Details for each Business Acquired

You can also control the timing of each acquisition as well as include details about debt used for each unit acquired.  

Add Business Unit Level Revenue and Cost of Goods Sold

Next you can build in monthly revenue and unit specific expenses for each unit. 

Add Operating Expenses

You will want to be able to add in operating expenses as a percentage of revenue, a fixed cost, or on a per unit basis.  For example, you will want to be able to model local marketing costs on a per unit basis. 

Consolidated Pro Forma for a Roll Up

Once you have all of your assumptions entered, you will need to be able to produce a consolidated set of financial projections.  You can see some examples of what that should look like below:

Consolidated Pro Forma Income Statement

If you need any help customizing a financial model for your specific roll up opportunity, check out our custom financial projection services . 

One more topic I wanted to hit on is that individual franchisees can use a roll up acquisition strategy to buy up multiple franchise units.  These could be the same franchise, or some owners will buy multiple units of multiple different franchises.  So you could have someone that buys 10 Subway units and 10 Jimmy John’s units.  This type of roll up can still benefit from many of the advantages of a roll up like shared back office services.  Our multi unit business financial model template will also be quite helpful in modeling out a multi unit franchise operation.  

In summary, I think there is a lot of opportunity for strategic buyers to roll up small businesses and with that comes some financial modeling complexity.  Our hope is to help you avoid the need for high priced financial modelers by creating tools and educational content that will help you do this work on your own.  If you have any questions or suggestions for us, please contact us today! 

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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Roll-Up Mergers & IPOs

A roll-up merger is a form of acquisition strategy that is often attractive to investors for its ability to consolidate markets. In this article, we describe how roll-up mergers work and why they might succeed or fail.

What do the industries of waste management, movie rentals, and cars have in common? A man named H. Wayne Huizenga. In 1968, Huizenga’s company had a single garbage truck. By 1983, he had turned his company, Waste Management, into the largest waste removal company in the United States. Huizenga then went on to create Blockbuster, the largest movie rental business in the nation. Then, Huizenga changed industries again and went on to build AutoNation, the nation’s largest automotive retailer. Huizenga didn’t build these businesses from the ground up; rather, he participated in hundreds upon hundreds of acquisitions in order to consolidate these industries into one dominant firm. This strategy, which led to great success in Huizenga’s case, is known as a roll-up merger. While Huizenga was not the first to use a roll-up merger strategy, his success made him the strategy’s historical poster child.

When a roll-up is successful, it can dramatically improve a company’s future trajectory. Because of this, roll-up mergers have become a prevalent strategy across many different industries. These transactions attract a lot of attention from investors. In some cases, roll-ups help create stronger, more profitable companies that can successfully go public later. In other cases, IPOs have been used to finance roll-up transactions. In addition, some public companies have used similar acquisition strategies to develop or maintain their dominant market position. In order to understand what makes this strategy so popular among investors, and to understand the factors that play into its success, this article will describe the definition and process that roll-ups follow, examine roll-up IPOs and their significance, and detail several of the benefits and drawbacks of roll-up mergers. By understanding this strategy, business leaders will be better able to assess whether a roll-up is appropriate for their business.

Roll-Up Merger Strategy

A roll-up merger is generally defined as the strategy of acquiring a large number of smaller businesses, either at the same time or over a period of time, in order to create one larger firm. There are several different motives for roll-up mergers that depend on the strategy of the parent company. For example, a roll-up could be used to increase market share within a company’s current market, or to build revenues across new, related markets. This could be done by acquiring companies that are already established in certain products, services, or geographies. Another reason to implement a roll-up strategy is to expand the current scope of a company’s operations. For instance, roll-ups are often used to expand across new and related products. Another motive for a roll-up strategy could be the need to consolidate talent across companies within an industry. If some companies are better at sales and others at operations, a roll up could give the acquiring company the industry’s top talent in both areas.

When business leaders are evaluating whether a roll-up will benefit their company, they need to consider long-term strategic benefits of the transaction. In the best-case scenario, both the acquirer and the target will have compatible synergies that make the merger worth more than the sum of its parts. In the worst-case scenario, a roll-up can lead to poor performance and eventually the death or sale of the various acquired companies. A roll-up strategy needs to be carefully examined to determine whether it will actually produce the desired results, even when considering the potential time and resources lost during the integration process. 

For example, imagine a software development company that is considering a roll-up in order to bring new software capabilities to its platform. In many cases, this is a great way to get the functionality and features a company needs, without having to develop them internally. However, because of the number of programming languages and styles, piecing together software from multiple entities and doing proper upkeep could end up taking a substantial amount of time and resources, eventually becoming a tangled web of complexity. This could raise the indirect costs of integrating the acquisition so far that the company would have been better off keeping development in-house. 1 As this example demonstrates, unless there are cost-cutting opportunities through an acquisition, a merger might not be justified. If there are underlying synergies, such as compatible software and code, then a roll-up merger might be a viable option.

Roll-Up Merger Process

The process of completing a roll-up merger strategy will differ in its details depending on the nature of the industry and motive of the company pursuing a roll-up strategy. However, the general process remains the same. Over time, one company in an industry acquires other smaller companies. This strategy might take place over many years, or happen relatively quickly depending on the nature of the industry.

The most difficult part of a roll-up acquisition strategy is finding the necessary capital to fund the various acquisitions. A company can fund these acquisitions with its own capital, by taking on additional debt, or by obtaining funds from private or public equity. In many cases, a roll-up strategy requires more capital than a company has on hand, so it will need funding from other sources. One of the most common places for roll-ups to find capital is in the private equity market.

If a company does decide to use funding from a private equity company to pursue a roll-up acquisition strategy, it should find a private equity company that specializes in this type of merger. Roll-up transactions are different than other private equity financing deals because they often require more capital and result in more experience with the difficulties of integrating multiple companies. A private equity company with experience in roll-ups will be able to help a company avoid many of the common mistakes that are made throughout the acquisition and integration process. In some cases, one private equity firm won’t be able, or want, to finance the strategy alone. In these cases, many acquisition-focused companies will need to use debt or other equity financing to fund at least a portion of the acquisition. When this is the case, the parent company will need to be prepared financially to pay interest on the debt incurred to fund the acquisitions. For more information about debt structuring, see our articles on Startup Debt Covenants and Debt Restructuring For Pre-IPO Companies .

In addition to the general process of generating the necessary capital, companies should be careful to integrate the acquisitions properly. The exact way that a company chooses to integrate its acquisition will depend on the industry, size of the acquisition, and nature of the acquirer’s strategy. Integration is a difficult process, which can be approached a number of different ways. For instance, the pace of integration can make a big difference in its success. In some cases, it may be possible and appropriate to approach integration quickly. In other cases, many acquisitions may be better off if they are integrated slowly and are largely allowed to continue functioning as an independent business unit. Another consideration is how to keep employees and leaders motivated. In many roll-up situations, a large number of employees may need to be let go. In other cases, keeping key employees will be imperative to a successful integration. Overall, the integration process needs to be approached strategically, and companies would be wise to think through the long-term implications of each decision they make as they go through the integration process.

Many of the factors that will play into the success of a roll-up merger are similar to those of a regular merger or acquisition. For more information about how to approach mergers and acquisitions, see our article titled M&A: Buy Side Vs. Sell Side .

Roll-Up IPOs

Because of the amount of capital needed to finance a roll-up strategy, many private company roll-ups in the past have turned to the IPO market to finance the acquisition deals. In these cases, the roll-up of several private companies and the IPO happen at the same time, so this is referred to as a roll-up IPO. Because the companies merge and become one company at the same time on the day of the IPO, some have even referred to some instances of roll-up IPOs as a “poof IPO.” 2 Roll-up IPOs are often done with the goal of the new merged firm becoming a major player in the industry.

In order to complete a roll-up IPO, the company will need to comply with the regulations of the Securities and Exchange Commission (SEC) regarding roll-up transactions. These requirements can be found in the Form S-1 3 and Form S-4. 4 These requirements specify how the company should file specific information about the roll-up transaction.

Roll-up IPOs were primarily popular in the late 1990s, with dozens of roll-up IPOs happening during several of those years. 5 This strategy has not been prevalent in recent years, however. Some have speculated that this is because of the abundance of available capital in the private equity market. Because capital is so abundant in the private equity space, roll-up IPOs are less relevant in the current market than other types of IPOs that are being used to pursue acquisitions, such as special purpose acquisition companies (SPACs). For more information on these types of IPOs, see our article about SPACs .

In the early 1990s, the electrical contracting industry was highly fragmented in the United States, with tens of thousands of small operating businesses. In 1997, John Colson brought four electrical contractors together to prepare for a roll-up IPO. On the day of the IPO, the four original companies, PAR, Potelco, Union Power, and Trans Tech, combined to form one larger company—Quanta Services. Quanta Services went public in 1998, raising approximately $45 million (USD). Of the IPO proceeds, $21 million were used to fund the cash portion of the acquisitions of the four original companies. 6 Since their IPO, Quanta Services has acquired over 200 additional companies as they continue to consolidate the electrical contractor and utilities space. The company now operates in industries such as electrical, pipeline, and communications. 7

Pros and Cons of a Roll-Up Merger

Roll-up mergers have been pursued in a variety of industries over the years. Many of these roll-ups have had great success, while others have ended in bankruptcy. In order to understand what makes certain roll-up mergers successful, leaders need to understand the potential benefits of this strategy as well as the drawbacks that have caused many roll-ups to fail.

Pros of a Roll-up Merger

Roll-up mergers have been and continue to be pursued in many industries. The fact that these types of transactions have remained prevalent indicates they have the ability to generate positive returns for investors. The continued interest of investors and private equity groups is likely due to the many potential benefits a successful roll-up merger can bring. Several of the potential benefits are detailed below.

Economies of Scale

One of the benefits of a roll-up merger is that it can help a company achieve the benefits of economies of scale. This means that the larger the company gets, the more efficiently it can operate. As a company grows, it is able to spread its fixed costs over larger volumes of production. In addition, with more experience and greater scale, a company is also able to lower its variable and marginal costs per unit. In other words, each new unit or service provided will be more efficient, bringing costs down. By lowering costs in this manner, a company’s profitability increases. Lower costs could also allow a firm to outcompete its competitors by charging lower prices or using profits to stay ahead in terms of product or business development. Because economies of scale can present such important strategic benefits, many roll-up mergers take place in fragmented industries where other companies have not yet achieved economies of scale. A roll-up strategy is more attractive in these cases because a company can be the first major player in a historically weak industry.

Cross Selling

Cross selling is another benefit of a roll-up merger strategy. Cross selling refers to the ability of a firm to sell its product or services to additional customers, or to sell additional products to existing customers. By acquiring several firms in the same industry, a company can either sell new products to its existing customers or sell its existing products to the newly-acquired customers. In this way, a company can effectively increase its size and scale without needing to expand into these markets on its own.

Market Power and Influence

As a roll-up company makes additional acquisitions, it significantly increases its market share. Once a company has established itself as a dominant player in a market, it will have more influence over that market. As market power increases, companies have the opportunity to use that market power to make higher profits which will continue to drive future growth. In this way, a consolidated company with market power can provide greater value to shareholders than the individual smaller companies ever could have provided separately.

With market power, companies can exert greater influence in several different areas. For example, a national grocery store chain is better equipped to reach favorable agreements with suppliers than is a small, single-location grocer. Market power can also give a company more influence over buyers as well. Larger businesses may have more influence on buyers and can demand higher prices or sell in higher volumes than could a smaller business. Another upside of scale and market power is the ability to obtain financing. Banks are more likely to provide capital and favorable terms to large, well-established companies than to smaller, riskier businesses.

Improving Financial Results

In many cases, mergers have the potential to improve the acquiring company’s financial ratios. For example, if the acquiring company purchases a company with a higher price to earnings ratio, this can improve the acquiring company’s price to earnings ratio. However, as detailed in the drawbacks section below, temporary improvement of financial ratios is not solid logic for a merger. Rather, a roll-up strategy should take a long-term approach. If a merger takes place because of legitimate synergies between the companies, then the merger will better the financial results of both companies in the short run and the long run.

Another way many companies use roll-ups to improve financial results is through multiple arbitrage. Multiple arbitrage is a term that is used in a different ways depending on its context. In the case of roll-up mergers, multiple arbitrage refers to the ability of an acquiring company to increase its valuation, or the valuation of the acquired company, without changing anything about the company other than the reflected financial results. In the case of roll-up mergers, the collection of multiple smaller companies can add significant value to the parent company, without needing to change anything within the acquired companies. For instance, imagine an industry with one large and many small players. If a large, reputable firm acquires a much smaller firm, then analysts might see the smaller firm more favorably and give it a higher valuation than it had before the acquisition, even though nothing about the firm has actually changed. In turn, this would increase the value of the parent company.

One example of a company that has successfully followed a roll-up strategy over an extended period of time is Constellation Software. The following is the description of the company from its website. Constellation Software is an international provider of market-leading software and services to a number of industries, both in the public and private sectors. Our mission is to acquire, manage and build market-leading software businesses that develop specialized, mission-critical software solutions to address the specific needs of our particular industries. Constellation Software has made a large number of acquisitions in a number of different industries over the years. They have six different operating groups within the company that manage operations in over 100 different markets. Most of the acquisitions made by Constellation Software are relatively small, and they each fall into distinct categories within the industries that the groups are interested in having as a part of their business. Because of its focus on making acquisitions that are a good fit, the company has seen remarkable success. Since closing at a price of $18.30 CAD on the day of its IPO in 2006, the company has reached share prices of over $1,700 CAD in 2021.

Cons of a Roll-Up Merger

While a roll-up merger strategy has a variety of potential benefits, it also has a number of significant difficulties and drawbacks. An article in the Harvard Business Review (HBR) reported that more than two-thirds of roll-ups failed to create any value for investors. 8 By this metric, less than one in three of these mergers result in success. The failure rate is so large that the HBR article actually lists roll-ups “of any kind” as one of several strategies that are most likely to lead to business failure. While there are a variety of drawbacks, some of the most impactful include the difficulty of integrating existing businesses, the necessity for certain market conditions, and the allure of illusory financial progress.

Integration Difficulties

Mergers and acquisitions are notoriously difficult to execute successfully. Often companies have very different cultures, values, and processes. Additionally, existing leadership is often key to the acquired company’s success, but may have a difficult time integrating within the new, merged company. When leaders stay, they may hinder a company from implementing the needed changes in a timely manner. However, in many small businesses, leaders play a critical role in holding things together. If a leader leaves, then productivity and morale may fall substantially. In addition to the difficulty with transitioning leadership, personnel across the board might have a difficult time integrating. In order to keep the company together and avoid losing talent, the new merged company will need to find ways to deal with these problems. In the end, so many things need to go right for an acquisition to truly add long-term value that many companies might not be able to see success with this strategy.

Ill-Suited Industry Attributes

Many of the benefits described above require certain industry attributes and market conditions for a roll-up merger to be successful. For example, to experience economies of scale, an industry needs to have the space in its general cost structure to lower overall costs. Put another way, mergers do not automatically create economies of scale. In some industries, scale doesn’t necessarily lower cost substantially, meaning that a larger company will have no real advantage over a smaller company. In these cases, smaller businesses are already operating so efficiently that a merger won’t provide any additional cost savings.

In addition to economies of scale, buyer attributes can play a role in whether a roll-up strategy is able to be successful. For example, in many industries, buyers may actually be less likely to favor national brands, instead favoring small businesses that are better able to cater to individual and local needs. For example, private music lessons are more often taken through a local teacher than they are through a national chain of professionally hired teachers. This industry would be difficult to consolidate, and consolidation would likely make service more expensive and wouldn’t necessarily increase the number of students. Other factors can also play into the success of a roll-up merger. If suppliers are still relatively more powerful, they may keep costs high and prevent scale-related cost savings. A roll-up firm may also have a difficult time finding a competitive edge against smaller rivals. Because of these various factors, a roll-up needs to take place in an industry where consolidation will give the combined larger company a competitive advantage that outweighs the potential difficulties it will face.

Financial Ratios

Another important potential drawback of mergers is that they can create the illusion of financial success without improving the underlying business. For example, a roll-up merger could improve a company’s price to earnings ratio. After an acquisition, the merged firms combine their earnings, raising the level of earnings for the merged company. If the acquiring company has a lower price to earnings ratio to begin with, then by merging with the higher price to earnings firm, the price to earnings ratio of the acquiring company may go up after the merger, at least initially. However, a higher price to earnings ratio, which is normally a good sign, doesn’t necessarily reflect the true economics of the merger. Instead, the higher price to earnings ratio may be obscuring the fact that the merged company isn’t actually making more money, at least not yet. In fact, these changes in financial ratios often hide the fact that a merger isn’t based on synergies that will allow both companies to operate more efficiently. And once the market realizes that the synergies aren’t there, the favorable price to earnings ratio of the combined company can come crashing down.

Financing Burden

For a company to pursue a roll-up strategy, it will need a large amount of capital to complete all the various acquisitions. While some companies have used IPOs or private equity to pursue these strategies, often some level of debt or financial leverage is used as well. With each acquisition, more debt may be incurred, which means a company needs to be able to service those debts. If an acquisition goes poorly, or the quality of the acquisition is poor, then the roll-up company may also face a lower credit rating. A lower credit rating will lead to worse terms for future debt financing. These worse terms will in turn continue to increase the cost of servicing debt. Increased debt servicing costs can then further reduce credit ratings. Because this process is circular, it can quickly become self-reinforcing and snowball out of control. When this happens, debt financing becomes a quick road to bankruptcy.

In the cases where a company chooses to use equity instead of debt financing, other burdens will appear. These include loss of ownership and control of the company and future decisions. For more information about the positives and negatives of losing control, see our article about Founder Control .

One famous example of a failed roll-up is Loewen Group. Loewen Group was a “death services” company that owned cemeteries and funeral homes. Over the course of several years, the company acquired hundreds of funeral homes and cemeteries. However, industry attributes, legal battles, and competitive pressures all led to the eventual failure of the firm. While the firm was able to see some benefit from economies of scale, there were several other problems that eventually led to the company’s downfall. These factors included nature of the industry, loss of focus, lawsuits, and loss of investor confidence. The death services industry is very different from most other industries. The individuals purchasing these services tend to have very different concerns than they do in their other purchasing decisions. For instance, the family members who are burying a loved one don’t usually have any interest in a large brand name. Rather, they are interested in personal recommendations and small, locally owned funeral homes. In fact, this preference was so strong that many of the funeral homes acquired by Loewen Group kept their new ownership a secret and retained their original names. Another problem with Loewen Group’s acquisition strategy was that they lost focus on what they did best: funeral homes. Investors had been promised a large growth rate, which put pressure on Loewen Group to make more acquisitions. To maintain growth, the company acquired a number of cemeteries, which began taking up a larger portion of the company’s portfolio. Unfortunately, these acquisitions turned out to be less profitable, which hurt the company and caused investors to lose confidence in the company. In addition to the difficulties in the industry, Loewen Group also faced several large and highly public lawsuits with both private U.S. citizens and the U.S. government. After these lawsuits were launched and after seeing the company turn down a favorable offer from a potential acquirer, investors started to lose confidence in Loewen Group, and share prices fell until the company eventually declared bankruptcy and had to sell over 300 of its holdings to stay afloat. 9 After reorganizing, the new company, Alderwoods Group, was eventually acquired by Service Corporation International. Interestingly, Service Corporation International (SCI), the firm that acquired Loewen Group, is an example of a successful roll-up merger in the same industry. Unlike Loewen Group, SCI has been able to establish business practices that have allowed it to grow and thrive, even in a low growth industry. By finding ways to cut costs and streamline operations appropriately while still focusing on providing best-in-class service, SCI has been able to avoid many of the pitfalls that caused Loewen Group to fail. SCI has also been able to establish successful national brands both in funeral management and cremation, in addition to establishing solid financials by finding ways to “lower expenses, reduce debt and increase cash flow.” 10

Because of the dramatic success of some roll-ups, this strategy has continued to stay relevant. In industries where consolidation has made operations more efficient, roll-ups have the potential to make customers and companies better off. However, roll-up mergers are incredibly difficult, and face a number of obstacles that are difficult to overcome. Companies should be careful to recognize and account for these difficulties as they pursue a roll-up strategy. By doing so, a roll-up company gives itself a better chance at achieving the success that it is pursuing.

Resources Consulted

Corporate Finance Institute: “ Roll Up Strategy .” Accessed 30 Mar 2021.

Deeb, George. Forbes: “ How To Roll-Up Several Companies Into One .” 2 Oct 2018.

• Morettini, Phil. PJM Consulting: “ When Does a Software Industry Roll Up Make Sense? ” Accessed 30 Mar 2021.

Kocourek, Paul; Steven Y. Chung; and Matthew McKenna. Booz & Company: “ Strategic Rollups: Overhauling the Multi-Merger Machine. ” 1 Apr 2000.

Deeb, George. Entrepreneur.com: “ A Secret Tactic for Quick Growth: The Roll-up .” 4 Nov 2016.

Associated Press. Los Angeles Times: “ H. Wayne Huizenga, who built his fortune from trash and founded Blockbuster, dies at 80 .” 23 Mar 2018.

Trainer, David. New Constructs: “ The High-Low Fallacy: Don’t Believe the Merger Hype .” 31 Aug 2012.

Wolfe, Henry D. Medium: “ Roll-Up Strategy: How To Create Value .” 24 Aug 2020.

Mayer, Christ. The Washington Post: “ In his worst investment, he got it wrong. Dead wrong. ” 19 Dec 2014.

Giddy, Ian. New York University: “ The Restructuring of The Loewen Group: Life After Death .” Accessed 30 Mar 2021.

Hempstead, John E. Philadelphia Business Journal: “ New player: The roll-up IPO .” 24 Feb 1997.

Shapiro, Jonathan. Financial Review: “ Roll up, roll up for the next blow-up .” 31 Oct 2018.

Chidley, Joe. The Globe and Mail: “ Constellation Software's elusive CEO .” 24 Apr 2014.

Constable, Giff. Axial: “ How to Pull Off a $2 Billion Roll-up .” 8 Aug 2018.

McCafferty, Joseph. CFO.com: “ High Rollers .” 1 Apr 1998.

Perin, Monica. Houston Business Journal: “ Quanta leap: IPO seeks to merge contractors in telecom, electricity .” 11 Jan 1998.

Quanta Services: “ History .” Accessed 30 Mar 2021.

Trainer, David. Forbes: “ This Roll-Up Can’t Roll On Forever .” 29 May 2021.

• Greco, Susan. Inc.com: “ Poof IPO Goes Up in Smoke .” 15 Oct 1999.
• SEC: “ Form S-1 .” Accessed 6 Apr 2021.
• SEC: “ Form S-4 .” Accessed 6 Apr 2021.
• Dittmar, Amy K., Keith C. Brown, and Henri Servaes. “ Corporate Governance, Incentives and Industry Consolidations .” SSRN Electronic Journal, Oct 2003. https://doi.org/10.2139/ssrn.379621.
• Quanta Services. 31 Mar 1999. Form 10-K.
• Quanta Services Inc: “ History .” Accessed 30 Mar 2021.
• Carroll, Paul and Chunka Mui. Harvard Business Review: “ Seven Ways to Fail Big .” Sep 2008.
• Reference for Business: “ The Loewen Group Inc. – Company Profile, Information, Business Description, History, Background Information on The Loewen Group Inc .” Accessed 30 Mar 2021.
• Service Corporation International: “ History ”. Accessed 4 May 2021.

The Art of the Roll-up

The Art of the Roll-up: 7 Keys to Success

Ask a fellow investor to invest with you in a roll-up strategy and one of two things will happen:

A) He’ll mortgage his home and give you every cent he’s got

B) He’ll say… “GET OUT.” Ouch, don’t let the door hit you on the way out…

Roll-ups are a controversial topic among investors. By roll-ups, we mean the strategy of growth by acquiring multiple companies in an industry.

Roll-ups have produced spectacular blowups. Valeant Pharmaceuticals (VRX:NYSE) is a painful example of a stock that imploded 95%. Bill Ackman’s hedge fund lost $4.2 billion in the Valeant debacle.

But roll-ups have also produced some of the most incredible gains we know of. The best performing stock in Canada over the last 10 years was a textbook roll-up strategy. Betcha can’t guess it….

It’s a company called the Boyd Group Income Fund (BYD.UN:TSE). They rolled-up car collision repair shops. Boring business. But returns that were anything but boring.

We are talking 56X returns for investors over the last 10 years.

So there seems to be no in between with roll-ups. But why do some roll-ups lead to unbelievable returns? And why are others spectacular failures?

And how can you as an investor tell which way a roll-up strategy will go?

We’ve seen the good, the bad, and the ugly in roll-ups over the last 30 years of investing. And from our experience we are going to share today the 7 keys to a successful roll-up strategy.

Ignore these at your own risk…

1) They target a fragmented industry

Fragmented means there are many players in an industry. No big guys dominate the market.

The first reason is simple math – a roll-up, by definition, makes multiple acquisitions and in a dominate market there is nobody to buy. Even if there are mid-size players to target, they are usually too pricey to build a roll-up with. Roll-up CEOs’ best bet is to negotiate with mom-and-pops.

The next reason is scale. As the roll-up grows, it uses scale to drive results and convince other sellers they are better off with them than as a stand-alone. This is hard to do if there are large players waiting in the wings to compete for deals.

We look for industries where the top 4 players control no more than 40% of the market. Roof truss manufacturing, for example, is a great industry to target. The credit rating industry is a very bad one.

2) They go for boring businesses

Warren Buffett will be the first to tell you that boring is often the most profitable investing.

We like boring in roll-ups for two reasons: 1) They are easier to understand and 2) there is less competition for deal flow.

Let’s start with 1). Let’s say the CEO wants to roll-up the artificial intelligence industry to make an industry-first complete solution. Most of the targets are pre-revenue, and the CEO will have to estimate each technology’s future value not only as a stand-alone business – but as part of the complete solution he’s building. Humans by nature are not good at this. They tend to be wrong on the optimistic side.

Now let’s say that same CEO is rolling-up the garbage removal industry. That’s a recurring business – everyone has trash whether the market is good or bad. He can vet their service contracts and relationship with cities. He can assess the condition of their equipment. With good due diligence he will have a handle of future cash flows. He’ll know what he should pay for the business.

Now for 2). It is human psychology to be invested in the next “big thing.” People like sexy, and they are willing to pay up for it. If a CEO is trying to roll-up say machine learning or cryptocurrency startups, he is going to face competition from all kinds of venture capitalists and hedge funds. That usually means higher valuations – and higher risk.

There is a reason the most successful case studies have been in industries like funeral services, waste management, and car repair. Boring industries, sexy returns.

3) They capitalize on industry succession challenges

As every successful entrepreneur gets older, they inevitably must think about succession. This a stressful part of every business owner’s journey.

How much money will I get from my business? Will it sustain me and my family into retirement? Will the buyer treat my business well and carry on my legacy?

For many mom-and-pop businesses, the answer is to keep the business in the family. The kids take over and the business continues to support the family.

Other sexy businesses like SaaS companies can sell for healthy multiples to other innovative tech companies or venture capitalists.

But let’s say you own a funeral home company…

It’s probably not your kid’s life goal to take over a funeral home business. As one funeral home CEO once said to us, “no kid is going to get laid running a funeral home.”

You’re too small to sell to private equity. You’ve got a dilemma.

Now imagine if there was a player in your industry who’s acquired companies just like yours. They offered you a fair price, cash up-front, and equity with big upside potential. Not only would they keep your business running, they’d use their scale and resources to grow it.

Sounds ideal doesn’t it? And let’s face it, you don’t have much of a choice.

These “acquirer of choice” situations are exactly what you want to look for as a roll-up investor.

Oh and one of the greatest roll-up stories ever came from the funeral home industry. It was Service Corp International (NYSE: SCI), made famous by Peter Lynch’s book One Up on Wall Street.

4) They see financing as a strategic tool

Every CEO has three main tools in the kit: cash, equity, and debt. Do they take the purchase price and divide by 3? No way!

Great roll-up CEOs think strategically about financing. They are always looking to minimize dilution and lower the effective purchase price.

Cash. Cash as they say, is king. Cash is often needed, especially if the seller is a founder looking for liquidity. That said, great roll-up CEOs know debt and equity can be better tools and are always mindful of their war chest for future acquisitions. Much like the all-cash home buyer, a strong balance sheet affords negotiating power with future sellers.

Debt. Debt as Warren Buffet says, is a “four letter word.” And that’s true, excess debt is probably the number #1 reason for failed roll-ups.

Great roll-ups CEOs have a deep understanding of the industry they are rolling up. Is it a predictable industry with steady cash flows? Is it recession-proof? If so, then debt could be the magic word. John Malone famously rolled-up the cable TV industry, using interest expense to lower net income and taxes. More cash, more deals. Rinse, repeat.

Other creative debt strategies include low (or better yet no!) interest seller financing and mortgage financing.

Equity. Great roll-up CEOs don’t see equity as black and white. It’s all price dependent. When shares are hot, they look to equity for currency.

When shares are fairly valued, or undervalued, they avoid dilution at all costs. The more stock management owns, the more you’ll see this behavior typically.

We like CEOs that will go to great lengths to avoid issuing equity – unless of course shares are trading at silly valuations.

But we never like to see a deal with no equity. That’s because sellers need to be incentivized to stay on or at least manage through a transition. With no equity on the table, sellers will do all they can to keep skeletons hid in the closet during due diligence.

5) They are value-minded and always thinking arbitrage

Sellers in M&A always know more than buyers. Maybe they are selling because they want liquidity. But maybe they see the writing on the wall… and things are about to go south.

M&A is full of unknowns. Beyond good due diligence, the acquirer has just one defense. And that’s price.

Great CEOs define valuation metrics up-front and don’t stray. They are not afraid to walk away from a deal when sellers won’t hit their price.

One CEO we invested with waited a year and a half for an acquisition because of a .5X difference in EBITDA multiple. That’s exactly what we like to see.

They also understand arbitrage. Because of the liquidity premium, public companies often trade at higher multiples than private companies.

When a roll-up buys earnings, those profits can get re-rated at a higher multiple. Then if the market gains confidence in the CEO’s strategy, the stock can see multiple expansion. It’s a powerful cycle.

Now do we want a CEO that can negotiate his targets to the bone? Do we want to see companies bought at fire-sale prices, 1-2X EBITDA?

Not always.

If the selling management team is staying on – and we almost always hope they do – it’s important they feel the deal was fair. Having a sense of goodwill will keep them engaged to grow the combined companies.

6) They do deals that make sense from day one

Forget synergies. Accretive is the word we want to hear.

Accretive means that post-acquisition, earnings increase per share. For this to happen, two things must be true:

1) The acquired business is profitable

2) The acquired profits are big enough to offset equity dilution

Many acquisitions pass 1) and fail 2). Great roll-up CEOs pass both with flying colors.

Now that’s not to say there shouldn’t be synergies. Greater purchasing power. Sharing fixed costs. Cross-selling.

All those are great and part of the upside. It’s just that far too often CEO’s use synergies as the deal rationalization. Synergies have a bad habit of falling short.

Great roll-ups CEO make sure they pay a fair price for the business today. And they see synergies as pure gravy.

7) They move fast. But not too fast!

Speed is important in a roll-up strategy. Momentum gets the investment community excited to write checks. It gets sellers excited to sell.

But great roll-ups CEOs know speed can kill. Acquisitions are complex. You have different cultures and personalities to mesh. Uncertainty can paralyze employees.

Great roll-up CEOs have a sound integration strategy they can repeat over-and-over. It usually has three phases. Phase I, just let the business run, don’t touch it. Phase II, begin to consolidate and integrate. And only in Phase III, do you merge strategies and go for growth with cross-selling.

The right speed of a roll-up strategy is more art than science. Great roll-up CEOs are always pushing the limits and trying to find that right balance between growth and risk.

We will leave you with a sobering statistic: 70-90% of acquisitions fail to deliver shareholder value.

That’s just for one deal. For roll-ups, it only compounds. Let’s say a roll-up is going to do 10 acquisitions. The success of each one is 25%.

This puts the roll-up’s success rate at 25% x 25% x 25%… okay you get the point. It’s a really low number.

But don’t let this scare you. Roll-ups are risky, but as investors in 50+-baggers like Boyd Income Group will tell you… they’re worth the chase.

Happy Investing, Paul & Brandon

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Knowledge Hub for Growth

Roll-up acquisition strategy: what is a roll-up.

Roll-up mergers and acquisitions can be beneficial, but they can also be difficult to pull off. Mergers and acquisitions are often complex, and roll-ups in particular face certain obstacles that can be difficult to surmount.

This guide walks you through the pros and cons and provides some pointers as to how you might successfully execute a roll-up acquisition strategy.

Better financials

Using your company’s equity as currency, how will i integrate my roll-up acquisition, what is a roll-up acquisition.

A roll-up merger is a consolidation process whereby smaller companies are rolled-up to form a much larger entity. They are sometimes pursued by investors like private equity companies. They are often used in new market sectors and are a way for businesses to grow and expand. Because large companies are often valued more highly than smaller ones, they enable private equity firms to drive value from a sale of the new business or a flotation via an Initial Public Offering (IPO).

In a roll-up merger, the owners of the companies being merged get cash and shares in return for their equity. These companies are then transferred to a holding company and combined. The advantages to the new business’s owners can include better market placement, improved access to new customer, technology and markets.   

What are the benefits of a roll-up acquisition strategy?

Larger businesses are often more successful than smaller ones and can dominate the sectors in which they operate. This is because they offer a wider range of products or services, are able to make economies of scale and also profit from improved brand awareness. Think Apple, Microsoft and Facebook for example.

In contrast to markets with a few, major players are more fragmented, with lots of smaller businesses operating in particular niches. Some examples are the restaurant and furniture industries. This fragmentation can lead to opportunity for investors who see the potential for ‘rolling-up’ individual companies and creating a larger one, leading to greater profits and increased value.

Some examples of successful roll-ups include the American giants, Waste Management, Inc. and Blockbuster Video. These businesses were the result of smaller companies being combined into a single player that dominated its respective market sector.

Here are some particular benefits of roll-up mergers:

Economies of scale

One potential benefit of a roll-up merger is that a company can make economies of scale by becoming more efficient, distributing its costs of production across larger volumes, lowering its unit costs and becoming more profitable.

A company (newco) could execute a series of ‘vertical’ mergers and acquire a number of smaller companies that produce products that are vital its supply chain. By acquiring these companies, it can save costs and consolidate its business. Or, newco can pursue a ‘horizontal’ merger, where it buys a number of small companies operating in the same sector but in different markets, perhaps in different countries. By making economies of scale, it can cut down on costs as well as gaining access to new markets.

Market influence

A company can significantly increase its share of a market by acquiring companies. If it makes enough acquisitions to significantly increase its size, it can become the dominant player giving it the power to increase prices and therefore profits as well as reducing costs through economies of scale.

Because it’s now large and influential, it can get better deals from suppliers, negotiating for lower prices as it’s buying larger quantities. It can also gain better to finance on more attractive terms as it’s a lower risk proposition.

Cross-selling

By increasing its access to new customers, or by increasing the numbers or types of products it sells to existing customers, a company can scale without having to acquire these customers by its own marketing efforts.

Sometimes a new, merged company will gain improved financial status by gobbling up smaller ones. It may have a better price to earnings ratio, or higher overall value than before without changing anything about its business.

What are the negatives of a roll-up acquisition strategy?

Although roll-up mergers can be very beneficial, they are also highly risky. Here are some of the downsides:

Integration problems

Mergers and acquisitions are complex transactions and require a lot of negotiation and paperwork. Often the companies being acquired have very different cultures, leadership styles and ways of doing business. When leaders clash, this can hinder the progress of integration and making the changes that are needed to take advantage of the merger can become protracted.

In addition, changes in leadership can lead to drops in morale, the departure of talent, and falls in productivity. The new company will have to find a way to bring teams together to ensure success.

Mis-matches in merged companies

Sometimes, the companies being merged are so different that it proves too difficult to make a success of the roll-up. Maybe the companies’ processes or assets are so different that it’s hard to make economies of scale. Or customers may prefer to buy local. For example, buyers may prefer to buy a car from a dealership in their local area, rather than from a large and distant consolidated company. 

Merged companies can improve their financials by merging. However, since these improved financials are not tied to any real improvement in the company’s financial position, but rather the potential for improvement, if the company fails to take advantage of the roll-up, its value can rapidly deflate.

In addition, a company may need substantial finance to execute its roll-up and will have to service this debt increasing the pressure on its financial position. It may also find itself with a lower credit rating that can add to worse financial terms, and the combination of these two factors can tend to snowball, leading quickly to financial difficulties.

If the new company uses equity rather than debt to finance the deal, this can also lead to issues, including loss of control over decision-making and dilution of founder holdings.

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What key things do I need to consider before executing a roll-up merger?

One of the first things to consider if you’re thinking about a roll-up merger is whether you understand the market sector you’re targeting. The most successful roll-ups have been in fragmented sectors with no real dominant players. Highly regulated sectors can offer attractive pickings when market conditions change. For example, Covid-19 has given rise to the emergence of small companies offering testing and track-and-trace technology. Consolidating smaller companies in this market could offer opportunities for a successful roll-up merger.

A second thing to consider is whether you have a proven formula for extracting value from the merger. You’ll need a plan to consolidate employees, management structures, assets, sales channels and IT. As with franchise businesses, a tried and tested process-driven approach is the best guarantee of success. You’ll need a great deal of organisational discipline to maximise your chances.

Thirdly, have you finance in place to do the deal? Or, if you’re planning an IPO to finance it, have you taken into account the additional complexity and regulatory scrutiny that will be involved, post-IPO.

How can I finance a roll-up acquisition?

One of the trickiest parts of executing a roll-up strategy is funding it. You can use your company’s capital, take on more debt or look for funding from private or public equity. Either way, you’ll likely need more cash than you’ve got at hand. The most common source of funding is the private equity market.

Using equity funding

If you choose private equity to fund your roll-up, you should choose a firm that’s a specialist in this kind of deal. Roll-up mergers tend to need more capital and can be more difficult, so you’ll need a team that knows what it’s doing.

Another way to fund a roll-up is to give away some of the company’s equity as part of the deal. While your share of the company might fall, you could achieve gains overall.

As well as generating finance for your roll-up, you’ll need to have a plan in place to manage the integration because this is the factor most likely to lead to success – or not. Think about whether you want to take things slowly or move quickly to build a new brand and keep talent on-side.

The most important thing is figuring out what your goal is, whether that be expanding into new territories, expanding your products or gaining a new customer base. You also need to be realistic about how tough the negotiations can be. Getting expert help is essential and using experienced mergers and acquisitions lawyers is one of the keys to success.

While you may see the advantages of a roll-up in theory, realising that hidden value can be tricky in practice. A trusted advisor can help you work through the financial implications of the deal and point out potential flaws in your approach, leading to a more successful roll-up.

About our expert

Adam Kudryl

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• Blogs relevant to search
• Books and Guides
• Case Histories
• Conferences
• Reports and Notes
• Search Tips

• Most Recent Blog
• Contemplating Search
• Launching Search
• Being a CEO
• Roll Up Strategies

Acquiring multiple businesses within the same industry is a dream for many searchers, but it’s far from reality in actual practice. While the acquisition process is very similar to Entrepreneurship through Acquisition (EtA), the additional skill of successfully integrating multiple businesses makes this strategy very complicated and with risk, as reported by searchers who have traveled this path. The primary basis of value creation is derived from multiple arbitrage as higher revenue businesses command larger valuations than what they were purchased for. However, it excludes small “tuck-in” deals where you may be essentially buying a customer list or a few employees in an “acqui-hiring” situation.

In a survey of 185 EtA businesses purchased by Harvard Business School graduates in the past decade, 14 (or 8%) have implemented a “roll-up” strategy of purchasing multiple businesses in the same industry vertical. These excluded franchises covered in another blog post,  Buying a Franchise , and a micro private equity (PE) acquisition strategy in multiple industry segments to be covered in a future blog post. The industry verticals were medical, dental, and veterinarian practices; master insurance agencies and a variety of smaller industry segments that the searchers preferred not to disclose for obvious reasons!

In the survey, 10 graduates (or 71% of the 14) self-funded their search process and raised funds from investors for their first transaction; the balance raised funding from investors to support a salary upon launching their search. 10 graduates (or 71%) searched and operated with a partner, which is about the opposite for most searches, and the balance went solo. Only 2 graduates launched mid-career, with the rest launching immediately upon graduation ( See Blog Post: Searching Mid-Career ).

Their acquisition multiple averaged earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4.5x with a range of 2.5x to 8.0x. These searchers had acquired an average of 15 businesses and a median of 4.0, with a range of 2 to 100. Total revenue averaged $15M, with a range of $3.5M to $150M. Total employee count averaged 227 with a median of 70, a low of 6, and a high of 1,500. Of the 14 searchers, 5 reported exits. In one case a 9x Cash on Cash (CoC) return and 15x in another. 

As with EtA, no one path is the best; each acquired search business is like a snowflake, unique in many ways. The survey of a dozen-plus searcher/CEOs yielded a variety of opinions, principles, and practices that worked well for them. Their comments can help you make a decision about whether this particular focused path makes sense for you at a unique stage in your career. This is their way of giving back to the EtA community and in many ways more valuable than my own opinions on the topic.

Having an up-front industry thesis or evolving into it

Paul Thomson at  Scottish American  reflected, “There was no primary thesis such that the investment only worked if it was a roll-up. Instead, we purchased the master insurance agency with the plan to prove we could operate it and grow organically. However, what we achieved in the first one with a personnel model, technology plan, and a brand were such that it was additionally scalable through acquisition.” Another searcher said, “We had not originally embarked upon our EtA journey having premeditated multiple acquisitions in the same space. However, we were seeking a business in a fragmented industry with a history of stable profitability. These two criteria naturally set the stage for further acquisitions in the same space: fragmentation means ample acquisition targets, and a stable history often means a relatively modest (i.e., nonexponential) future organic growth trajectory, such that supplementing organic growth efforts through M&A is very compelling.” Jay Davis at  The Nashton Company  observed, “We didn’t have a consolidation thesis in the PPM (Private Placement Memorandum). An opportunistic acquisition outside of our base business convinced us to concentrate in that industry.” Another CEO reflected, “It took us five years to see an optimal path for EBITDA growth in our extremely fragmented industry with many small players who have no good exit or succession options and lack professional management, which allowed us to establish footholds in new geographic markets.” One CEO said, “My first acquisition was purely opportunistic, but it did have potential for add-ons that could be executed in the fourth year, once I understood our industry dynamics.”

Brandon Halcott at  TruFamily Dental  and his partner had a general focus on the outset: “We wanted a very fragmented and low-technology service business without significant asset intensity and discovered that our top two, Fleet Refueling and Self-Storage, were too asset heavy. So we became very focused on dental practices, and it was nine months before we acquired the first practice that was part of an estate, which was the only way we could convince someone to part ways with their business since we knew nothing about dental! We grew to 27 before exiting.” Another looked at a variety of opportunities and said, “I had an investment thesis, not industry focused. When I raised funding for the first business, I zeroed in on the industry to match.” Two partners raised capital for a nontraditional EtA path with a very specific scope: “We’re very focused on rolling up direct-to-consumer e-commerce stores on the Shopify platform.”

One searcher/CEO cautioned, “It took a long time and many deals for us to actually have a thesis that is proven and not a hypothesis that is simply conjecture. We are becoming more theses driven as we learn from each deal. The first few were purely opportunistic geographically, and our exit to a PE firm helped us narrow our focus and step up the size of the acquisitions.” Echoing that evolution, Andrew Walker at  Oak Lane Dental  said the following: “As we’ve grown the group and have more resources to support underperforming target practices, we’ve expanded our thesis to include even smaller practices, as long as those practices can likely scale quickly with our approach.” One CEO reported a specific “build to exit” strategy, “It was not an original thesis and but more driven by how big we thought the remaining white space/opportunity was.”

Operating “in” the business and “on” the business

Jay Davis from The Nashton Company pointed out, “We were folding in our acquisitions to our larger company. So, in most cases, an acquisition had someone who ended up reporting up through either our regional director or even directly to the COO.” In a veterinarian practice roll-up, the CEO reported, “We either keep the seller on (who has rollover equity) or give a small amount of equity to the next level of management.” In a medical practice, the CEO said, “We inherited a very solid operator on our second deal, and she is now the COO.” For a very large operation, the CEO found that “Oftentimes we do need to recruit a new area director; in essence, these are CEOs of the local business operation. The COO helps execute the integration playbook. He has worked with me long enough to know what I look for in a deal and what I expect to happen.”

In a smaller size business, the CEO observed, “Our acquisitions are run as part of our platform business and become integrated into our own business, just located in another geography. The Covid pandemic helped us see how effective the management team can be with remote management and guidance.” One searcher/CEO pointed out, “Each business doesn’t need a CEO, I think finding one would be pretty tough, at least at the compensation we would be willing to pay. Instead, we split up the former CEO role, bringing high-level tasks to myself at the holding company, while distributing the other lower-level tasks to specialists in the business.” Another CEO commented, “We are now at our third acquisition, we act as the CEOs for our multiple businesses and have not yet crossed the threshold of span of control.” Andrew Walker at Oak Lane Dental projected, “When we move into tangential businesses (like laboratories, software, supplies, etc.), we will have CEOs for those unique businesses.”

A common theme for many CEOs is to be fully engaged in operating the business, not just active on the deal side. It may not last for a long time, but investors and lenders want to see them “in” the business. At early stages of the process, one CEO observed the following: “While I learn the ins and outs of the business and clarify the business model, I am the CEO of our companies, but there are very solid managers in place who run the day to day. At some point down the line, I will bring in a COO and revert to working ‘on’ the business.” Brandon Halcott at TruFamily Dental echoed the thought: “My partner and I filled all the roles for the first few units, then started hiring. We both provided the operational expertise even though neither of us had worked in the industry before, just relying on our prior experiences in other industries.” Adam Parker at  Data102  found, “By being a CEO/operator, everything is your jurisdiction, which forces you to learn and understand all different parts of the business. You hone your operation’s expertise, which informs your acquisition strategy and better enables future execution and integration of acquisitions.”

Funding multiple acquisitions

Funds providers are attracted to a roll-up model because of the “proven” business model, relatively low multiples, and maturity of the businesses with an eye to reducing their financial risk/exposure. Banks with a national footprint often specialize in verticals.  Live Oak , for example, has more than two dozen “Industry-Focused Teams.” Paul Thomson at Scottish American found, “Our bank specialized in the insurance industry. With our 80% repeating revenue, our model had demonstrated scalability, the lender looked at it as a good bet, despite a hefty personal guarantee. Our increasing revenue really mattered to them.” One CEO felt that their experience as an operator appealed to their bank: “Lenders and investors were excited to be involved, as our several years of ‘insider’ industry and management experience gave them confidence in the loans.” Jay Davis at The Nashton Company reflected, “We used cash and incremental debt. Our lenders and investors were very supportive of our program, especially after we had proved ourselves with the first one or two.” As did Alex dePfyffer at  Heritage Holding , who said, “We typically finance our platforms with banks and investors. We have had good success doing bolt-on acquisitions off balance sheet with some additional debt. “However, another CEO cautioned, “Lenders in the home health care sector were generally skeptical about roll-ups because they have seen a lot go badly, especially with less experienced management teams, which ETA is going to be, almost by definition.”

CEOs recognize pretty quickly that cash flows are the cheapest form of financing, combined with smaller amounts of debt and expensive equity. Andrew Walker at Oak Lane Dental used a combination of bank leverage and cash flow as he evolved: “We initially used investor money combined with lender financing for our first three deals. For our fourth deal, we used pure debt financing. The next two practices used capital from our cash flow, and three additional practices utilized 100% debt financing due to their larger size. We anticipate using a mix of cash flow and debt financing depending on the timing and size of the deals.” Another CEO, who used a majority of both cash flow and debt with limited outreach to investors, said lenders were “very supportive as they saw the potential value creation.” Like many other EtA acquisitions, seller notes reduce capital costs, as pointed out by one CEO: “On each successive acquisition, we have used a combination of seller and investor financing. I believe that negotiating attractive valuations at a 2.5x multiple allows us to also create a high-yield debt financing structure that is appealing to investors on a deal-by-deal basis.” Max Wexler at  EarlyBird Education Group  utilized “A 25% seller note and SBA loan even in the midst of the pandemic. Also, there has not been as much consolidation in Midwest region of the USA and there is generally less competition than your major bicoastal cities like NY or Boston.”

Depending on the sector, venture-type funding may be available as reported by a CEO in the e-commerce space: “Our lender sees an opportunity to deploy a lot of capital. But they also have very high interest rates on these funds, which could be argued are ‘equity light’ return expectations.” By contrast, Brandon Halcott at TruFamily Dental found, “Less than 1% of dental practices fail on an annual basis, so many small and regional banks will lend for single practices in their community.” For the initial acquisition, some equity capital will be needed, especially for a self-funded searcher, as one recounted: “Investors saw a long-term consolidation play that allows them to see enormous capital appreciation over decades. Our lenders see steady, cash-flowing businesses with high recurring revenue. However, going forward, we are likely using only debt financing and cash flow for future acquisitions as I continue to learn the nuances of operating the businesses.”

Focusing on what more there is to learn

Just like compound interest Compounded Annual Growth Rate (CAGR), any incremental learning as each year progresses can be applied to all the businesses that are acquired. Whether its pattern recognition from so many similar businesses you acquire or the efficient application of new creative solutions across a variety of the same businesses, this is part of the value creation if executed properly. Jay Davis and his partner Jason Pananos at The Nashton Company noted their learning from each successive acquisition: “Integration is really hard, and therefore pacing has to match your resources. Also, discipline around targeting reasonable valuations is critical since, in some industries, the large players are acquisitive down to pretty small EBITDA levels, which tends to drive multiples higher. It is important to understand what multiples you have to pay. In some industries, you can still buy smaller ($500K – $1.5M EBITDA) for pretty reasonable multiples.” 

On the transaction side, one CEO summed it up as, “Building relationships with potential sellers is greatly improved. The fact that we are an industry insider, speak the language they speak, and have former sellers who can serve as references, means you are now viewed as a very qualified buyer! Our early experience using pricing as a means of value creation gave us confidence that we would see similar profit synergies.” Faraz Karbasi and Courtney Ellenbogen of  Conant Capital  felt they had learned “how to run a tight closing process and avoid losing deals which happened to us once. We also refined how to stage gate QoE (Quality of Earnings) and due diligence in a way to finalize valuation as early as possible and avoid deal breakups at the 11th hour.” Another CEO pointed out, “Our transaction costs declined with each deal as we became more skilled at structuring the deals and negotiating lower legal costs on each successive deal as our terms became more standardized and boilerplate.” Paul Thomson at Scottish American found, “The insurance carrier partners are all the same, so you know what their contracts should be. In addition, you know where to look for issues such that due diligence is very easy and is better than anything an outside firm will be able to do.” 

Adam Parker at Data102 observed, “What I value in an acquisition now compared to the beginning has been greatly refined. As you operate a business and get deeper within an industry, you hone in on the particular dynamics that would be unknown to a generalist.” Another CEO said, “Because we continue to hunt for businesses after our initial acquisition, our relationships with brokers, bankers, lawyers, and dealmakers are much deeper and long lasting. We all work better together knowing that we will likely work again in the short- and long term. We can get under Letter of Intent(LOI) within days and close on the deal within 6–12 weeks compared to many more weeks of diligence and closings that used to take took between 3 and 6 months.” A CEO stressed, “We carefully consider whether the internal culture of the company we are buying is already living our existing mission. Our least successful acquisition was falling short in this regard, and, in hindsight, this should have been a red flag to pull out of the deal.”

On the operating side, practice and repetition was often cited, as one CEO observed, “Every day I learn how to manage people better and practice dividing my time appropriately between day-to-day fire drills and long-term growth projects.” Brandon Halcott at TruFamily Dental reflected, “Over time, I learned what worked and what didn’t work around innovations in the business while trying new things. The most important accumulated knowledge was developing a great culture.” Andrew Walker at Oak Lane Dental put his accumulated lessons to use: “One core competency we needed to develop quickly was how to create and merge businesses efficiently and effectively. This key differentiation predicts a successful or poor roll-up outcome. We now have a near 700+ point checklist for each transaction. We codified every role and how they interact with every other role, every SOP, and best practice into operational manuals, etc. To ensure rave-worthy patient and team experiences is very difficult and critically important. These are rarities in small businesses and thus need to be created from scratch from internal and external sources, but [also] create value in consistent and efficient processes across our platform.”

Driving to achieve synergies and efficiency

Surprisingly, less than half of the CEOs reported significant back-office efficiencies as a major source of value creation. As Paul Thomson at Scottish American found, “We outsourced some overnight work to foreign countries, but it was not a great driver of margin uplift though. Revenue growth is really the value-add component—bigger businesses just trade for higher valuations.” Even at $75M of revenue and five units, one CEO felt, “Consolidation of back-office tasks like finance, purchasing and customer service can be very difficult and time-consuming. We used consultants to help with the process, and it was still very challenging. However, if you do not do this, as you grow, the company will become more and more complex to manage.” Another CEO with more than 2,000 employees said, “It can be difficult to integrate as quickly as one might like just with our focus on accounting. We are getting better at it after three years, but it still takes time to learn how to do and see any significant savings.”

Accounting and finance support generally are most common. One CEO made the following observation after two acquisitions: “I just hired a controller to oversee the internal finance/accounting at the various companies, but not replace any staff at the unit. It is more like overhead at the operating company than a cost savings.” Another CEO commented, “We targeted primarily the financial reporting and some initial vendor consolidation on materials. However, we want to maintain a decentralized approach to ensure that the businesses continue their entrepreneurial vigor and proximity to the front line’s customer dynamics that is critical to long-term success.” A CEO reflected, “We have reduced or eliminated many expenses from the acquired companies, including accounting, HR, and insurance. In the short term, these savings are offset by transaction costs and expenses associated with the increased complexity of our business.”

The dynamics of each industry segment are different and may lend themselves to economies of scale. Andrew Walker at Oak Lane Dental said, “Initially we were focused on learning the business and transactions. Now we have sufficient size and scope, we have been able to build out our centralized back-office team of centralized billing, finance and accounting department, marketing and social media team, compliance and clinical management team. We can now pick up speed in the acquisition process.” Adam Parker at Data102 found, “The back office is the first thing we integrate, specifically, HR, finance, and reporting metrics.”

Adding another level of complexity with roll-ups

There are good reasons why 92% of the searchers stay focused on a single business. While a consolidation industry thesis can be written down and may sound attractive to a large PE firm, executing on it is challenging and adds levels of difficulty, especially with EtA searchers who, by definition, have less-experienced operators with no prior industry experience, having only purchased a single business, and with zero practice at integration. Hunting for “synergies” is often more easily said than done.

Transaction costs related to each acquisition need to be accounted for and generally do not decrease with scale. One CEO said, “Smaller deals, while having attractive valuations, can be as much or more work than the larger ones. There is real cost in terms of your own time, your team’s attention and focus, and legal bills, just to name a few.” One CEO with more than 100 units warned, “Centralization is not easy and requires a pretty heavy investment; test the ‘nice to have’ against the ‘must have’ for each initiative. You really can’t afford a ‘deal team’ until about 50 units, so we were very busy early on.”

Negotiating better prices for consolidated purchases with vendors can yield savings, but having the central office take responsibility for purchasing decisions may not always be feasible. In the lawn-care services business, each unit has its legacy equipment, and one searcher/CEO says, “It did not make sense to ‘force’ the team to switch to Honda from Snapper for which they had spare parts, full training on, and—in some cases—better locally negotiated prices. If we were following a ‘greenfield’ strategy, it would be different.” On the other hand, after six acquisitions and more than $50M in revenue, one CEO reported, “We now have consolidated finance, customer service, and purchasing, saving ~$1 million per year.”

Another CEO related, “Our strategy relies on our ability to extract more value from the same customers than the previous owners could, primarily through price.” Cost synergy by itself is not enough to make it worthwhile.” Max Wexler at EarlyBird advised, “We immediately have each acquisition transition to an industry SaaS (Software as a Service) education center software package that each unit uses, and we can access from anywhere. It came with our first acquisition, and it scales well as we grow. It was challenging at first, but we become the IT champions.”

Brandon Halcott at TruFamily Dental resisted too much consolidation: “Initially, we did nothing, and after a dozen or so, began to centralize those functions that did not touch patients because the patient would not know the difference if this was being handled at the practice or centrally. The patient’s view was the lens we used to make the decision, even it was more costly at the practice level. We did make a mistake by renaming each practice and should have kept it with the original name or local reference.” Another CEO was also cautious about centralization: “We are focused on maintaining a decentralized approach such that the businesses maintain their entrepreneurial vigor and proximity to the customer-facing front lines that we view as critical to long-term success.” Finally, one pointed out the “time” factor: “Operations is harder and more time consuming. HR and financial reporting are the first to be integrated, but any operation is much harder and more time consuming.”

Preparing for unique challenges

Andrew Walker at Oak Lane Dental observed, “One challenge was learning how to build a platform business from scratch while conducting ongoing serial searches, securing new financing, and successfully transitioning and merging all of the companies into a single, cohesive team. Also, dealing with each new business’s acquisition and execution risks makes a serial search/roll-up considerably more challenging. Finally, the most challenging part of working in a ‘key man/woman’ dominated industry is successfully retaining team members and customers/patients. As the owner steps aside, the searcher faces the challenge of retaining key staff and clients/patients and instituting a new culture and systems that may be completely different than what some team members may have been doing for decades.” After his third acquisition, Adam Parker at Data102 said that when “merging businesses that have their own ambitious people who may see their new counterparts as rivals, there is also a lot of fear with M&A around change and job redundancy. I usually don’t make big changes for a year and communicate that going too fast risks ‘buy-in’ from the acquired group.”

Citing the more challenging elements of multiple acquisition growth, one CEO mentioned “determining who among our existing management team were capable of scaling their own roles to participate in a larger enterprise and having to move on from those who were great fits in earlier, smaller stages but no longer a fit for the new, larger stage.” One CEO also found, “Managing multiple seller relationships takes a lot of time. It is stressful to deal with the ups and downs of very small, people-intensive businesses when I’m not based in the same city.” Not surprisingly, Brandon Halcott at TruFamily Dental cited, “Going into default with the bank because of no cash flow was unprecedented and scary in the early stages of the pandemic.” Paul Thomson at Scottish American shared the emotional toll: “The travel is constant, and you are endlessly firefighting. Employees who are not on your side cause the problems the moment you leave, not when you arrive—at least in my case!”

A very important consideration in an acquisition is self-discipline around what you pay. One searcher pointed out, “Finalizing valuation and payout structure that is justified by the business performance and being cautious about overpaying for a business that you may want to rationalize is worth it, knowing the multiple risks it faces.” It is not surprising that so many have a partner, mentor, or strong COO, as one CEO said: “Economics don’t support a ‘deal team,’ and sourcing and closing acquisitions versus running/integrating a business are two very different skill sets. The former is 100% a sales role, so if you don’t want to fly around the country doing sales, you need to have a business partner who does and may talk you out of overpaying for a business!”

Advice for searchers investigating this path

One CEO pointed out, “Done right, this is one of the quickest paths to value creation. When you buy your first business, keep in mind the potential for acquisitions as one of your investment criteria. It also keeps the CEO job interesting, as each means your role will be changing.” Another CEO reflected, “Get a deal under LOI before you raise committed capital. Then select the right investors. More than one or two but keep it to a small group. Try to get at least one ‘lead’ who will be in the trenches with you in the early days. Finally, make sure everyone is generally aligned on your time horizon and strategy, not theirs!” Max Wexler of EarlyBird said, “I would advise those looking at this path to do it with a partner. There is a lot of work to be done on both the operations and M&A side. It is also challenging and lonely at times. I am very happy I decided not to do this alone.”

Adam Parker at Data102 pointed out, “You have to be disciplined with the multiples you acquire to make this work. This also most likely means you need to rely on direct sourcing for most of your acquisitions, which drive a lot of value. Spending time as a CEO operator is very important. It forces you to learn and understand all different parts of the business. You gain credibility and build a reputation that helps when you are courting the CEOs of follow-on acquisitions. Your pitch shifts from a traditional searcher to providing professional support for the business.” Another CEO urged taking time to understand the business model of your platform: “It is a great potential path once you’ve developed confidence that the original industry you’ve purchased into is a great one to be in. Momentum can build quickly as you begin to develop a reputation in the industry.” One CEO urged, “It really helps to have your own house in order before you start adding additional businesses. This may vary somewhat depending on the quality and sophistication of your management team.” 

Paul Thomson at Scottish American suggested “It will be rockier and more challenging than you can imagine. Do not lie to yourself about the timescale and do not always believe your spreadsheet. Make sure you have a set of trusted eyes and ears wherever you are not, that are loyal to only you.” Andrew Walker at Oak Lane Dental said, “Juggling the building of a platform while managing your multiple businesses and doing M&A while continuing to do search is much more complicated and challenging than the standard EtA approach, but also potentially more rewarding! If you don’t love the ‘search’ part of EtA, don’t do this. If you’re not excited by doing ‘deals,’ this is not the path for you!”

One of the searcher/CEOs said, “Generally I would not advise this path since there are easier ways to build a business. But, if you are going to proceed, have a staff operating position with someone who is good at authoring and executing the integration plan. There are a lot of details that you have to get right.” Another warned, “Do it if you’re excited about building a big company, the thrill of the journey, and becoming a great leader. Don’t do it if you’re simply looking for a finance-type career path or want a large paycheck and a stable gig. The economic payoff from this will take many years to produce, and the day-to-day stresses are incomparable to that of a typical finance/consulting career path.”

No discussion of this topic would be complete without referencing a report by McKinsey on  M&A Value Creation . More recently, Professor  A. J. Wasserstein at the Yale School of Management  has written four excellent cases: “On the Nature of Programmatic Acquisition Strategies: Why Entrepreneurs Should Consider This Approach,” “How to Source Deals,” “Their Implementation,” and “Why Things Go Awry” .

Pursuing a roll-up acquisition thesis for value creation within the EtA ecosystem is neither a trend nor a significant portion of where searcher/CEOs are spending their time. From the “balanced” commentary above, as described by CEOs who have followed this path, you can make your own judgement as to whether this makes sense for you. As with many of the divergent EtA decisions, making an informed choice that is the right fit for you is most important. Hearing lessons learned from other searchers can help you decide your own path.

Feel free to share some of your own best practices or experiences in dealing with these issues in the written blog comments below. I encourage this dialogue, allowing all to learn from both my own views and the views of others in a virtual learning cycle—so jump right in! In addition, I frequently update individual blog posts, so visit the  www.jimsteinsharpe.com website regularly.

This is a really interesting blog post, Jim. Outside of the EtA space, the empirical evidence is very clear, in that historically most acquisitions end up destroying value, not creating it (and this is the case for experienced operators, never mind first time CEOs!). Despite some of the successes that you profiled in this post, what does your data suggest about acquisitions in the EtA space? On average, are they more likely to destroy value or create value?

Steve, thanks for the great comment. Strategic acquisitions are reported to miss their expectations about 75% of the time. PE firms and EtA Searchers do much better in my mind because of their focus on value creation. AJ Wasserstein at Yale cited at the end of the blog post outlines acquisitions “Gone Awry” and points to aggressive pace, bad integration, too much debt and over-paying as reasons for EtA CEO’s not creating value, so there have been some poor outcomes. For this reason, funded-search investors have been reluctant to fund a searcher with this this approach The searchers that I reported on were primarily self-funded and seen to be more entrepreneurial that the typical strategic buyer and do create value. Thanks for your own contribution to the EtA community through your https://inthetrenches.net/ Blog. Search on!!! Jim

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• Exit and/or Recapitalization
• Seller After Closing
• Early Years as Searcher/CEO
• Taking Over the Business

Random Quote

45-“Strategic partners” are very important to the business searchers. You want to rely on some trusted providers to support your business, you can’t do everything yourself!(See Blog Post-Strategic Partnerships)

42-Start early on legal documents, they often delay closings while under LOI Both the searcher and the seller are plowing new ground and it takes a while to comprehend the meaning of all of the legal details .(See Blog Post-Getting to closing)

63 Searchers make promises they can meet to build trust with sellers. It is important to provide incremental opportunities to show that you can be counted on to deliver.(See Blog Post-Building Trust with Sellers)

34 Searchers who get access to employees before closing are more likely to close. Once the seller begins to confide in their employees about the sale of the business and introducing you as the “new owner”, they are more likely to proceed to finalize the transaction than to change their mind at the last minute. (See Blog Post-Getting to Close)

07-You are not a PE firm, don’t act like one! Potential sellers resonate with your taking over their legacy, a PE firm is simply adding to their portfolio. Make sure your website looks personal and non-intimidating.

04-Fight Seller Fatigue in Due Diligence! Sellers get worn out in this process. It is highly emotional for them, probably their first time at relinquishing their “baby” to someone else. During LOI stage, make it a practice to communicate with them, in person or by phone, every 2 days.

53-Holding monthly “all-hands” meetings indicates your transparency. Trust employees with what is going on with the business and they will trust you more .(See Blog Post-Communicating with Employees)

06-Use metrics to drive decisions Track what is most important for your search – getting in front of prospective sellers to make offers to buy their business. Track the number prospects, IOI’s, LOI’s and set goals for yourself! If you measure it, you can improve it.

22-When in conflicts arise, remind professional advisors they work for you. Inevitably, you will disagree with some advice you are getting. After checking multiple sources, do what feels right to you and move forward. You will have to “live” with your own choices, not the professionals! (See Blog Post-Professional Support)

18-Every day that goes by during Due Diligence raises the chance that you won’t close! Time is of the essence when it comes to moving from a signed LOI to closing on your business. Seller fatigue sets in as the closing date gets extended and the seller constantly re-evaluates their motivation to sell. Only you can push the process along. (See Blog Post-Due Diligence)

44-Plan ahead, give thought to the small details of how you present yourself as the new owner. The first introduction to the employees of the business has a huge impact so you want every word to be rehearsed! (See Blog Post-Taking over the business)

50-Don’t expect immediate “loyalty”, the previous owner earned it, it takes time. You will need to earn the trust of your employees by your actions, not your words. (See Blog Post-Seller Tranisition)

35-Searcher CEO’s need to be prepared to walk away from volume orders if margins will decline. It takes a forward thinking CEO to seek out higher margin, value added opportunities to grow profits, not revenue. (See Blog Post-Wearing the sales hat)

09-Learn from others – read case histories Over 40 case histories have been written about funded and self funded searchers in a variety of industries and historical settings. Each have great “lessons learned” and are worth the $10 cost to read them. Searchers are learners!

39-The business seller is “hiring” you to run their business. The owner trusts you enough to turnover the “legacy” of their business to you. (See Blog Post-Searcher Profile)

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Case Study #1: Build, Acquire, Roll-up, and Sell Out

Case Studies is a new series here at the APEX blog.  We study business exits and break down a few key points for you to keep in mind.  This month’s selection comes from the sale of Appletree Answers.

John Ratliff started Appletree Answers in 1995 in a spare bedroom in his house, eventually grew it to over 600 employees and over $5M in annual EBITDA before selling to a strategic acquirer.  Appletree was (and is) an inbound high-touch customer service call answering service.  

From 2003-2011 John, in concert with his CPA and the bank that his CPA had a relationship with, completed 24 total acquisitions.  A lot of times acquisitions can be a mask for real growth, but John and his team wanted organic growth within existing locations as well as ongoing growth for new locations.  

Deal Structure

John arranged for the bank to put up no more than 80% of the total amount of the sale price, while convincing the sellers to put up 20% in a seller-financed note.  They were able to do these deals because they built and maintained a sterling reputation in the industry.  They were also very disciplined in their execution and after-action of the sales.

They would routinely pay between 3 and 3.5 times EBITDA for an acquisition.  In every deal, they stipulated that it could not be a turnaround, that no employees would be fired as a result of the deal, and ensured that tweaks were done in the first 60 days that freed up cash flow to cover the loan payment.

By 2012 John had been at it for 18 years.  All his assets were tied up in the business, and because they had been so acquisitive there wasn’t a lot of cash coming out of the business, so he was thinking about going to market anyway.  At the same time, an S&P 500 publicly traded company stated to pursue a roll-up in the same industry and so there was an opportunity for a strategic rather than financial valuation of the business.

Despite having personally done 24 buy-side acquisitions, and having acquired a possible buyer on his own, John still hired an M&A firm because, in his words, “we were emotional” and he wanted “space and perspective,” in doing the deal, which a third party gives.  While he admits he paid plenty in fees, he is certain that it was far more than recouped in the added value that firm brought to the table.

Moral of the story?  No matter how many business transactions you’ve been through, you can always benefit from the objective view of a 3rd party who isn’t emotional about the valuation or the sale.  And often, they’ll get you far more than you could have gotten on your own.

Obviously, we know a few people who can help you sell your business or buy one you will love.  Schedule an appointment with us today.

The information in this case study was taken from here .

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Why Tim Hortons’ digital rebrand was a powerful play for the future

For 36 years, quick service restaurant chain Tim Hortons had Canadian consumers rolling up their coffee cup rims in hopes of winning a range of prizes. But when the pandemic hit, the brand had a matter of days to shift from their traditional campaign to the Tim Hortons app. In 2021, the team made the decision to stick with their digital approach. Matt Moore, VP of Digital and Loyalty at Tim Hortons, shares their story.

The Tim Hortons Roll Up The Rim campaign was an iconic annual tradition for Canadians from 1986 onwards. Every year, Tim Hortons guests could reveal a tab printed under the rim of hot beverage cups that would either announce a prize win — ranging from a free coffee or donut to a free car — or a “please play again” message.

More than 80% of all Canadians have said they played Roll Up over the years. 1 Some things changed — prizes were updated and the odds of winning gradually improved — but the core game remained largely the same.

Then 2020 happened.

Like so many businesses and industries, Tim Hortons was pushed into a digital renaissance of sorts. App Annie saw between two and three years of mobile usage habit growth squeezed into less than a year due to the pandemic. Fortunately, Tim Hortons had already been focused on building and developing a strong digital foundation over the last three years, such as the launch of Tims Rewards and Mobile Order + Pay on our app. But in a matter of days, we were forced to take our digital plans to the next level.

We could not appreciate it fully back in early 2020, but the digital reinvention of the Roll Up campaign that March would be an important element of accelerating our digital strategy as Canadians’ adoption to digital experiences went into warp speed. And the results from our fully digital Roll Up To Win campaign in 2021 proved it was the right decision.

We paused the hundreds of millions of cups going to restaurants and replaced them with a digital Roll Up component within five days.

Guests loved the digital game and told us they found it fun and easy to play. It also helped propel our digital sales and digitally engaged guests. Over 30% of all sales in Q1 2021 came through our digital channels including our app, nearly doubling the levels of Q1 2020 and up from 1% of all sales in Q1 2019. During the campaign, engagement in our app hit an all-time high, and the biggest impact came from our redesigned Roll Up To Win contest . 2

Here’s how the strategy rolled out.

App strategy engaged new customers and drove sales

Last year marked the 35th anniversary of Roll Up The Rim, and we had designed a hybrid game that planned to feature the traditional paper cup experience along with a new in-app experience that gave guests a way to play digitally. It was scheduled to launch on March 11, 2020.

As the realities of the emerging spread of COVID-19 became clear, we had to quickly shift to a primarily digital game. As we announced at the time, we knew it wouldn’t be right to have team members in our restaurants collecting and handling Roll Up tabs.

We paused the hundreds of millions of cups going to restaurants and replaced them with a digital Roll Up component within five days. Our team worked all weekend and pulled off an unbelievable feat to ensure that we could keep our original launch date.

Our customers not only embraced the app, they loved it. As the year went on, we saw continued growth in positive consumer attitudes toward digital and in the role digital played in our business. The Roll Up To Win game in the app had clearly helped us connect with our customers at a time when we needed digital ways to stay together.

We then recognized that 2021 was the year to officially launch Roll Up as a completely digital game and to retire the tradition of playing the game with paper cups.

Our customers are ready for change and we’re evolving together, meeting each other’s new needs.

Results inspired a permanent shift in a digital direction

To help mark this watershed moment, we gave the 2021 contest a new name — Roll Up To Win. This helped signal our commitment to our shift from paper cups to the digital app, but it also allowed our campaign to not be defined by cups. Consumers embraced this change and continued associating the “Roll Up” term itself with Canadian pride, even using it in memes and videos about rolling up their sleeves to get vaccinated.

We also made it even more exciting and generous than before by making every Roll win — we retired the dreaded “please play again” message and added a list of new prizes that reflected the new digital nature of the game, and expanded eligible products beyond hot drinks. In total, we awarded nearly 60.5 million prizes.

Online search interest in both Roll Up The Rim and Roll Up To Win surged in 2020 and 2021. Working with our Google team, we ran a comprehensive full-funnel strategy informing, educating and driving consumers to partake in the event. Central to our strategy was Google App Campaigns, which allowed us to capture interest with new audiences, and helped connect new and existing customers with the app. With this strategy we saw:

• 2 million downloads of our app in March 2021, twice the downloads that we saw last year during the contest, and significantly higher than a typical month. 3
• Over 40% of sales came through our digital channels during the peak of Roll Up — and just over 50% of transactions through our loyalty program Tim Rewards that same week. 4

Modernizing the iconic Roll Up The Rim game enticed even more Canadians to go digital with us — both during the new Roll Up To Win promotion and after the game ended. It showed us that our customers are ready for change and that we were evolving together, meeting each other’s new needs.

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How to generate high-quality leads with digital ads, how 4 brands consolidated their media buys to increase ad effectiveness and boost reach, how sephora gave its app a customer-first makeover, how brands like aveda and kraft heinz are unlocking the value of full-funnel marketing, how eli lilly’s digital transformation led to a customer-first pandemic response, matthew moore, sources (4).

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Seven Ways to Fail Big

• Paul Carroll

Lessons from the most inexcusable business failures of the past 25 years.

Reprint: R0809F

What causes companies to fail spectacularly? A recent study of 750 of the biggest U.S. business disasters of the past 25 years reveals that seven popular but risky strategies are often to blame.

Drawing on that extensive research, Carroll, a journalist, and Mui, a fellow at Diamond Management & Technology Consultants, describe seven sirens that lure companies onto the rocks. One is the synergy mirage —hoped-for but nonexistent merger synergies. Group disability insurer Unum unwittingly pursued these when it acquired individual disability insurer Provident, assuming the units could cross-sell each other’s products. It turns out they had entirely different sales models and customers. Pseudo-adjacencies also lead companies astray, as school bus operator Laidlaw learned when it spent billions on a move into ambulance services. The firm expected its logistics expertise to carry over but discovered ambulances were not a transportation business but a highly regulated health care business demanding skills it sorely lacked. Faulty financial engineering, stubbornly staying the course, bets on the wrong technology, and rushing to consolidate are all dangerous, too, as Conseco, Kodak, Motorola, and Ames can attest. And a rollup of almost any kind is a high-wire act in which a slight market downturn is all it takes to finish you off.

If the executives at these companies had taken a closer look at history, they might have avoided billions in losses. But even experienced teams can fall into these traps. The best way to safeguard your company against them is to institute a formal strategy review by a devil’s advocate panel not involved in strategy development. Its members must have license to ask tough questions, say the authors, who offer guidelines to help panels focus on facts, test assumptions, and bring to light flaws in the strategy that could lead to costly blunders.

The Idea in Brief

Giant investment write-offs. Shuttered business lines. Bankruptcy. The culprits behind these flameouts? Strategies so alluring they blinded executives to their dangers.

It’s tempting to embrace a strategy that helped another company strike it rich. But not every strategy works for every enterprise. To avoid falling sway to the wrong one, first understand the seven “sirens” accounting for most business failures, suggest Carroll and Mui. These include attempting to move into adjacent markets, using mergers to try capturing synergies, and staying the course when market signals point to the need for a new direction.

Then, when considering your next strategic move, designate devil’s advocates (people with no stake in the decision) to ask tough questions: “Is this idea realistic for long-term success?” “Has important information about the strategy’s limitations reached the right people?”

By objectively evaluating potential strategies, you stand the best chance of choosing the right one for your firm.

The Idea in Practice

Businesses rack up losses for lots of reasons—reasons not always under their control. The U.S. airlines can’t be faulted for their grounding following the 9/11 attacks, to be sure. But in our recent study of 750 of the most significant U.S. business failures of the past quarter century, we found that nearly half could have been avoided. In most instances, the avoidable fiascoes resulted from flawed strategies—not inept execution, which is where most business literature plants the blame. These flameouts—involving significant investment write-offs, the shuttering of unprofitable lines of business, or bankruptcies—accounted for many hundreds of billions of dollars in losses. Moreover, had the executives in charge taken a look at history, they could have saved themselves and their investors a great deal of trouble. Again and again in our study, seven strategies accounted for failure, and evidence of their inadvisability was there for the asking.

• PC Paul Carroll is an author and consultant. He is a founding partner with the consultancy The Devil’s Advocate Group . His most recent book, coauthored with Chunka Mui, is Billion-Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years (Portfolio 2008).
• CM Chunka Mui, is the managing director of the Devil’s Advocate Group and co-author of Unleashing the Killer App and Billion-Dollar Lessons . Follow Chunka on Twitter @chunkamui .

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O.J. Simpson, Football Star Whose Trial Riveted the Nation, Dies at 76

He ran to football fame and made fortunes in movies. His trial for the murder of his former wife and her friend became an inflection point on race in America.

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By Robert D. McFadden

O.J. Simpson, who ran to fame on the football field, made fortunes as an all-American in movies, television and advertising, and was acquitted of killing his former wife and her friend in a 1995 trial in Los Angeles that mesmerized the nation, died on Wednesday at his home in Las Vegas. He was 76.

The cause was cancer, his family announced on social media.

The jury in the murder trial cleared him, but the case, which had held up a cracked mirror to Black and white America, changed the trajectory of his life. In 1997, a civil suit by the victims’ families found him liable for the deaths of Nicole Brown Simpson and Ronald L. Goldman, and ordered him to pay $33.5 million in damages. He paid little of the debt, moved to Florida and struggled to remake his life, raise his children and stay out of trouble.

In 2006, he sold a book manuscript, titled “If I Did It,” and a prospective TV interview, giving a “hypothetical” account of murders he had always denied committing. A public outcry ended both projects, but Mr. Goldman’s family secured the book rights, added material imputing guilt to Mr. Simpson and had it published.

In 2007, he was arrested after he and other men invaded a Las Vegas hotel room of some sports memorabilia dealers and took a trove of collectibles. He claimed that the items had been stolen from him, but a jury in 2008 found him guilty of 12 charges, including armed robbery and kidnapping, after a trial that drew only a smattering of reporters and spectators. He was sentenced to nine to 33 years in a Nevada state prison. He served the minimum term and was released in 2017.

Over the years, the story of O.J. Simpson generated a tide of tell-all books, movies, studies and debate over questions of justice, race relations and celebrity in a nation that adores its heroes, especially those cast in rags-to-riches stereotypes, but that has never been comfortable with its deeper contradictions.

There were many in the Simpson saga. Yellowing old newspaper clippings yield the earliest portraits of a postwar child of poverty afflicted with rickets and forced to wear steel braces on his spindly legs, of a hardscrabble life in a bleak housing project and of hanging with teenage gangs in the tough back streets of San Francisco, where he learned to run.

“Running, man, that’s what I do,” he said in 1975, when he was one of America’s best-known and highest-paid football players, the Buffalo Bills’ electrifying, swivel-hipped ball carrier, known universally as the Juice. “All my life I’ve been a runner.”

And so he had — running to daylight on the gridiron of the University of Southern California and in the roaring stadiums of the National Football League for 11 years; running for Hollywood movie moguls, for Madison Avenue image-makers and for television networks; running to pinnacles of success in sports and entertainment.

Along the way, he broke college and professional records, won the Heisman Trophy and was enshrined in pro football’s Hall of Fame. He appeared in dozens of movies and memorable commercials for Hertz and other clients; was a sports analyst for ABC and NBC; acquired homes, cars and a radiant family; and became an American idol — a handsome warrior with the gentle eyes and soft voice of a nice guy. And he played golf.

It was the good life, on the surface. But there was a deeper, more troubled reality — about an infant daughter drowning in the family pool and a divorce from his high school sweetheart; about his stormy marriage to a stunning young waitress and her frequent calls to the police when he beat her; about the jealous rages of a frustrated man.

Calls to the Police

The abuse left Nicole Simpson bruised and terrified on scores of occasions, but the police rarely took substantive action. After one call to the police on New Year’s Day, 1989, officers found her badly beaten and half-naked, hiding in the bushes outside their home. “He’s going to kill me!” she sobbed. Mr. Simpson was arrested and convicted of spousal abuse, but was let off with a fine and probation.

The couple divorced in 1992, but confrontations continued. On Oct. 25, 1993, Ms. Simpson called the police again. “He’s back,” she told a 911 operator, and officers once more intervened.

Then it happened. On June 12, 1994, Ms. Simpson, 35, and Mr. Goldman, 25, were attacked outside her condominium in the Brentwood section of Los Angeles, not far from Mr. Simpson’s estate. She was nearly decapitated, and Mr. Goldman was slashed to death.

The knife was never found, but the police discovered a bloody glove at the scene and abundant hair, blood and fiber clues. Aware of Mr. Simpson’s earlier abuse and her calls for help, investigators believed from the start that Mr. Simpson, 46, was the killer. They found blood on his car and, in his home, a bloody glove that matched the one picked up near the bodies. There was never any other suspect.

Five days later, after Mr. Simpson had attended Nicole’s funeral with their two children, he was charged with the murders, but fled in his white Ford Bronco. With his old friend and teammate Al Cowlings at the wheel and the fugitive in the back holding a gun to his head and threatening suicide, the Bronco led a fleet of patrol cars and news helicopters on a slow 60-mile televised chase over the Southern California freeways.

Networks pre-empted prime-time programming for the spectacle, some of it captured by news cameras in helicopters, and a nationwide audience of 95 million people watched for hours. Overpasses and roadsides were crowded with spectators. The police closed highways and motorists pulled over to watch, some waving and cheering at the passing Bronco, which was not stopped. Mr. Simpson finally returned home and was taken into custody.

The ensuing trial lasted nine months, from January to early October 1995, and captivated the nation with its lurid accounts of the murders and the tactics and strategy of prosecutors and of a defense that included the “dream team” of Johnnie L. Cochran Jr. , F. Lee Bailey , Alan M. Dershowitz, Barry Scheck and Robert L. Shapiro.

The prosecution, led by Marcia Clark and Christopher A. Darden, had what seemed to be overwhelming evidence: tests showing that blood, shoe prints, hair strands, shirt fibers, carpet threads and other items found at the murder scene had come from Mr. Simpson or his home, and DNA tests showing that the bloody glove found at Mr. Simpson’s home matched the one left at the crime scene. Prosecutors also had a list of 62 incidents of abusive behavior by Mr. Simpson against his wife.

But as the trial unfolded before Judge Lance Ito and a 12-member jury that included 10 Black people, it became apparent that the police inquiry had been flawed. Photo evidence had been lost or mislabeled; DNA had been collected and stored improperly, raising a possibility that it was tainted. And Detective Mark Fuhrman, a key witness, admitted that he had entered the Simpson home and found the matching glove and other crucial evidence — all without a search warrant.

‘If the Glove Don’t Fit’

The defense argued, but never proved, that Mr. Fuhrman planted the second glove. More damaging, however, was its attack on his history of racist remarks. Mr. Fuhrman swore that he had not used racist language for a decade. But four witnesses and a taped radio interview played for the jury contradicted him and undermined his credibility. (After the trial, Mr. Fuhrman pleaded no contest to a perjury charge. He was the only person convicted in the case.)

In what was seen as the crucial blunder of the trial, the prosecution asked Mr. Simpson, who was not called to testify, to try on the gloves. He struggled to do so. They were apparently too small.

“If the glove don’t fit, you must acquit,” Mr. Cochran told the jury later.

In the end, it was the defense that had the overwhelming case, with many grounds for reasonable doubt, the standard for acquittal. But it wanted more. It portrayed the Los Angeles police as racist, charged that a Black man was being railroaded, and urged the jury to think beyond guilt or innocence and send a message to a racist society.

On the day of the verdict, autograph hounds, T-shirt vendors, street preachers and paparazzi engulfed the courthouse steps. After what some news media outlets had called “The Trial of the Century,” producing 126 witnesses, 1,105 items of evidence and 45,000 pages of transcripts, the jury — sequestered for 266 days, longer than any in California history — deliberated for only three hours.

Much of America came to a standstill. In homes, offices, airports and malls, people paused to watch. Even President Bill Clinton left the Oval Office to join his secretaries. In court, cries of “Yes!” and “Oh, no!” were echoed across the nation as the verdict left many Black people jubilant and many white people aghast.

In the aftermath, Mr. Simpson and the case became the grist for television specials, films and more than 30 books, many by participants who made millions. Mr. Simpson, with Lawrence Schiller, produced “I Want to Tell You,” a thin mosaic volume of letters, photographs and self-justifying commentary that sold hundreds of thousands of copies and earned Mr. Simpson more than $1 million.

He was released after 474 days in custody, but his ordeal was hardly over. Much of the case was resurrected for the civil suit by the Goldman and Brown families. A predominantly white jury with a looser standard of proof held Mr. Simpson culpable and awarded the families $33.5 million in damages. The civil case, which excluded racial issues as inflammatory and speculative, was a vindication of sorts for the families and a blow to Mr. Simpson, who insisted that he had no chance of ever paying the damages.

Mr. Simpson had spent large sums for his criminal defense. Records submitted in the murder trial showed his net worth at about $11 million, and people with knowledge of the case said he had only $3.5 million afterward. A 1999 auction of his Heisman Trophy and other memorabilia netted about $500,000, which went to the plaintiffs. But court records show he paid little of the balance that was owed.

He regained custody of the children he had with Ms. Simpson, and in 2000 he moved to Florida, bought a home south of Miami and settled into a quiet life, playing golf and living on pensions from the N.F.L., the Screen Actors Guild and other sources, about $400,000 a year. Florida laws protect a home and pension income from seizure to satisfy court judgments.

The glamour and lucrative contracts were gone, but Mr. Simpson sent his two children to prep school and college. He was seen in restaurants and malls, where he readily obliged requests for autographs. He was fined once for powerboat speeding in a manatee zone, and once for pirating cable television signals.

In 2006, as the debt to the murder victims’ families grew with interest to $38 million, he was sued by Fred Goldman, the father of Ronald Goldman, who contended that his book and television deal for “If I Did It” had advanced him $1 million and that it had been structured to cheat the family of the damages owed.

The projects were scrapped by News Corporation, parent of the publisher HarperCollins and the Fox Television Network, and a corporation spokesman said Mr. Simpson was not expected to repay an $800,000 advance. The Goldman family secured the book rights from a trustee after a bankruptcy court proceeding and had it published in 2007 under the title “If I Did It: Confessions of the Killer.” On the book’s cover, the “If” appeared in tiny type, and the “I Did It” in large red letters.

Another Trial, and Prison

After years in which it seemed he had been convicted in the court of public opinion, Mr. Simpson in 2008 again faced a jury. This time he was accused of raiding a Las Vegas hotel room in 2007 with five other men, most of them convicted criminals and two armed with guns, to steal a trove of sports memorabilia from a pair of collectible dealers.

Mr. Simpson claimed that he was only trying to retrieve items stolen from him, including eight footballs, two plaques and a photo of him with the F.B.I. director J. Edgar Hoover, and that he had not known about any guns. But four men, who had been arrested with him and pleaded guilty, testified against him, two saying they had carried guns at his request. Prosecutors also played hours of tapes secretly recorded by a co-conspirator detailing the planning and execution of the crime.

On Oct. 3 — 13 years to the day after his acquittal in Los Angeles — a jury of nine women and three men found him guilty of armed robbery, kidnapping, assault, conspiracy, coercion and other charges. After Mr. Simpson was sentenced to a minimum of nine years in prison, his lawyer vowed to appeal, noting that none of the jurors were Black and questioning whether they could be fair to Mr. Simpson after what had happened years earlier. But jurors said the double-murder case was never mentioned in deliberations.

In 2013, the Nevada Parole Board, citing his positive conduct in prison and participation in inmate programs, granted Mr. Simpson parole on several charges related to his robbery conviction. But the board left other verdicts in place. His bid for a new trial was rejected by a Nevada judge, and legal experts said that appeals were unlikely to succeed. He remained in custody until Oct. 1, 2017, when the parole board unanimously granted him parole when he became eligible.

Certain conditions of Mr. Simpson’s parole — travel restrictions, no contacts with co-defendants in the robbery case and no drinking to excess — remained until 2021, when they were lifted, making him a completely free man.

Questions about his guilt or innocence in the murders of his former wife and Mr. Goldman never went away. In May 2008, Mike Gilbert, a memorabilia dealer and former crony, said in a book that Mr. Simpson, high on marijuana, had admitted the killings to him after the trial. Mr. Gilbert quoted Mr. Simpson as saying that he had carried no knife but that he had used one that Ms. Simpson had in her hand when she opened the door. He also said that Mr. Simpson had stopped taking arthritis medicine to let his hands swell so that they would not fit the gloves in court. Mr. Simpson’s lawyer Yale L. Galanter denied Mr. Gilbert’s claims, calling him delusional.

In 2016, more than 20 years after his murder trial, the story of O.J. Simpson was told twice more for endlessly fascinated mass audiences on television. “The People v. O.J. Simpson,” Ryan Murphy’s installment in the “American Crime Story” anthology on FX, focused on the trial itself and on the constellation of characters brought together by the defendant (played by Cuba Gooding Jr.). “O.J.: Made in America,” a five-part, nearly eight-hour installment in ESPN’s “30 for 30” documentary series (it was also released in theaters), detailed the trial but extended the narrative to include a biography of Mr. Simpson and an examination of race, fame, sports and Los Angeles over the previous half-century.

A.O. Scott, in a commentary in The New York Times, called “The People v. O.J. Simpson” a “tightly packed, almost indecently entertaining piece of pop realism, a Dreiser novel infused with the spirit of Tom Wolfe” and said “O.J.: Made in America” had “the grandeur and authority of the best long-form fiction.”

In Leg Braces as a Child

Orenthal James Simpson was born in San Francisco on July 9, 1947, one of four children of James and Eunice (Durden) Simpson. As an infant afflicted with the calcium deficiency rickets, he wore leg braces for several years but outgrew his disability. His father, a janitor and cook, left the family when the child was 4, and his mother, a hospital nurse’s aide, raised the children in a housing project in the tough Potrero Hill district.

As a teenager, Mr. Simpson, who hated the name Orenthal and called himself O.J., ran with street gangs. But at 15 he was introduced by a friend to Willie Mays, the renowned San Francisco Giants outfielder. The encounter was inspirational and turned his life around, Mr. Simpson recalled. He joined the Galileo High School football team and won All-City honors in his senior year.

In 1967, Mr. Simpson married his high school sweetheart, Marguerite Whitley. The couple had three children, Arnelle, Jason and Aaren. Shortly after their divorce in 1979, Aaren, 23 months old, fell into a swimming pool at home and died a week later.

Mr. Simpson married Nicole Brown in 1985; the couple had a daughter, Sydney, and a son, Justin. He is survived by Arnelle, Jason, Sydney and Justin Simpson and three grandchildren, his lawyer Malcolm P. LaVergne said.

After being released from prison in Nevada in 2017, Mr. Simpson moved into the Las Vegas country club home of a wealthy friend, James Barnett, for what he assumed would be a temporary stay. But he found himself enjoying the local golf scene and making friends, sometimes with people who introduced themselves to him at restaurants, Mr. LaVergne said. Mr. Simpson decided to remain in Las Vegas full time. At his death, he lived right on the course of the Rhodes Ranch Golf Club.

From his youth, Mr. Simpson was a natural on the gridiron. He had dazzling speed, power and finesse in a broken field that made him hard to catch, let alone tackle. He began his collegiate career at San Francisco City College, scoring 54 touchdowns in two years. In his third year he transferred to Southern Cal, where he shattered records — rushing for 3,423 yards and 36 touchdowns in 22 games — and led the Trojans into the Rose Bowl in successive years. He won the Heisman Trophy as the nation’s best college football player of 1968. Some magazines called him the greatest running back in the history of the college game.

His professional career was even more illustrious, though it took time to get going. The No. 1 draft pick in 1969, Mr. Simpson went to the Buffalo Bills — the league’s worst team had the first pick — and was used sparingly in his rookie season; in his second, he was sidelined with a knee injury. But by 1971, behind a line known as the Electric Company because they “turned on the Juice,” he began breaking games open.

In 1973, Mr. Simpson became the first to rush for over 2,000 yards, breaking a record held by Jim Brown, and was named the N.F.L.’s most valuable player. In 1975, he led the American Football Conference in rushing and scoring. After nine seasons, he was traded to the San Francisco 49ers, his hometown team, and played his last two years with them. He retired in 1979 as the highest-paid player in the league, with a salary over $800,000, having scored 61 touchdowns and rushed for more than 11,000 yards in his career. He was inducted into the Pro Football Hall of Fame in 1985.

Mr. Simpson’s work as a network sports analyst overlapped with his football years. He was a color commentator for ABC from 1969 to 1977, and for NBC from 1978 to 1982. He rejoined ABC on “Monday Night Football” from 1983 to 1986.

Actor and Pitchman

And he had a parallel acting career. He appeared in some 30 films as well as television productions, including the mini-series “Roots” (1977) and the movies “The Towering Inferno” (1974), “Killer Force” (1976), “Cassandra Crossing” (1976), “Capricorn One” (1977), “Firepower” (1979) and others, including the comedy “The Naked Gun: From the Files of Police Squad” (1988) and its two sequels.

He did not pretend to be a serious actor. “I’m a realist,” he said. “No matter how many acting lessons I took, the public just wouldn’t buy me as Othello.”

Mr. Simpson was a congenial celebrity. He talked freely to reporters and fans, signed autographs, posed for pictures with children and was self-effacing in interviews, crediting his teammates and coaches, who clearly liked him. In an era of Black power displays, his only militancy was to crack heads on the gridiron.

His smiling, racially neutral image, easygoing manner and almost universal acceptance made him a perfect candidate for endorsements. Even before joining the N.F.L., he signed deals, including a three-year, $250,000 contract with Chevrolet. He later endorsed sporting goods, soft drinks, razor blades and other products.

In 1975, Hertz made him the first Black star of a national television advertising campaign. Memorable long-running commercials depicted him sprinting through airports and leaping over counters to get to a Hertz rental car. He earned millions, Hertz rentals shot up and the ads made O.J.’s face one of the most recognizable in America.

Mr. Simpson, in a way, wrote his own farewell on the day of his arrest. As he rode in the Bronco with a gun to his head, a friend, Robert Kardashian, released a handwritten letter to the public that he had left at home, expressing love for Ms. Simpson and denying that he killed her. “Don’t feel sorry for me,” he wrote. “I’ve had a great life, great friends. Please think of the real O.J. and not this lost person.”

Alex Traub contributed reporting.

An earlier version of this obituary referred incorrectly to the glove that was an important piece of evidence in Mr. Simpson’s murder trial. It was not a golf glove. The error was repeated in a picture caption.

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Robert D. McFadden is a Times reporter who writes advance obituaries of notable people. More about Robert D. McFadden