The benefits of a roll-up are numerous.

Additional revenue streams, geographic expansion, economies of scale, greater name recognition, higher company valuation, and better market reach.

These are just a few of the advantages of rolling up competitors in your industry over sticking to just organic growth and innovation within your business.

That said, even though the potential for growth is immense, there are serious considerations you need to make before committing to pursuing a roll-up strategy in your industry.

In this week’s post, I’m going to explore the factors you need to take a look at before you dive into the deep end of roll-ups.

 

What Is a Roll-up?

First off, what’s all the hype around roll-ups, and could this approach work for you?

A roll-up merger is when you “roll up,” or consolidate, two more companies in the same industry. For example, if you wanted to buy all the landscaping companies in your city (or even start with merging two), that would be considered a roll-up.

Although you’re probably familiar with large firms like Berkshire Hathaway owning a portfolio of businesses that are diversified across various industries, a roll-up focuses on a specific sector. It starts with acquiring a foundational company within that industry, then gradually adding smaller, related businesses to become a larger, more formidable entity.

The goal of roll-ups is to create synergy between merging companies that operate in the same vertical. As I alluded to, this can lead to more efficiencies in your business, greater market influence, and, of course, increased profitability.

That said, a roll-up isn’t for the faint of heart, and it isn’t an approach I’d recommend if you’re new to entrepreneurship. Given that a roll-up falls further in the investor category than simply day-to-day business ownership, it’s a growth strategy normally taken by larger entities, such as private equity firms, venture capital groups, or corporate venture funds.

To have a successful roll-up, you’ll want to make sure a few things are in place. First, you’ll want to make sure that you’re well-versed in capital allocation, which is essentially how to properly manage funds across a number of different companies to increase efficiency and maximize profit (specifically shareholder profit).

 

Source: 10-K Diver

Number two, to execute a successful roll-up you need to fully grasp the intricacies of your chosen sector and assess the available opportunities. If these are aligned with your objectives, then a roll-up might be worth considering.

Let’s get into what industry factors you need to consider before pursuing a roll-up.

 

1. Sector Dynamics

The first factor to evaluate is sector dynamics, which simply means the landscape of the industry you’re looking to roll up.

 

Cyclicality

A cyclical industry is one that has inconsistent earnings over a period of time, with revenue rising during economic growth and falling during periods where the economy slows.

An example is the airline industry – we saw during the pandemic how the airlines took a massive hit, but even outside Black Swan events, the demand for corporate and tourist travel falls during economic downturns.

 

Source: WallStreetMojo

 

Another variation of cyclicality are seasonal businesses, which have inconsistent revenue throughout the year due to a flux in demand. Examples are landscaping businesses, e-commerce businesses selling holiday gifts, snow removal businesses, and personal training.

For a roll-up to be viable, you need a steady stream of acquisition opportunities with consistent annual revenue, as this allows you to make acquisitions in a calculated and sustainable way. Having consistent earnings will allow you to grow the business predictably, which is necessary when you’re managing multiple companies versus just one.

Even if you’re looking to acquire just one business, businesses that have recurring or stable income month-to-month are more attractive as they provide the long-term consistency that can offset the risk you’ll incur during the transferability of the business.

 

Disruptions

Next, you need to assess if the industry is prone to large-scale technological disruptions that could make your industry go from being at its heyday to obsolete overnight.

A well-known example of industry-changing disruptions include film photography, which was decimated by digital cameras. Kodak, the most iconic and groundbreaking name in photographic film, served as a household name for 120 years. The name Kodak even became synonymous with the world of cameras:

 

Source: Independent Photo (Courtesy of Kodak Archives)

 

A little known fact about Kodak is that they invented the first digital camera in 1975. Even still, they struggled to keep up with the continued technological advances.

Kodak believed that customers would always prefer printed photos over digital images, and it was unfortunately this assumption that led to their demise. Although they were the largest seller of digital cameras in the US in 2005, they slipped year after year, with competitors Nikon and Canon surpassing them in sales.

When they stopped selling traditional film cameras in 2009, after 74 years of production, it was too late to regain lost ground. They’ve been struggling to redefine their focus ever since.

 

Source: Yahoo! Finance

 

Instead, you want to seek out industries that are resilient to this type of disruption. Industries like window washing, snow plowing, and plumbing aren’t likely to see innovations that will replace the need for the service.

This is why I talk about eternally profitable businesses in my book Buy Then Build.

Of the four types of business, I generally recommend eternally profitable businesses, “cash cows” that are stable and dependable, with low risk of disruption. Even the two Harvard professors who wrote HBR Guide to Buying a Small Business, said they prefer to look for eternally profitable businesses in acquisitions, as these are the types of businesses that serve needs that won’t go away.

 

Supplier and Customer Consolidation

Additionally, consider whether there is supplier or customer consolidation happening in the industry.

Are suppliers merging, limiting your options?

Are customers consolidating, reducing your potential market base?

The suppliers we work with actually have a lot of power. It’s not always easy to find a substitute supplier that can create the same type of product at the same quality.

If a supplier decides to raise rates, sell directly online, or broaden their authorized dealer network, these decisions would impact your business’s stability and sustainability. However, if you have the ability to switch suppliers with little to no effect on your product quality, then dealing with a potential supplier concentration wouldn’t be an issue.

How many suppliers are there in the industry?

If there are too few suppliers or customers, your acquisition targets could be squeezed, hindering your plans for growth. Using models like Porter’s Five Forces can help you analyze where power lies in the supply chain and customer base.

 

 

The Ideal Scenario: Fragmented Industries

The best sectors for a roll-up tend to be fragmented industries with predictable growth. A fragmented industry is one where there isn’t a single company that owns the majority of the customer base. These allow for multiple smaller acquisitions, creating the perfect environment for consolidation.

A great example is the boat docks and marina industry. On the surface, this sector may seem like a quiet, cash-flowing space, but it’s already attracted significant private equity interest, with several key players having bought up most of the valuable assets.

Timing and sector dynamics are everything when choosing an industry for a roll-up. Steady revenue, minimal disruption, and fragmented industry conditions can contribute to a successful roll-up strategy.

 

2. White Space

The next important factor to consider is white space, which is essentially the gap between supply and demand in the market.

For a roll-up to succeed, there needs to be enough businesses available for acquisition and not too many buyers competing for them. 

Take the example of baby boomers, who are retiring at a rate of 11,000 per day. This generation owns more businesses than any other in history, with an estimated $10 trillion worth of business value expected to change hands by the end of the decade. Industries with a large concentration of baby boomer-owned businesses present significant acquisition opportunities, making them rich in white space.

 

Source: The New York Times

 

Next, consider the demand side. How many other consolidators are already active in the industry?

For example, in the boat marina industry, private equity firms have already scooped up most of the valuable businesses. In this case, there’s little white space left, as too many buyers have already claimed the best opportunities.

If the market is already crowded with consolidators, you might find yourself in a situation where the opportunities are dried up.

A perfect example of this was the Amazon aggregator gold rush between 2020 and 2022. During this period, Amazon aggregators flooded the market with $12 billion in capital for small acquisitions, driving up acquisition prices and making it harder to close deals. Toward the end of the bubble, deals were consistently overbid and would fall through, leaving latecomers with poor returns.

 

Source: CBInsights

 

In industries where competition is high, it becomes difficult to find worthwhile acquisitions. Too many buyers chasing too few deals drives up prices, making it hard to find value. This also erodes the potential for multiple arbitrage, where you acquire businesses at lower valuations and then sell them at a higher multiple.

In contrast, industries with healthy white space provide room to grow through acquisition. Even if there are other consolidators in the space, that’s not necessarily a bad thing. If you’re moving from smaller acquisitions (Main Street) to larger ones (middle market), and there’s enough runway before the market becomes too crowded, you can still benefit from multiple expansion. However, timing is critical – you need to move before the market becomes saturated with buyers.

Regardless, to succeed with a roll-up, you need a steady environment where the supply of businesses for acquisition matches your ability to find value before competition drives up prices.

 

3.  Start with a Roll-Up Strategy

In addition to understanding sector dynamics and white space, it’s essential to begin with a clear roll-up strategy from the outset. This shouldn’t be an afterthought. You don’t want to buy a single company now and then decide later that you’re ready to pursue additional acquisitions.

If you’re considering a roll-up, commit to the strategy up front. What it takes to acquire one business is vastly different from the approach needed for a full-scale roll-up. 

A roll-up requires a mindset similar to that of private equity – you’re allocating capital, raising funds, and managing operations across multiple acquisitions. Capital allocation is a very different, even if related, skillset to operating businesses.

 

Source: Elon Musk | X

 

Does this mean you shouldn’t consider a roll-up? Not at all. This just means you need to develop a clear thesis before you start. Ask yourself these questions:

What’s your plan for growth through acquisitions? What capital structure will you use?

Next, follow these steps:

 

• Build a strong team: Who are the people who will execute this roll-up? This can’t be a spur-of-the-moment decision where you bring someone on after acquiring a company. Your team needs to be in place from the start to ensure a deliberate and focused execution of your strategy.

• Conduct sector analysis: Once your team is assembled, you need to evaluate the sector dynamics and white space in your chosen industry.

• Secure capital: After this analysis, start talking to lenders, private equity firms, and debt funds that are active in the space. You’ll need access to significant capital to fuel your roll-up, both in terms of debt and equity, so securing these relationships early on is critical.

 

A roll-up can be a highly effective growth strategy when done right, but it’s not for everyone and it’s certainly not for every industry. Preparation is key when it comes to a successful roll-up, and that includes developing a strategy, evaluating the sector dynamics, building a team, and securing capital.

With this plan in hand, a roll-up can allow you to scale rapidly and dominate your industry. However, without adequate planning, you could find yourself caught in a crowded market with no room to grow.

For more insights, check out my detailed discussion on raising a $200 million offer and how the capital stack comes together in large roll-up deals.

Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.