Exploring Industry Roll-Ups: Opportunities and Considerations for Business Sellers

In the current market of business sales and acquisitions, private equity groups (PEGs) are some of the most active buyers of mid-market companies. They are placing a growing emphasis on what is commonly known as “industry roll-ups” – a strategic merging of multiple companies within the same market or vertical.

This has been a growing trend throughout the state since the beginning of this year and could present some big opportunities for Florida business owners looking to sell. At the same time, sellers need to be well informed about how roll-ups work, so they can properly protect themselves during the sale process.

Understanding Industry Roll-Ups

Industry roll-ups involve a buyer, often a private equity group or another financial entity, acquiring several companies within a specific industry, usually one approaching maturity. These acquired entities are then integrated or “rolled up” into a single overarching company.

According to Investopedia, private equity firms use roll-up mergers to streamline competition in crowded or fragmented markets and to combine companies with complementary capabilities into a comprehensive business entity.

Buyers like industry roll-ups because they help them achieve substantial, rapid growth and increase market presence in a relatively short period of time. Investors who acquire businesses with the roll-up method can consolidate back-office functions, allowing them to increase overall revenue without increasing overhead. This helps increase the per-company return on investment much more than if a business was purchased on its own.

Benefits of Industry Roll-Ups for Business Sellers

Selling a business as part of an industry roll-up can offer sellers advantages not typically found in conventional sales processes. The competitive dynamics of multiple PEGs pursuing roll-up strategies in the same industry can drive up the selling price due to heightened buyer interest. More buyers lead to increased leverage for the seller.

Even more importantly, roll-ups give sellers the opportunity to realize additional profits by opting to “roll equity” in the transaction. In a typical roll-up scenario, sellers receive a combination of cash and shares in the holding company in exchange for their ownership stakes in the acquired companies. This arrangement can potentially yield substantial returns in the long term.

To clarify the concept of rolling equity, here is an example. Instead of selling your company for 100% cash, you decide to receive 75% of the value in cash, then roll 25% of the value in the roll-up. Five years later, after more companies have been added to the roll-up, the combined company sells for a lot more money, and you, as one of the individual sellers, can cash out.

Considerations When Selling a Business

While industry roll-ups present enticing opportunities, sellers must exercise caution. Unlike conventional sales, where buyers typically drive the due diligence process, sellers must also scrutinize the buyer’s capability to execute successful acquisitions and ensure post-purchase earnings growth.

As a seller, it is important that you are comfortable with the buyer’s strategy and track record in executing roll-ups. Some key items to ask about include the buyer’s experience in the industry, their past roll-up endeavors, integration plans for acquired companies, and your continuing role within the new entity. Make sure you gain an understanding of how many deals the buyer has executed and the value those deals have created. With respect to the current roll-up, ask about the number of companies that are included and specifically which ones.

Navigating the complexities of industry roll-ups requires the involvement of a seasoned M&A professional, such as a business broker. A broker can navigate you through the intricacies and potential risks associated with roll-up transactions. Do not underscore the necessity of expert guidance in this type of transaction. If you are not an expert on roll-ups a small mistake can prove to be very costly. Choosing the right professional to guide you through the process can significantly improve the chances of a successful and lucrative transaction.

If you are considering the sale of your business in the near future, or even within the next few years, it’s important to understand what your options are, and what type of buyers your business may appeal to. Unless you’ve sold multiple companies, getting a holistic picture of the entire process can be overwhelming.