MM M&A 011: Empire Building Through a Roll-Up Strategy

In this episode, Gina Cocking and Jeff Guylay continue their discussion on deal structuring.
Today, the focus is on roll-ups. Key takeaways from this episode are:
• Highly fragmented industries are ripe for roll-ups
• A roll-up is an attractive exit alternative for companies that are subscale or have an incomplete management organization
• Transparency from both the buyer and the seller leads to the most successful outcomes

Other episodes in our series about deal structuring include price and terms, earn outs, rollover equity, and reps and warranty insurance. 

Later in this episode, Gina is joined by our guest Rob Humble, Chief Revenue Officer at Innovative Aftermarket Systems ("IAS"), to share his insights from executing a roll-up strategy for IAS as the Senior Vice President of Strategy and Corporate Development.
In this episode, Colonnade Advisors addresses the following questions as related to roll-ups:
What is a roll-up? (01:02)
Gina: "A roll-up is when an owner, which could be a private equity owner or a strategic, starts with a platform company. The roll-up adds other companies in the same industry, and they're typically smaller companies than the platform. The add-on companies are rolled into the platform."

What is the purpose of implementing a roll-up strategy? (01:34)
Gina: "It's a way for a company to increase in size inorganically, quickly, and while doing so, they are recognizing both expense synergies and perhaps revenue synergies."

Jeff: "It plays on the themes that we've talked about in other episodes, which is bigger is better, in many respects. Generally, bigger companies are more attractive to a wider audience of investors or buyers."

What industries typically do roll-ups? (02:42)
Gina: "One industry that comes to mind is the insurance agency industry. We have seen this time and time again, where a private equity firm buys an insurance agency, a large insurance agency, and then they start making smaller acquisitions."

Jeff: "The insurance distribution sector is perfect for the roll-up strategy. It's low capital intensity, recurring revenue, and highly fragmented market."

What type of companies implement roll-up strategies? (04:29)
Jeff: "This strategy works for large public companies, private equity firms, and independent companies."

What is the rationale for roll-ups? (05:34)
Gina: "One is geographic. Number two, it might be because of specific product knowledge. Number three, it can be to get a specific customer.

What is the financial benefit of roll-ups? (06:49)
Jeff: "A large platform company is going to trade at a higher multiple than a smaller company. There's arbitrage if a large platform company acquires smaller add-on acquisitions and integrates successfully."

Why is integration important? (07:56)
Gina: "Sometimes, acquisitions fail because they fail to integrate properly. That is not just making sure everybody is on the same technology system, but integrating cultures, integrating client relationships, and integrating product sets. That is the real challenge in an acquisition."

Jeff: "The integration is key to a lot of things, certainly to value maximization over time."

How do add-on companies benefit from roll-ups? (10:23)
Jeff: "The add-on companies benefit from the resources of the parent company, the larger enterprise. Add-on companies can grow their business, which probably will have some contingent consideration involved in the transaction, and be a part of the success."

Gina: "The smaller company, ideally, will have some rollover equity or earn outs that are structured on growth in the company, so you get to participate in the upside."

When Colonnade represents a seller into a roll-up, what diligence is done on the buyer? (12:10)
Jeff: "We do diligence on the parent company and the financial sponsor. We talk about their track record and history in doing roll-ups. We do diligence on the acquisitions they have done already and the outlook of the combined entity. Part of the consideration to our client is likely going to be equity in this new entity, so we will think about how much to rollover, what's it worth, what are all the conditions around it, and who is in control."

What is one of the challenges for sellers in a roll-up? And what are the trade-offs? (13:23)
Gina: "One of the challenges for entrepreneurs when they go through a sale process is the sudden realization that they're going to have a boss. Entrepreneurs are entrepreneurs for a reason. They like running the show. It can be a challenge to be part of a larger organization and not be in charge."

Jeff: "There are the trade outs with control. Being part of a larger organization, the add-on company benefits from the growth of the larger organization, increased size, and resources for future acquisitions."

What is the potential upside for sellers that rolled over equity into the new entity from a financial perspective? (15:63)
Gina: "The upside can be enormous. The next exit with the platform could be worth just as much if not more than when the seller went in and did the first transaction."

What is your outlook on roll-ups used in transactions? (17:45)
Gina: "Roll-ups are used all the time. Going into the next decade, I do not see a slow down in roll-ups as a strategy being deployed by private equity firms."

Gina invites Rob Humble, Chief Revenue Officer at IAS, to share his insights from executing a roll-up strategy for IAS as the Senior Vice President of Strategy and Corporate Development.

What is the most effective structure for proceeds to the seller for a roll-up? (18:40)
• An acquisition under private equity ownership generally comes with an equity component
• For sellers that are not looking to be a long-term part of a bigger organization, they are likely maximizing value at closing, which means they are going to value cash and as little earn out as possible
• IAS was private equity-owned and was buying companies that bought into the private equity model, which is to invest the executive’s energy, and together produce greater value and then share in that value

How do you guide sellers that shy away from roll-ups because they want to protect their employees? (21:13)
• As the buyer, be honest and transparent as much as possible throughout the process
• Sellers can build a deep trust with the buyer and can trust that the deal that they entered into together is going to work out for not only what the buyers’ strategic intent is, but sellers’ as well
• It is best if the buyer can collaborate with the sellers on what are the ways that they can be more efficient together

How do you get business owners comfortable with working for someone post the transaction? (23:33)
• It comes back to honesty, transparency, and as much diligence both ways as possible.

What would you tell a business owner that is getting ready to sell into a roll-up strategy? (23:51)
• Get prepared and get organized. Perform diligence on your own company before you let somebody else look at your company
• Sellers should understand why they want to sell then find a buyer that they believe meets that criteria

Featured guest bio and contact information:

Rob Humble
Email: [email protected]

Rob Humble is the Chief Revenue Officer at Innovative Aftermarket Systems. Before coming to IAS Rob held strategy and corporate development leadership roles with financial services firms NetSpend and Rent-A-Center. Prior to his time in financial services, Rob held strategy, finance, and operations roles at Fortune 500 companies spanning the automotive, defense & aerospace, and chemical industries.

Rob earned his bachelor's degree in mechanical engineering from Washington University in St. Louis, graduating magna cum laude. He also holds an MBA from Harvard Business School.
Rob lives in Austin, TX with his wife and two young kids. He enjoys hanging out with his family, distance running, binge-watching the hottest TV shows, watching Oklahoma Sooners football and indulging in random interests including knitting, furniture building, and home improvement.

Host Information:

Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.

Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.