Roll up Acquisition Strategy: The Pros and Cons

If you’re operating in a fragmented market - where there are numerous firms with relatively little differentiation going after the same client base - how can you create substantial value and stand out? 

One way, if you have the necessary capital, is through a roll-up acquisition strategy. 

In simple terms, a roll-up strategy involves the acquisition of multiple smaller companies to create a bigger consolidated one with a stronger position in the market. 

In theory, a well-executed roll-up strategy will result in a company with lower operational costs, higher revenues, and, consequently, higher profits as a result of being able to combine resources and create synergies. The larger company will be able to offer a wider range of services, take on more clients, and have a broader geographical reach. 

Roll-ups have been increasingly popular in the e-commerce space, especially during the pandemic as online shopping has skyrocketed, and the trend is here to stay. 

Should I do a roll-up?

Rolling up smaller businesses into a big one does have its advantages, but also has important drawbacks you need to remain aware of. 

Benefits

• Economies of scale: By taking on a number of companies active in the same space, you can reduce your costs and realize synergies that were not possible before. This is especially true if your roll-up is vertically integrated - meaning that they form part of the same supply or value chain - you can cut out on commissions or production fees. Even if you are integrating horizontally, for example by buying similar companies in other countries, you can make your international operations more cost-efficient. This will also have the added effect of increasing your market influence almost by definition, as you now have a higher market share and can get better deals from suppliers and better financing terms from lenders. 
• Cross-selling: A pretty obvious one here. If your new combined company has taken on the capabilities of others, you can now offer more products, or bundle the new products with your existing ones and create more value for clients and customers. 
• Value Increase: Generally speaking, rolling smaller players up and bringing together their resources means that you add value to your company without necessarily having to make operational or functional improvements.

Risks

• Mismatching: Companies are not like Lego. They are not standardized entities that can all fit each other by design. If you’re carrying out a focused acquisition strategy, you run the risk of buying a company that is not a good fit with the mothership, even if you really like what they’re doing. Cultures can vary and changes in leadership styles and ways of doing business might not always be welcomed. This has the potential to create many problems down the line - such as a drop in morale or lower productivity - if not identified and fixed early on.
• Finances: It should go without saying, but buying companies takes money. The overwhelming likelihood is that the acquisition capital won’t be coming off your company’s balance sheet, but rather from some combination of debt and equity - much of the time the majority, or even all, of the acquisition is funded by debt that will need to be serviced over time. Even if you don’t use debt and opt for a capital raise instead, it will mean a dilution of control and decision-making power. 

Keep in Mind

Before you commit to a rollup strategy there are a number of things you need to consider. Firstly, these don’t come cheap, and you need to have sound financing - or at least a solid plan to finance -  before you approach any seller, or you may end up in a tricky situation down the road. 

Keep in mind that roll-ups typically work best in fragmented markets where you can become a dominant player - if there are already established big players in the space you may have to more closely assess whether the costs are worth the upside. 

If you weigh the pros and cons and determine that it is in your strategic interest and you do want to go ahead with a roll-up, it is best practice to have a dedicated acquisitions team that has within its capabilities for identifying prospective target companies, finance and accounting, negotiation, strategy and more. 

Finally, nothing will matter if you don’t have a good integration plan in place to actually extract the value from the smaller companies - if you go into it blind without proper plans to consolidate employees, processes, systems, sales channels, and more, you can end up with a big clunky ship that you are unable to steer.

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