Best Corporate Structure for Roll-Up?
June 21, 2024
by a searcher from Harvard University in Nashville, TN, USA
This came up in my convo with a couple folks in the roll-up world.
When rolling up 10+ companies within 24 months, what's the best corporate structure?
Add'l context: In each child company, the seller specifically wants to stay on and continue to operate with significant upside 20-49%, which allows the core team to focus on M&A and integration.
Slightly unusual in that the play wouldn't necessarily have one platform + bolt-on's but rather a hub-and-spoke model.
Option 1: Each child company is structured as its own entity siloed from the others, where the cap table has the HoldCo entity own 51-80%. This allows each seller to "eat what they kill" as they continue to operate/build their companies. It would mean that each child company would have its own reporting that flows up to the parent company.
Option 2: Each child company is owned wholly by the parent company, and the sellers would get a piece of the parent co. This would simplify the cap table since you wouldn't have a different cap table for each child company. But it would require you to frequently re-evaluate internally your parent company's value as you add-on.
Would invite feedback from folks who's thought about this/experienced this firsthand!
from Carnegie Mellon University in San Jose, CA, USA
If you should take option 1 or option 2 heavily depends on your exit plan. If you want to exit the rollup as one sell option 2 is an easier path to take. Option 1 is better if you want to grow those individually and sell separately (same or different vertical).
from Harvard University in Denver, CO, USA