Real-Life Roll-Up Case Study

This is a post I wrote on my search-focused blog, Big Deal Small Business. This is Part 1, and Part 2 about add-on acquisition integrations can be found here.

What is a roll-up?

The concept of a roll-up is to acquire many businesses within the same industry. It relies on a couple key assumptions:

- Bigger companies (within the same industry) can operate more efficiently thanks to their scale, so can outcompete smaller competitors.

- Bigger companies are worth a higher multiple (which means they have a lower cost of capital) than smaller companies. That in theory follows from assumption #1 above, but is worth articulating.

Very simply, if $300K EBITDA businesses sell for 3x multiples, and $1M+ EBITDA businesses sell for 5x multiples, the roll-up math is:

- Buy four $300K EBITDA businesses for 3x each, which is $3.6 million in acquisition costs

- Sell the resulting $1.2M EBITDA business for 5x, which is $6.0 million in proceeds

- [Pretend I put the Profit meme here.]

In addition to the multiple expansion math above, there are a couple standard ways to drive equity value in a roll-up:

- Leverage: Using debt to acquire businesses lowers your equity needs and allows you to acquire more EBITDA quickly.

- Cash Generation: Ongoing cash flow generation from the businesses help pay down debt as you build your roll-up (so you have less debt to pay off when you sell).

- Growth: Seems obvious, but you increase the annual cash flow at the businesses along the way, which drives your overall exit value as well.

This is all FAR easier said than done, to be clear. But the math is simple and shows how powerful the concept can be.

This is a common strategy amongst Private Equity buyers. Arguably the most well-known roll-up in our space (residential & commercial building services) is Apex Service Partners (the roll-up platform) backed by Alpine Investors (the PE firm).

This HVAC, Plumbing, and Electrical roll-up kicked off in 2019; it transacted in 2023 at a $3.4 billion valuation.

To be clear, there are lots of thoughts & opinions on how to do a roll-up “well” or if one should even pursue this strategy. I’m not tackling that in this post — in this post, we are going to learn about Rafi’s journey as a roll-up operator.

The Process

Rafi describes his process as 1) Deal Sourcing, 2) Build Trust, 3) Data Gathering, 4) Valuation Expectations, and 5) Offer.

We’re going to go through each of these steps below. In Part 2, we’ll cover 6) Purchase Agreement structuring, 7) Transitioning Clients, and 8) Integrating Teams.

Deal Sourcing

The obvious place to start — how do you find companies to buy? As most searchers know, it’s hard enough to buy one…

Rafi said, “You need a seat at the table to play the game. Once you have a seat, it’s up to you. It’s a massive disadvantage for searchers or PE firms to try to build a platform without having a start. I bought a seat at the table with my first acquisition of Coastal Luxury Outdoors.”

Rafi’s first business was 90% construction / 10% maintenance — not the revenue mix he wanted, given maintenance revenue is the higher-quality, recurring revenue.

But it bought him a seat at the table. And he knew that through a series of targeted acquisitions, he could move the revenue mix in the direction he wanted.

In August 2022, it was 90/10. In Feb 2024, it was 65/35. Today, in November 2024, it’s 60/40. Still a ways to go, but headed in the right direction.

As Rafi put it, “Sometimes you have to find a business to get a seat at the table, and then enhance it.”

After the initial acquisition, the first couple add-on targets require outreach and hustle — nothing crazy. The pool industry operates with a lot of subcontractors, so he put the word out to their best subs — if they have other pool contractors they work for, let them know that Rafi is open to buying them.

Once he got a couple add-ons under his belt, he found that people started to reach out to him. He started to build a reputation.

He put the message out to his distributors (chemicals, parts, etc.), letting them know to find him sellers as well — it’s a win-win in that scenario, as the distributors know that Rafi is growing, so they want their slower-growth clients to sell to Rafi, rather than retire or sell to another slower-growth company. The distributor gets to retain the client’s business, the seller finds a great buyer, and Rafi finds another add-on.

Rafi has even offered referral fees of 1-3% at times, but hasn’t found it to be necessary — the incentives are sufficiently aligned with his vendors that they’re more than happy to find him companies to buy.

Interestingly, his choice of real estate is part of his strategy too — he has the nicest office in town. It highlights that Rafi’s company will be the long-term winner locally. It lends legitimacy and provides sellers with confidence that their legacy will be preserved — this isn’t some fly-by-night operation.

I’ve heard this point from other roll-up and SMB operators as well — having a great office space can make a meaningful difference in recruiting great candidates and potential acquisition targets. It signifies investment in the team & business.

Building Trust

The highest-quality lead is when there’s some intention around buying/selling, such as a prospective Seller letting a distributor connect him to Rafi. On the other hand, a basic intro, with no discussion of a sale, may require a much slower burn. There’s no reason to force it.

For context, Rafi is currently actively working on a deal where he first met the Seller in Jan###-###-#### They talked seriously about a transaction a couple months later. Then the Seller ghosted Rafi for 9 months. Rafi followed up, and the Seller eventually came back and said he’s open to selling. 22 months after the initial intro, a deal is finally underway.

The key here is Building Trust — you’re not jumping straight to an offer, you’re not jumping straight to financials. The Seller needs to actually see that you’re a good, reliable person who can be trusted with their business.

Rafi noted that most older sellers will play things very close to the chest, so Rafi opts to be totally open — “I tell them how many clients we have, just to build trust.” Leading with vulnerability can thaw the initial reticence of sellers to share anything.

Rafi also talked about using this time to understand what the Seller actually values, and responding to that. If the Seller seems focused on maintaining high service quality, Rafi will talk about how at their scale, they can add more service manager roles to ensure quality of work.

If the Seller is more focused on the team’s well-being, Rafi can walk him through the benefits package they offer and assure him that the transition will be handled smoothly.

If the Seller is solely focused on financial outcome, that may also be data for Rafi that this isn’t a great acquisition target.

Ultimately, there are a number of reasons why Rafi’s business is a great acquirer — the key is highlighting the reasons that are most important to that specific seller.

Importantly, Rafi noted that if the Seller is ready to move, you have to move fast. Don’t waste time — move quick, get it done. You don’t have to do nearly as much due diligence when you’re buying primarily client ontracts in an industry you already know — more on that below.

Data Gathering

Once the Seller is ready to share more information, Rafi embarks on a brief data gathering step — this should not be arduous for the Seller.

As you learn your industry, your diligence request list will get tighter and shorter. You usually don’t care about their cost structure outside of the employees — their insurance will be replaced by yours, their chemical vendor pricing will be replaced by yours, etc.

Rafi requests exactly three items:

- Customer List: in Excel, with full name, address, phone number, email address, price per month, what type of pool, which tech completes the work, and which day of the week it gets cleaned.

- Vehicle List: VIN, mileage, make, model, year

- Employee List: Names, tenure, pay details, drivers license (to confirm if the driver will be insurable)

That’s it. And Rafi also helps the Sellers get this figured out.

The client list may be the hardest one to get done of course, but interestingly, Rafi’s deal structure allows for that part to happen before OR after the purchase agreement is signed.

Rafi’s valuation structure hinges on # of pools retained, so the Seller can agree to the valuation mechanic, sign the purchase agreement, and then do the customer list work.

Valuation Expectations

Everything up to this point can be done by anyone — Valuation Expectations is where M&A turns into more of an art than a science.

Rafi notes that most serious Sellers have a rough valuation idea in their head — if they don’t, they haven’t thought that hard about selling in the first place. Rafi wants to hear that number first before putting together an offer.

That said, Rafi also has a rough valuation band he pays based on contracted revenue (as discussed above, cost structure is less relevant in these add-on deals).

Here are some of his reasons for paying at the higher end of the band:

- Perfect overlap with your current routes, which means you have more control of the area. That will likely allow you to increase pricing across the board, and optimize routes further over time.

- Expansion into new geographies — this is only worth more if the business has a platform presence in that region. This means they have a location and a GM in place. Otherwise, it’s just operational headache without any of the scale benefits of buying more locally.

- Very strong pricing — some businesses have structurally better pricing power. For example, one business he looked at operates solely on an island with a captive client base, and so they charge 25% higher than Rafi’s core business. That is sustainable, so Rafi can pay a higher revenue multiple for it — ultimately, it’s still reasonable EBITDA multiple in this case.

The Offer

Unlike most acquirers, Rafi skips the LOI stage — he just makes an offer with an actual purchase agreement.

Rafi’s first purchase agreement (like mine) was 30+ pages long, which felt short relative to PE deals we were used to. Rafi then pushed his lawyer to cut it down to 10 pages for their first couple add-ons.

Today, their standard purchase agreement is only 3 pages long — it is clear on how the Seller gets paid, it includes some very basic Reps & Warranties from the Seller.

On the one hand, you lose some of the bells & whistles of a fully-drawn out purchase agreement, with every protection under the sun.

On the other hand, each acquisition is relatively small compared to your platform, so the risk is lower. You can also generate real protection from a good deal structure.

Imagine being the Seller and being delivered a 30-page purchase agreement from a searcher who isn’t in the industry, or a 3-page purchase agreement from Rafi, a local in-industry player. Rafi will win that deal every single time.

After Rafi has provided valuation expectations, if he can tell the Seller is seriously considering it, Rafi will follow up with a written offer the same day. And then he’s following up with them to keep it top of mind.

Of course, you have to give the Seller time to think it over, talk with their spouse, etc. But you don’t want the offer to just sit out there either.

Conclusion

That’s it for Part 1! Give Rafi a follow on Twitter, where he’s planning to be more active. Big thank you for him for being transparent and willing to share his experience.

If you're interested in reading Part 2 (part of the paid subscriber section), please click here.

If you just want to check out other posts of mine -- the search-related ones are free, the operator-related ones are paid -- you can check out the archive here.

Thanks,

Kaustubh