Roll-out strategy for a solo searcher

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by a searcher from IESE Business School
in Madrid, España

1yr ago

Roll-out strategy for a solo searcher

I would appreciate your insights on the feasibility of a roll-out strategy for a solo searcher.

Do you think it could be successful? Additionally, could you share any successful examples from your country?
Many thanks in advance for your time and support!

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reply by a searcher 1yr ago
in New York, NY, USA

Let's say you buy 5 companies doing 1 million in ebitda for 4x each for 90% cash at close (you're competing against SBA buyers and its quite often to see deals with majority % cash at close). Usually these companies don't have a mgmt team and you have to add them.
Great you have a platform doing 5 million in ebitda, assuming you didn't do any bad deals (very rare). You then go ahead and try to sell to a LMM private equity fund.
LMM private equity funds are going to expect a CEO, CFO, COO, etc. You probably hired them in order to facilitate your roll up anyhow. Tack on another 500k conservatively in employee expenses to professionalize the business in order to sell it. You're at 4.5 million in ebitda now. Again, this is assuming no growth and no bad deals. In reality, you'll have one deal that went bad, one that did great, etc.
LMM PE funds might offer you 7x. Yes, you got multple expansion... except the LMM PE funds structure their deals with 60 percent of that is cash at close, 20 percent is equity rollover, and 20 percent is an contingent seller financing earnout. The cash at close you are getting is 18.9 million. Well, you paid 18.9 million cash at close including financing/closing costs for your original acquisitions and used whatever remaining cash flow to put the necessary downpayments on the other companies you bought out. You walked away with a contingent earn out and equity roll over that was part of that "multiple expansion" (you may never see this money and good luck trying to fight a PE firm to get it)....

Did you really win? I'm a bigger believe in organic growth than financial engineering. Mike is right... start with one and see how it goes. In practice, its very hard to execute in the sub 5 million ebitda space.

reply by a searcher 1yr ago
from University of Wisconsin in Hopkinton, MA, USA

I’d second the comments from ^redacted‌ here; all very well put. A buy then build strategy is absolutely feasible, but multiple arbitrage is not the purview of searchers (that’s for PE) so you’re likely thinking of a strategic roll-up. Question your thesis — road test it with prospective customers before doing any M&A or spending money. Check out The New Business Road Test with a view to a roll up rather than a start up. And again, to Mike’s point, find your capital partners — you’ll need them.