Roll-up strategy applicable to traditional search fund?

October 11, 2020

by a searcher from University of Wisconsin-Madison - Wisconsin School of Business in San Diego, CA, USA

I am new to search fund and would like to get feedback on whether the roll-up strategy has been used or is being considered for traditional search fund. To me, the ability to use roll-up can help in several ways:
(1) Lower multiples during acquisition by 20+% therefore setting a solid economic foundation on top of improvements the operator will do. I'm not in for a quick multiple arbitrage. I'm in for the long term "buy then build"!
(2) Grow the business via consolidation to gain competitive strength and improve financials with synergy benefits.
(3) Faster route to exit in a higher multiple space. This is closer to pure multiple arbitrage by "bolt-on". Not my main focus. I think it's a benefit if combined with successful operational improvements the principle plans to execute anyway.

After searching the forum here, it appears roll-up has been used in self funded searches and acquisitions but I haven't seen any traditional search embracing this. I suppose the main obstacle is the complexity such as equity dilution handling? It's complex enough for 10+ investors and principles to align on one acquisition?

Any innovators out there attempting to capture the above benefits (and more that I haven't thought of) with search best practice improvements? Is the search fund industry constantly evolving and open to new ideas?

Reply by a searcher
in Charlottesville, VA, USA

I am rolling up veterinary clinics. I don't think there is a right or wrong answer. I've explored a few different ways of doing it. The challenge with a rollup is that you typically need to have a team before you do your first deal if you have more than one deal lined up closing back to back. You also need to have at least basic common infrastructure ahead of time (accounting and HRIS at the very least). To give you a sense, we hired 2 people before we did our first deal. However, its important to caveat that our first deal was a standalone vet clinic (i.e. not a platform of its own).

The easiest way to do a rollup would be to buy a tiny platform in the first place and start adding to it, but multiples will be much higher and you also risk walking into something that has crappy systems that you will find hard to scale.

I hope this helps

Reply by a professional
from Embry in Orlando, FL, USA

I was involved in roll-up, funded by a PE firm $130m to assemble Hi tech organizations, of managed Service Providers, SaaS, small carriers, and VoIP companies. A roll up is a difficult one, unless you set up some ground rules. Seed organization and acquired organizations.. Many PE firms are so excited to get the Seed, that they give too many concessions to get started. Concessions should be strategically provided based upon measurable performance.

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