Roll ups and Investors

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October 21, 2024

by a searcher in San Antonio, TX, USA

Can anyone share what the typical process looks like for investors when executing a roll-up strategy? For context, if I raise 10% from investors to acquire Business A, then later acquire Business B as part of the roll-up, how does that impact the original investors?

I assume the structure of the Business B acquisition plays a big role. For example, if it’s a zero-down, seller-financed deal, purchased using Business A’s profits, or funded with new investor capital, how would each scenario affect the original investors?

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Reply by a searcher
in Leeds, UK
Hi Erick, the methodology can vary but I would generally expect investors to hold equity/debt in a holding company. Any further acquisitions would be financed by acquisition a or the holding company using a mixture of cashflow, debt and vendor financing but if the business doesnt hold / can't finance acquisition b,c,d etc then it would need to raise additional capital. It would be normal that existing investors would be given the opportunity first but it may be that outside investors would be necessary which would typically mean existing investors would be diluted (a smaller slice of a larger pie). This can be complicated and potential contentious so it would be much smoother if this was understood and documented from the outset. Your business model should illustrate how this might work and show what additional finance should be brought in as you conduct further rollups over time.

Hope that helps
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Reply by a searcher
from Columbia University in New York, NY, USA
As others have said the structure matters and everything can vary, but in a simple example if you owned 90% of business A and outside investors owned 10%, then you used debt or business A proceeds to purchase business B as an add-on, in that case your investors would still own 10% of the combined business.

If instead you needed to (or decided to) bring on additional equity investors to purchase business B and your original investors did not contribute more equity to maintain their pro rata ownership, they would be diluted by the new equity coming in. The exact amount of dilution depends on the valuation of acquisition B and the amount of new equity you bring in.
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