The life-changing magic of a company "rollup" strategy...(chart included)

June 13, 2023

by a lender from Baylor University - Hankamer School of Business in Houston, TX, USA

In 2019, I met an old-timer in Tyler, Texas who was buying up varicose vein clinics.

Yeah, I know.

Let me repeat that: "varicose vein clinics."

You know the ones tucked away in those dingy strip malls?

"I'm running a classic roll-up strategy," he said.

"What do you mean?" I said as I finished another lukewarm Lonestar.

"Whelp, I buy 'em cheap, bolt 'em together and then sell 'em up the chain to my buyer."

[silence]

I was confused. Like, reeeeeaaallly confused.

"How is this possible???"

I wondered how he could be so sure that someone would actually buy this big varicose vein clinic "roll-up" from him.

And that's when he showed me THE EMAIL.

It was a 5 bullet-point email from a large private equity shop in Dallas. Each bullet-point described (in great detail) exactly what they were looking to buy -- niche, size, geography, timeline, etc. -- at exactly what EBITDA multiple they were willing to pay"

This changed everything for me.

Imagine a teacher handing you the answers to the test...BEFORE THE TEST!

Honestly, it took weeks for me to fully appreciate the genius of this strategy.

Here's the bottom line: people pay up for SCALE.

If you can "roll up" your sleeves, scrounge up some capital and buy onesie, twosie businesses in a particular niche (ala varicose vein clinics) -- you can make a small fortune.

Take the "manufacturing" industry, for example.

Check this out...

Did you see it??

You can buy 3 or 4 small-ish manufacturing companies for ~5.7x EBITDA, rollllllll them together, and then sell them for 7-9x EBITDA.

Imagine buying $100 bills for $50 bucks a pop.

Sign me up!

Even better: imagine lining up the eventual buyer BEFORE you even get started.

Giddy up!!!!

Cheers,

Grant

Reply by an intermediary
from University of Wisconsin in Lawrence, KS, USA

What you describe with the clinics is an example of simple mass building roll ups. Yes, of course, you can get a higher multiple spread for more mass, because you have done the hard work to piece it together and standardize what you can, rather than the ultimate buyer having to do that. But, the other type of roll up, a "synergistic" roll up has a much higher value increase potential, because in addition to building EBITDA mass alone, you are accelerating the top line growth, which pushes more EBITDA to the bottom, due to the very real phenomenon of cross service/cross product and cross client fertilization. they require more planning and careful integration, but outcome is a value of twice what the mass building one achieves. Thanks for the post

Reply by a searcher
from Colorado State University in Seattle, WA, USA

Hey Grant - where did you source the table of TEV vs multiple?

I've been thinking about this relationship, and the other levers, that could deliver multiple expansion. I'm sure other people know, and perhaps even communicate with similarly clear tables... Cheers!

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