Roll-up investment strategy has become increasingly popular among private equity firms and strategic acquirers. By consolidating multiple small companies in a fragmented industry, investors can gain economies of scale, operational synergies, and increased pricing power. However, not all roll-up deals are successful. This article will analyze the core concepts behind effective roll-up deals, using real-world examples of successful roll-up companies.
Focus on fundamentally sound but undermanaged companies
The ideal targets for roll-up deals are companies that have strong underlying fundamentals and market positioning but are undermanaged or subscale. For example, KinderCare was acquired by KKR and rolled up with Knowledge Universe to create the largest childcare provider in the US. Similarly, Parts Town, a foodservice equipment parts distributor, was acquired by The Jordan Company and subsequently rolled up with other players to build market leadership.
Consolidate fragmented markets with room for growth
Roll-up investment works best in fragmented industries where the top players have low market share, such as veterinary clinics, insurance brokerages, and landscaping services. This fragmentation indicates that there is room for consolidation and economies of scale. A good example is VCA Antech, which executed a successful roll-up strategy in the highly fragmented pet healthcare industry and became the leading player before being acquired by Mars.
Standardize operations and maximize synergies
A key objective of roll-ups is to standardize operations, centralize functions, and maximize cross-selling. PetVet Care Centers implemented ERP systems across its acquired clinics to improve operations. Carousel Industries rolled up IT services companies and integrated them onto a common technology platform. Finding synergies is critical to justifying the high valuations paid.
Retain and incentivize management
Roll-ups often fail when acquirers replace existing management too aggressively. It is important to retain talent who know the local markets and customers. Carousel incentivized management with partial equity ownership and earn-outs. Parts Town also kept the founders involved to leverage their industry expertise during integration.
Maintain brand identity
Although some back-office consolidation makes sense, it is important not to undermine the local brands which customers identify with. PetVet Care Centers and KinderCare maintained their distinct regional brands after acquisition. This allows them to preserve existing customer relationships and local reputation.
Successful roll-up investment requires consolidating fundamentally sound but undermanaged companies in fragmented markets, while standardizing operations and retaining talent. PetVet Care Centers, Parts Town, and KinderCare are good examples of maintaining brand identity while finding synergies.