What Is a Roll-up Strategy? (Plus How To Implement One)

By Indeed Editorial Team

Published April 2, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Roll-up strategies involve acquiring a number of smaller companies within a related industry and combining them into a single company. This is a useful way to reduce operational costs, increase revenue and consolidate resources for improved efficiency. It's useful for professionals in the mergers and acquisitions field to understand more about roll-up strategies and why companies implement them. In this article, we discuss what a roll-up strategy is, list a few industry best practices, share some benefits of these strategies, explain how to implement one and provide an example demonstrating how one works.

Related: Mergers and Acquisitions: Definition, Types and How They Work

What is a roll-up strategy?

A roll-up strategy is when a larger company purchases multiple companies within a certain industry, allowing the larger company to expand its market. Companies often use this strategy to expand their operations into new geographic markets and offer customers a broader range of products or services. By employing a roll-up strategy, a company can reduce the amount of time spent engaging in research and development and complete a large number of transactions in a shorter period of time.

Businesses in a wide range of industries engage in roll-up strategies regularly. Large food corporations may decide to purchase smaller companies that supply grocery chains with items they don't sell, such as dairy products or cereals. Industrial manufacturers may purchase smaller suppliers to expand their own operations. Even companies in the financial services, medical services or IT software industries may engage in these strategies every so often, especially when their industry has been experiencing fragmentation and there aren't too many dominant firms.

Related: A Guide to the Mergers and Acquisitions (M&A) Process

Best practices for executing roll-up strategies

Every deal may be slightly different, and there are a few best practices to follow when executing a roll-up strategy:

Target industries without a lot of competition

Successful roll-ups tend to look for companies in an industry that have a large number of both small and medium-sized companies. These industries lack a designated market leader or a single company that has either significant influence on the rest of the industry or enjoys a large share of the market. Emerging opportunities for executing a roll-up strategy in such an industry may result from increased government regulation or sudden changes to a rapidly maturing industry. For example, increasing compliance requirements for the prescription drug industry may create an opportunity for a larger firm to execute a roll-up.

Have a plan for creating value

It's important for a company to have a plan to create meaningful growth and profitability, regardless of the industry. Companies that acquire smaller companies often conduct a wide variety of deals and are able to develop their own plans for creating value based on their years of experience. For companies that don't have a lot of experience, it can be useful to seek out advice and assistance from professionals who have previous experience using roll-up strategies to acquire and merge smaller companies.

Research the industry

Before doing a roll-up, it's important to thoroughly research the industry, including how the market has changed, what the dynamics are between companies within it and what the easiest targets might be. Successful roll-up strategies involve understanding more about the industry and the various internal and external factors that affect it the most. These may include everything from government regulation to demographic or macroeconomic influences, depending on the industry. Newer industries may have additional considerations since they often have a lot of growth potential.

Consider the customers

It's especially important to consider the customers before implementing a roll-up strategy because it's the customers who are likely to see the most direct impact from the consolidation. Ensuring that customers have access to information and keeping them properly informed throughout the process is crucial to a successful integration. It's also helpful to gain input from customers through the use of surveys or other forms of feedback.

Benefits of using a roll-up strategy to expand operations

Companies that properly implement a roll-up strategy often enjoy the following benefits:

Increased economies of scale

Purchasing smaller companies and combining them into a single entity makes it easier to share resources. It's also a great way to reduce operational costs since the acquirer can leverage its buying power to get lower prices on goods and services. Even with the reduction in operational costs, the selling price can remain constant, which results in additional value and revenue. This leads to increased economies of scale, which are the cost advantages a company experiences when production becomes more efficient.

Reduction in competition

By purchasing smaller companies, the larger company increases its market share and reduces its competition. Smaller companies can take away market share from a larger company, but by employing a roll-up strategy, there are fewer companies in the industry. Increased market dominance can make it easier to negotiate lower prices with suppliers, since having a larger order volume increases buying power. Having a competitive advantage in the market can also make it easier to focus resources and develop new products since there's not as much risk.

Increased value

A company that implements a roll-up strategy can increase its value without making significant operational improvements and changing its growth strategies. When the company properly implements the strategy, the new company becomes more valuable and can attract additional customers. Later, if the company decides to sell it, it may be able to enjoy additional leverage when it comes to setting a final price.

Enhanced ability to cross-sell

Roll-ups allow a company to sell a wider range of products and attract more customers. The ability to cross-sell can give the company a significant competitive advantage over the competition since it allows customers to access products from a single entity. This can result in an expansion of the customer base and even allow the company to develop new products to sell to a newer portion of the market.

How to implement a roll-up strategy

Here are a few steps you can take to implement a roll-up strategy for your company:

1. Create an acquisition team

Creating an acquisition team is a useful way to gain the expertise necessary to purchase smaller companies in a more efficient way. Successful acquisition teams include professionals from a number of backgrounds, including finance, accounting, law, investment banking and even IT. The team's legal counsel can ensure the team is able to structure the deal without breaching any important securities laws, while the financial professionals and accountants can help to validate transactions and identify potential financial challenges with the roll-up. The IT professionals can help to manage the standard technology that may come into use during the acquisition process.

2. Determine how to finance the roll-up

There are a few ways companies choose to finance a roll-up strategy. One way is to use the company's equity as a form of currency, with the shareholders of the other businesses owning a certain portion of shares in the company. Another way is to use a private equity fund to assist the company with getting the necessary cash, with the fund making a direct investment in the company. Since not every private equity firm assists in roll-ups, it's important to check to see which funds do prefer these strategies within the industry.

Related: Equity: Definition and How It Works

3. Identify the target companies

After defining goals, the company that's implementing a roll-up strategy can begin to search for ideal companies to acquire. Depending on the industry, these may have a variety of different characteristics. Regardless of the industry, it's important to choose targets that have a high growth potential, a history of innovation and high profitability. It's also useful to perform a basic evaluation of each company to access their potential benefits and challenges.

Related: How To Do Market Analysis (With Steps and Tips)

4. Complete valuations and come to an agreement

During this stage in the process, the target companies provide the company with important financial information about their operations. Besides financial information, it's also useful to consider how each company fits in culturally. External conditions might also affect the roll-up, including the state of the economy. The valuation models and external conditions both help the company to create an initial deal, which becomes finalized when all parties agree to sign it.

5. Perform due diligence and begin integration

Due diligence in mergers and acquisitions allows the acquirer to confirm all of the most important information about the companies it's buying. This stage often involves performing financial modeling and operational analysis. By performing these analyses, the acquirer can make a more informed decision and secure the deal accordingly. Integration involves combining the operations of all the acquired companies. This process can take time, especially when it comes to consolidating office operations like payroll. The more companies that are in the roll-up, the longer the process is likely to take.

Example of a roll-up strategy

Consider the following real-world example of a roll-up strategy to see how it works:

Trek Company sells a variety of household equipment in the North American market. The company is experiencing significant growth in revenues, but its operational costs continue to rise. Trek Company has plans to expand its operations by acquiring two smaller home goods companies since the two already manufacture many similar products. To support the roll-up strategy, Trek Company borrows $2 million and uses the funds to purchase Meg's Home Goods and Intriguing Interiors for $1 million each. This acquisition helps it to reduce operating costs while expanding operations into South America.

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