Acquisition Financing for Roll-Up Strategies: Capital Requirements Explained

Roll up strategies need copious levels of acquisition financing, yet capital requirements do not end there.   Rapidly scaling companies create capital needs far beyond the purchase price in the form of integration costs, transaction costs, working capital and growth investment. Integration and closing costs occupy a grey zone region within the sphere of acquisition financing. They are one-time costs and either an internal or external cost. Disciplined acquirers allocate them to every deal and consider them part of acquisition financing. When not accounted for in the closing sources and uses of funds, internal cashflow is burdened. Transaction closing costs are almost always external and can balloon rather quickly due to lack of budgeting and cost monitoring. These should always be estimated on the conservative, high side and continually revisited through the process to ensure the acquisition financing budget has not been busted.

Acquisition Financing Realities in Roll-Ups: Managing Scale, Working Capital Strain, and Integration Costs

In addition to these costs, roll-up acquisition strategies cause multi-directional growth that in itself necessitates higher levels of management oversight and cost. When you double the size of the company in a year, you need more managers on deck to help steer the ship when moving in such dramatic and abrupt fashion. Most roll-up acquirers understate the management cost required given the speed of the scale up and try to make do with a short-handed team. Yet the faster you move, the greater the operational risk and the need for more senior management resource intensity. Working capital is always usually a liquidity stealer in roll up strategies especially given the need to notify new customers and vendors of the ownership transition. Vendors and customers may tighten their terms and collections and payments can always experience an internal hiccup.

Finally, roll-ups usually require system harmonization across the enterprise be it production, delivery, information technology, sales or service. Growth investment is needed to standardize as well as to unlock complementary advantages between newly acquired businesses. Given the opening of new frontiers for growth, investment is critical though often unprioritized in the hierarchy of acquisition financing need.