Deal Size Considerations In A Leveraged Buyout Roll Up

Posted on: November 16th, 2021


Roll-ups are one of the most popular types of acquisition strategies and have been a staple of private equity buyers for decades. In this strategy, a platform company acquires smaller add on acquisitions, realizing network, product, operational and cost efficiencies in the process. The resulting company has more mass and is more diverse, and scales at a faster rate, accelerating the potential exit event.

Beauty of Leveraged Buyout Roll-up

On paper, a leveraged buyout roll-up is a thing of beauty due to the multiple arbitrage available. Smaller companies sell at lower prices but once they become part of a larger platform, they are instantly more valuable. Many roll-ups also use a product distribution strategy, wherein the acquirer has advanced technology products, and acquire the smaller companies to gain more accounts as a distribution channel.

The add on is usually purchased at a much lower price than the value of the platform company, leading to highly accretive layers of value. It is tempting to select smaller deals to roll-up due to the lower prices they carry. Yet, often smaller deals can cause headaches and slow a company down, especially at a time when scale-up speed is paramount. Over the years, we have worked with hundreds of roll-up companies and learned there are four major deal size considerations to ensure roll up leveraged buyout success.

  1. Resist the urge to go too small – often the price reduction of a much smaller deal is irresistible, in the order of 30% to 40% lower. Yet, micro sized companies like these usually lack structure, process, and systems, not to mention enough people on hand to scale with. Even though you can buy two for the price of one of these small deals, they need more resource investment post-closing than a larger add on deal. Small deals always take longer to integrate and grow. These time delays are the nemesis of roll-up speed & scalability.
  2. Resist the platform perfection view – many roll-up entrepreneurs see platforms as the ultimate solution to deal success. While you need a good platform, there are no perfect platforms and each of them will need some improvement or fortifying to ensure rapid scalability.
  3. Balance the proper number of deals with loan check size realities – Roll-up loan sizes start at the $7 million to $10 million level. If your deals are $1 million each, then you need 7 to 10 deals to be able to have a loan closing. This introduces far too much integration risk for the lender. Integration risk is the sum of all things that could go wrong and the more deals you must close to absorb the loan, the more things could go wrong and the less interested the lender is. Most lenders will limit the starting number of deals to 2 or 3 and then support a healthy rate of grow, such as one a quarter thereafter.
  4. Aside from the general roll – up thesis, ensure there is a compelling reason to do each deal – a lot of times, leveraged buyout entrepreneurs do deals for the sake of doing deals, with nary a thought toward the specific benefits of buying each asset. Each deal must have a compelling value creation angle to it, where you can specifically identify how you can grow it and create more value from buying it.