Roll-up Acquisition Target Sizing

Posted on: December 15th, 2023

Acquisition financing

Roll-ups involve a series of fast-paced acquisitions in the creation of a strong platform company. Roll-up sponsors are usually motivated by the high valuations they see in their industry. They adopt a carpe diem approach and seek turbo charged acquisitions as the way to grow. The acquisition financing market is welcoming to strong companies with good business plans, but the deal size needs to make sense both size-wise and risk-wise for the lender.

Acquisition financing lenders generally use standard deal size metrics when screening the deal. They seek minimum loan sizes of $8 to $10 million. They seek companies with minimum revenue of $12 to $15 million and EBITDA of $2.5 million to $3 million. The added wrinkle with roll-ups is the size of the companies being acquired. If the size of each acquisition is too small, this forces the roll-up sponsor into buying a high number of companies to meet the minimum. For example, if the acquirer has $1.5 million of EBITDA and is buying businesses with only $250k in average EBITDA, they will need 4 deals to reach $1 million of acquired EBITDA and $2.5 million of combined EBITDA. While smaller businesses can usually be scooped up at good prices, $250k of average EBITDA per deal is unfortunately too small. Purchasing more companies to bulk up revenue and EBITDA creates a high level of operational integration risk.

Acquisition financing lenders want low levels of operational integration risk, especially with companies that are smaller to begin with. Acquiring companies can pursue smaller deals but need to have a beefier sized deal or two as the keystone to their initial acquisition financing raise. For example, a $1.5 million EBITDA sized company should look to acquire targets with $500k to $1 million in EBITDA. Two $500 EBITDA targets or one $1 million target will lead to $2.5 million of combined EBITDA. The acquisition financing lender’s size sensitivity is most acute at the point of initial scale-up to the minimum. If too much integration risk is involved in forming the platform company, there could be operational problems and financial underperformance. Understandably, smart acquisition financing lenders want to fund platform companies with operational strength and acquisition vision to scale at a fast rate after the initial closing.