Posted on: July 4th, 2017

art of roll up The lure of executing a series of acquisitions to gain scale and market strength is a powerful one. The key to a successful roll up lies in the making disciplined acquisitions.

Once you have a compelling business rationale for roll-up, the right acquisitions can transform your business.

The transformation is not just in the size of your operation but also in your business model differentiation – more products, more regions, more customers, and more ways to grow.

Exercising discipline in the acquisition process requires you to have a deep understanding of your operational strengths and management abilities. Each acquisition under consideration must answer the following questions:

1. How can this acquisition make our current business stronger?

2. What do we need to have in place, before the acquisition, to capture the value the acquisition brings?

If there are not clear answers to both questions, then you are likely better off taking a pass. Most roll ups that fail do so because management has not focused on developing a compelling business rationale.

Often, deals get done because a buyer sees an acquisition in solely financial terms, as opposed to operational terms. Buyers often fall in love with an attractive, low multiple acquisition and believe them to have little downside.

Roll-ups require careful internal assessment and significant operational planning. Acquirers need to have their operational integration steps mapped out beforehand and ensure they have people on their team who will lead the required operational change.

Successful roll-ups have a platform company, the keystone acquisition, which acts as the operational bridge builder for each company acquired. Within this keystone acquisition, there is an operational assessment team consisting of professionals from each department in the company.

These operational assessment professionals come together to research, analyze and plan each proposed acquisition. This step is critical and ensures discipline in the roll up process.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.

The Art of the Roll-up