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Investment banking: Merger and aquisition roll-ups, part 1

By Bob Hodgson, Investment Banker

Bob Hodgson. (FILE)

The easiest and quickest strategy to grow your Branson business is to do a roll-up. A roll-up is a company that is built by acquiring smaller companies with common services or products.

These smaller businesses generally operate in a fragmented industry and lack strong management and capital. Combining forces can create efficiencies, marketing depth, buying power and access to less expensive capital.

Any industry with a comfortable twenty percent or more profit margins and a commonality of services, products and operations needs can be a roll-up candidate.

A good example of a type of industry that easily fits the roll-up profile is the funeral business. Other industries that make effective roll-ups are hospitals, computer technology, printing, staffing and trade magazines. There is no end to the types of companies that lend themselves to a roll-up as long as the industry is fragmented.

One way you can finance a roll-up is using your company’s equity. For example, you own 100 percent of your business today, but you will own 25 percent of the companies after four businesses are rolled-up. The shareholders of the other businesses will own the other 75 percent.

Another way to finance a roll-up is through private equity firms to help you with the needed money. Not all private equity firms do roll-ups. An investment banker is knowledgeable of the firms that prefer roll-ups within your particular industry. These firms can also bring considerable experience to the table beyond supplying capital. They can guide you past proven pitfalls they have learned over the years.

The equity firm will not completely finance the roll-up with equity. There will be some debt involved. The businesses you propose rolling up should have adequate cash flow to service the debt.

An Investment banker will act as an extension of your company in dealing with merger and acquisition matters.

This topic will be continued next week. The continued article will describe the various tasks an investment banker goes through to facilitate an orderly roll-up. It will also describe how the companies are integrated into one company.

Amvest Financial Group is a leading international investment banking firm based in Kansas City representing clients with sales from $10 million to over $6 billion. www.amvest.com

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