Upon reaching a certain level in business, an owner aims to enhance their company’s profit and stability. This phase marks a shift in focus from operational activities to strategic development. Procedures and job descriptions are implemented, planning is introduced, and both the owner and managers learn to delegate tasks.
Over time, the owner gains a consistent and predictable income, as well as the freedom to pursue creative ideas, which is a key motivation for many entrepreneurs. The business gradually attains a certain value, shaped by the quality of the team, internal processes, and their efficiency.
However, many entrepreneurs ponder their next steps at this stage. With a system, team, and profits in place, dedicating all their time to the business becomes unnecessary, yet the desire for growth persists. The article discusses the next step to scale your business and elevate it to a new level.
If your business already has a management system, consistently generates profit, and you can comfortably take vacations, it’s a commendable achievement. The next growth opportunity might be merging with or acquiring other companies. The concept of a roll-up strategy and its application are explored next.
What is RollUp Strategy
Rollup refers to a specific type of merger and acquisition, where one company serves as a platform to incorporate other companies. This incorporation is known as Tuck-in, and the acquired companies are called target companies. For instance, when an air conditioning company acquires another company in a different region and integrates its management technologies, marketing, call center, and suppliers, it’s a rollup. This applies even if it involves a few companies, like one or two.
If an owner believes their competitors have organized their businesses less effectively, they can buy these companies and merge them with their own. In this scenario, the owner’s first company becomes a platform for the others.
The financial aspect of roll-ups can be explained as follows. Suppose the competing companies earned significantly less than half a million a year, say about 300,000. Due to lower efficiency, these businesses are sold at a lower multiple, not 3 but 2. It’s feasible to attract a partner, secure financing, and acquire this competing company.
Attracting a partner for such a purchase is relatively easy because the risks aren’t as high as investing in a startup. After all, you’re buying a company with an existing cash flow, a certain market value, etc.
RollUp as a Method for Acquiring Other Companies
In the business world, the roll-up strategy is widely utilized. This approach falls under the category of mergers and acquisitions. Its essence is straightforward: if an entrepreneur is convinced that competing companies are less efficient, they can acquire them and integrate them into their corporate structure. In this process, the entrepreneur’s main company acts as a platform for all subsequent purchases.
Consider two small U.S.-based companies as examples. The first business earns half a million dollars in revenue, and its founder is involved in day-to-day operations. The price tag for such a company would be around $500,000. This may seem high, but companies in America are sold at much higher prices.
The second company operates independently of its owner. A hired director handles all responsibilities, and the founder only participates in strategic matters. Its value is about a million dollars, higher solely because a new owner wouldn’t need to revert to operational activities after purchase.
Regarding the financial aspect, suppose competitors earn not $500,000 a year but about $300,000. Due to their lower efficiency, their business is valued with a multiplier of 2, not 3.
This multiplier, usually ranging from two to three, reflects the company’s dependence on its owner. The multiplier is closer to three if the owner is actively involved in operational activities and the company relies on them. If not, it’s closer to two.
The point is that a business with a low multiplier is cheaper due to its dependency on the owner. After the acquisition, your main company becomes a platform for developing the next one, solving the issue of operational dependency. This presents an opportunity to attract an investor, secure the necessary resources, and purchase this company.
Attracting partners for such acquisitions is relatively easy, considering the risks. They are significantly lower than those associated with investing in startups, as you become the owner of a company that is already functioning successfully, has a steady income, and is well-established in the market.
How the Rollup Strategy Affects Business
If managing a regular business can be described as 1+1=2, then applying the rollup strategy turns it into 1+1=11. Here’s how it works in real-life scenarios.
- Centralization of Functions
For instance, instead of several call centers, you form one professional center. It employs five people who earn more, perform better, and achieve higher conversions at about half the cost to the company.
- Strengthening Marketing
To manage modern advertising campaigns effectively, you need a team. By combining this team, you can serve the same volume of clients while spending less.
- Financial Management
Maintaining 30 accountants-financiers in 30 companies is expensive and inefficient. However, 2-3 people can do the same job using the right tools.
- Scaling
A consequence of using the rollup strategy is the expansion of the range of products, services, and geographical coverage. Customers prefer working with a company that has more locations.
Changing Your Business Perspective
If you’re well-prepared in terms of management and have an established management system, growth will be rapid. By integrating new companies into your own, you centralize certain functions and implement know-how from the platform company into the others. The goal is not just to increase the size of the companies but also to enhance efficiency and grow new ones.
It’s entirely realistic to double total revenue in three years. Thus, acquiring, for example, 30 companies could increase turnover not by 30 times but by 60. This will elevate the company to a completely new level, well-organized and managed by hired executives.
Paradoxically, you multiply your wealth, even though you initially acquired companies at a multiplier of 2. Now, the combined company can be sold with an annual multiplier of 8 of the annual earnings, attracting a different kind of buyer.
Conclusion
By implementing a RollUp strategy, you can quickly move from earning $1.5 million to $100 million in capital, and this is no exaggeration. Knowledge, partners, and investors are necessary, but such a strategy is absolutely realistic and fair for a business owner. You have created and streamlined an organization in the company, invested hundreds of hours, and worked to create a functioning model. Now, you can expand this model and earn even more.
