What is a Roll Up Anyway?
During a roll up, several small companies are combined to create one larger corporation. A roll up goes well beyond the level of commitment involved with consortiums, networks, and strategic alliances. A roll up is more like a multi-company merger. When an outside investor or financial management company is involved, a roll up works more like a multi-part acquisition.
What is the Purpose of a Roll Up?
A roll up is a very tempting growth strategy. The hope is that participation in a roll up will bring the participating companies the chance to skip past the growing pains associated with “organic growth.” Roll ups bring the promise of cost savings associated with large volume purchases. Roll ups also bring the hope for advantages when competing for large accounts.
In many situations, a roll up is actually an exit strategy rather than a growth strategy. A roll up can appeal to an owner of a small business who does not have a clear succession plan in place. The roll up brings the possibility of sustained life for the business after the owner has retired. Some business owners choose to participate in roll ups to free their time for the creation of second businesses, but roll ups are most often financial strategies for outside investors. Once several smaller companies are combined into one larger entity, an initial public offering is possible.
Is There a Down Side to Roll Ups?
When roll ups start to happen within an industry, business owners become distracted wondering who is buying whom, weighing if they should sell now or later, and worrying if they will be able to compete against newly created mega-firms. Investment in research and product development is often put on hold during roll ups, which slows innovation. As industry leaders sell to outside investors, the key employees of competing companies are aggressively recruited, which disrupts ongoing operation, raises the cost of doing business, and heats up the already hot talent wars.
Even businesses that participate in large networks or consortiums are not immune to the adverse impact of roll ups. The value of their alliances is dramatically reduced when participating firms are lost to roll ups.
Even when a roll up makes financial sense to the investor, there is no guarantee that the combination of cultures of the participating companies will result in a profitable larger corporation. The risks increase when the companies suddenly lose experienced leaders. Plus employees and managers often resent being forced to work with people they have not helped to select. Turnover increases.
What Are Your Options?
Having a clear mission and articulated goals are particularly important within industries that are besieged by roll ups because you’ll need to know if you want a growth strategy, an exit strategy, or an investment strategy. You’ll need to know if you’ll play the role of an investor, a seller, a participant, or an observer.
It’s often a good idea to take a proactive stance rather than wait for roll ups to roll over you and your industry. BEFORE it happens, you can take your time to get to know your competitors on a more personal basis. Financially-driven roll ups can feel like arranged marriages, but you can increase the potential for positive synergy and have an increased chance for success if you take the time to select the companies with which you will be combined.
If your business is part of a large network, you might want to consider formalizing those relationships to prevent the loss of your strongest participants to roll ups.
Over the past few years, I have helped facilitate the evolution of a few owner-driven roll ups. One began with a handful of independent companies that referred business leads to one another, then evolved to a 35 company consortium, and later became two separate IPO roll ups. The owners were able to sell their businesses for three to four times the price they would have gotten on an individual basis and the participating businesses have remained active after most of the previous owners cashed out, so it is possible.
However, owner-driven roll ups can be difficult to manage because mergers are more difficult to navigate than acquisitions. Most people need to know who is leading and who is following. Peer-to-peer, consensus-style decision making between the leaders of multiple companies can become quite cumbersome. If you consider doing an owner-driven roll up, be prepared to involve outside facilitators, negotiators, etc. You won’t want to get bogged down in your own process and miss opportunities.
If you choose to “go it alone” and avoid all types of roll ups, you’ll need to be prepared to compete against larger competitors with buying clout, recruiters, financing, and visibility.
Known as The Growth Strategist®, Aldonna R. Ambler, CMC, CSP helps professional service firms, technology-driven businesses, and construction-related product/service for distribution companies reach their goal of Achieving Accelerated Growth With Sustained Profitability® through a combination of speaking, consulting, executive coaching, authorship, and growth financing. She has published two books and over 100 articles. She currently hosts a weekly Internet radio show, The Growth Strategist®, on www.GrowthStrategistShow.com every Tuesday at 11 a.m. ET. Aldonna Ambler can be reached at Aldonna@AMBLER.com, 1-888-ALDONNA (253-6662) or at www.ambler.com.