Nov 16, 2020
In this episode, Gina Cocking and Jeff Guylay continue their
discussion on deal structuring.
Today, the focus is on roll-ups. Key takeaways from this episode
are:
• Highly fragmented industries are ripe for roll-ups
• A roll-up is an attractive exit alternative for companies that
are subscale or have an incomplete management organization
• Transparency from both the buyer and the seller leads to the most
successful outcomes
Other episodes in our series about deal structuring include price and terms, earn outs, rollover equity, and reps and warranty insurance.
Later in this episode, Gina is joined by our guest Rob Humble,
Chief Revenue Officer at Innovative Aftermarket Systems ("IAS"), to
share his insights from executing a roll-up strategy for IAS as the
Senior Vice President of Strategy and Corporate Development.
In this episode, Colonnade Advisors addresses the following
questions as related to roll-ups:
What is a roll-up? (01:02)
Gina: "A roll-up is when an owner, which could be a private equity
owner or a strategic, starts with a platform company. The roll-up
adds other companies in the same industry, and they're typically
smaller companies than the platform. The add-on companies are
rolled into the platform."
What is the purpose of implementing a roll-up strategy?
(01:34)
Gina: "It's a way for a company to increase in size inorganically,
quickly, and while doing so, they are recognizing both expense
synergies and perhaps revenue synergies."
Jeff: "It plays on the themes that we've talked about in other episodes, which is bigger is better, in many respects. Generally, bigger companies are more attractive to a wider audience of investors or buyers."
What industries typically do roll-ups? (02:42)
Gina: "One industry that comes to mind is the insurance agency
industry. We have seen this time and time again, where a private
equity firm buys an insurance agency, a large insurance agency, and
then they start making smaller acquisitions."
Jeff: "The insurance distribution sector is perfect for the roll-up strategy. It's low capital intensity, recurring revenue, and highly fragmented market."
What type of companies implement roll-up strategies? (04:29)
Jeff: "This strategy works for large public companies, private
equity firms, and independent companies."
What is the rationale for roll-ups? (05:34)
Gina: "One is geographic. Number two, it might be because of
specific product knowledge. Number three, it can be to get a
specific customer.
What is the financial benefit of roll-ups? (06:49)
Jeff: "A large platform company is going to trade at a higher
multiple than a smaller company. There's arbitrage if a large
platform company acquires smaller add-on acquisitions and
integrates successfully."
Why is integration important? (07:56)
Gina: "Sometimes, acquisitions fail because they fail to integrate
properly. That is not just making sure everybody is on the same
technology system, but integrating cultures, integrating client
relationships, and integrating product sets. That is the real
challenge in an acquisition."
Jeff: "The integration is key to a lot of things, certainly to value maximization over time."
How do add-on companies benefit from roll-ups? (10:23)
Jeff: "The add-on companies benefit from the resources of the
parent company, the larger enterprise. Add-on companies can grow
their business, which probably will have some contingent
consideration involved in the transaction, and be a part of the
success."
Gina: "The smaller company, ideally, will have some rollover equity or earn outs that are structured on growth in the company, so you get to participate in the upside."
When Colonnade represents a seller into a roll-up, what
diligence is done on the buyer? (12:10)
Jeff: "We do diligence on the parent company and the financial
sponsor. We talk about their track record and history in doing
roll-ups. We do diligence on the acquisitions they have done
already and the outlook of the combined entity. Part of the
consideration to our client is likely going to be equity in this
new entity, so we will think about how much to rollover, what's it
worth, what are all the conditions around it, and who is in
control."
What is one of the challenges for sellers in a roll-up? And what
are the trade-offs? (13:23)
Gina: "One of the challenges for entrepreneurs when they go through
a sale process is the sudden realization that they're going to have
a boss. Entrepreneurs are entrepreneurs for a reason. They like
running the show. It can be a challenge to be part of a larger
organization and not be in charge."
Jeff: "There are the trade outs with control. Being part of a larger organization, the add-on company benefits from the growth of the larger organization, increased size, and resources for future acquisitions."
What is the potential upside for sellers that rolled over equity
into the new entity from a financial perspective? (15:63)
Gina: "The upside can be enormous. The next exit with the platform
could be worth just as much if not more than when the seller went
in and did the first transaction."
What is your outlook on roll-ups used in transactions?
(17:45)
Gina: "Roll-ups are used all the time. Going into the next decade,
I do not see a slow down in roll-ups as a strategy being deployed
by private equity firms."
Gina invites Rob Humble, Chief Revenue Officer at IAS, to share his insights from executing a roll-up strategy for IAS as the Senior Vice President of Strategy and Corporate Development.
What is the most effective structure for proceeds to the seller
for a roll-up? (18:40)
• An acquisition under private equity ownership generally comes
with an equity component
• For sellers that are not looking to be a long-term part of a
bigger organization, they are likely maximizing value at closing,
which means they are going to value cash and as little earn out as
possible
• IAS was private equity-owned and was buying companies that bought
into the private equity model, which is to invest the executive’s
energy, and together produce greater value and then share in that
value
How do you guide sellers that shy away from roll-ups because
they want to protect their employees? (21:13)
• As the buyer, be honest and transparent as much as possible
throughout the process
• Sellers can build a deep trust with the buyer and can trust that
the deal that they entered into together is going to work out for
not only what the buyers’ strategic intent is, but sellers’ as
well
• It is best if the buyer can collaborate with the sellers on what
are the ways that they can be more efficient together
How do you get business owners comfortable with working for
someone post the transaction? (23:33)
• It comes back to honesty, transparency, and as much diligence
both ways as possible.
What would you tell a business owner that is getting ready to
sell into a roll-up strategy? (23:51)
• Get prepared and get organized. Perform diligence on your own
company before you let somebody else look at your company
• Sellers should understand why they want to sell then find a buyer
that they believe meets that criteria
Featured guest bio and contact information:
Rob Humble
Email: rhumble@iasdirect.com
Rob Humble is the Chief Revenue Officer at Innovative Aftermarket Systems. Before coming to IAS Rob held strategy and corporate development leadership roles with financial services firms NetSpend and Rent-A-Center. Prior to his time in financial services, Rob held strategy, finance, and operations roles at Fortune 500 companies spanning the automotive, defense & aerospace, and chemical industries.
Rob earned his bachelor's degree in mechanical engineering from
Washington University in St. Louis, graduating magna cum laude. He
also holds an MBA from Harvard Business School.
Rob lives in Austin, TX with his wife and two young kids. He enjoys
hanging out with his family, distance running, binge-watching the
hottest TV shows, watching Oklahoma Sooners football and indulging
in random interests including knitting, furniture building, and
home improvement.
Host Information:
Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade
Advisors. She returned to Colonnade as a Managing Director in 2014.
Gina began her career in investment banking at Kidder Peabody, was
an analyst at Madison Dearborn Partners, and an associate at J.P.
Morgan & Co. She was a Vice President at Colonnade Advisors from
1999 to 2003. She left Colonnade to gain operating experience as
the Chief Financial Officer of Cobalt Finance, a specialty finance
company. She went on to become the Chief Financial Officer of
Healthcare Laundry Systems, a private equity-backed company for
which she oversaw the successful sale to a strategic acquirer. Gina
served as the Line of Business CFO – Consumer Banking and Lending
at Discover Financial Services. Gina serves on the Board of
Directors of CIB Marine Bancshares, Inc., a bank holding company
based in Brookfield, Wisconsin, that operates banking offices in
Illinois, Indiana, and Wisconsin. Gina received her BA in Economics
and an MBA from the University of Chicago. Additionally, Gina holds
the Series 24, 28, 79, and 99 securities licenses.
Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to
joining Colonnade in 2000, Jeff was an investment banker at J.P.
Morgan in the firm's Mergers & Acquisitions and Fixed Income
Capital Markets groups in New York. He also spent several years in
J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and
investment banking experience and has served as lead execution
partner on over 25 M&A and financing transactions at Colonnade.
Jeff received an MBA from Northwestern University's Kellogg
Graduate School of Management and a Master of Engineering
Management from the University's McCormick School of Engineering.
Jeff received a BA from Dartmouth College and a BE from Dartmouth's
Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and
79 securities licenses. Jeff serves as a director of the non-profit
Nurture, an organization dedicated to enhancing the nutrition and
wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A
investment bankers Gina Cocking and Jeff Guylay of Colonnade
Advisors discuss the technical aspects of and tactics used in
middle market deals. This podcast offers actionable advice and
strategies for selling your company and is aimed at owners of
middle market companies in the financial services and business
services sectors. Middle market companies are generally valued
between $20 million and $500 million.