A company roll-up, also known as an acquisition roll-up, refers to the process of acquiring and combining multiple smaller companies in the same market into a single entity. This strategy is often used by investors and business owners to create economies of scale and competitive leverage within their market vertical and increase operational efficiency. For investors and private equity companies, it serves to diversify their portfolios.
In this article, we outline the steps that lead to a company roll-up.
Step 1: Identify potential target companies
The first step in doing a company roll-up is to identify potential target companies that align with your business strategy and goals. Some key considerations when identifying target companies include:
Industry:
A company roll-up in the same or related industry will likely be more successful. Your company’s management will have a working knowledge of the competitive landscape, channels for distribution and marketing, and best practices that can improve operational efficiencies. In combination, these factors create synergies that translate into cost savings and greater market impact.
Market position:
Where does the target company fit into your market vertical? If it is a market leader in sales, your merged company will vastly improve its scale. If it provides one or more new niche product or service offerings that enhance what you currently promote to your customer base, make sure that your new combined sales team is well equipped to reposition your new product menu.
Financial performance:
Look at the financial performance of the target company: its revenue, profitability, and cash flow. A merger or acquisition inevitably requires costs to scale the new larger entity - as well as potential cost savings by reducing redundant staff or real estate.
Step 2: Conduct rigorous due diligence
When approaching a target company, your initial evaluation of its market position and financial performance are based on your experience in the industry. In step two, you take a deep-dive into the target company’s current and historical financial and market performance: due diligence.
Due diligence entails:
- Three to five years of financials performance reports, including annual reports, tax filings, profit and loss statements, the general ledger, accounts payable statements, a schedule of the latest accounts receivable, and Articles of Incorporation and bylaws
- Names of board members and shareholders and an organizational chart
- Records for partnership agreements, vendor and supplier contracts, securities and real estate purchase agreements, and any legal liabilities
- Intellectual property, including patents, logos, and other legally-protected assets
- Physical assets, including real estate, manufacturing equipment, office equipment and supplies, inventory, and raw materials
In addition to these accounting records and corporate documents, a thorough due diligence process will require analysis of the target company’s competitive position within the industry, forecasts of market potential, and a clear-eyed assessment of risks. This analysis is likely performed by third-party experts, including those versed in legal and regulatory matters.
Step 3: Pay attention to security risks
The due diligence process requires amassing a large number of company records, legal agreements, and other confidential documents. These documents are then shared among a team of in-house and third-party experts. Providing ultra-secure document sharing is an absolute must.
The best solution is a virtual data room (VDR), an online platform for storing and sharing confidential information. A VDR from a quality provider like ShareVault provides a full array of safeguards:
- All documents in the VDR are automatically encrypted
- Access to documents is limited to an authorized list of users who gain access using a two-factor password
- Protected access and document sharing can be extended to analysts, accountants, the legal team, regulatory experts and other third parties
- When the time is right, access can be extended to investors and the target company.
With more than 15 years and $50 billion dollars of M&A deal making experience, ShareVault understands the pressure-cooker atmosphere of a company roll-up. To speed the process, ShareVault provides organizing software called the Due Diligence Checklist that automatically populates the data room with folders for every due diligence category. Other helpful tools include drag-and-drop uploads, a powerful full-text search engine, inter-document hyperlinking, and easy integration with DocuSign and other file-sharing apps.
Providing an ultra-secure environment for due diligence not only protects confidential documents, but also enhances your company brand, especially with investors and other industry pros. In today’s business environment where hackers are a constant threat, a company that employs state-of-the-art security is clearly a market leader.
Step 4: Negotiate the terms of the acquisition
Once you have completed due diligence and have decided to proceed with the acquisition, the next step is to negotiate the terms of the deal. This involves determining the purchase price, financing arrangements, and other key terms of the transaction. Some key considerations when negotiating the terms of the acquisition include:
Purchase price:
Determine the purchase price for the target company, taking into account the value of the company's assets, earnings, potential synergies, and any significant threats to performance.
Financing arrangements:
Determine how the acquisition will be financed, whether it will be funded through debt, equity, company reserves, or a combination of one or more sources. In today’s world, where inflation and worrisome performance by some banks has created jitters among financiers, a sensible financing plan is crucial.
Integration:
Consider how the target company will be integrated into your business, including any changes that will need to be made to the company's operations, management structure, and culture.
Step 5: Close the deal and integrate the acquired company
Once the terms of the acquisition have been agreed upon, the next step is to close the deal and begin integrating the acquired company into your business. This may involve transferring ownership of the company's assets; hiring, transferring, or downsizing employee counts, and consolidating financial and operational systems. Some key considerations when integrating the acquired company include:
Communication:
Communicate with employees and stakeholders about the acquisition and any changes that will be made as a result. This may include informing employees about their job status and any changes to their roles or responsibilities.
Financial review:
It is important to monitor and optimize the performance of the combined entity. Regularly review financial metrics and operational efficiencies, comparing them to industry benchmarks and the projections you have forecast for performance.
Growth opportunities:
Look for opportunities to grow the combined entity, such as expanding into new geographic market areas, launching new products or services, and increasing marketing.
Conclusion
Company roll-ups can be a powerful strategy for investors and business owners seeking to create economies of scale, increase operational efficiency, and diversify their portfolio. By following the steps outlined above, you can successfully execute a company roll-up and optimize the performance of the combined entity.
And, even after you close the roll-up deal, maintain high security for your company records and team collaborations, using the resources of industry-leader ShareVault. ShareVault has a 3-tier pricing program to adjust to your company needs - contact us today for a custom quote!