Although it may seem complicated, pursuing a roll up or consolidation strategy may be a great way to grow a business. In the blog today we will answer a few of the most popular questions that people ask about business rollups and acquisitive growth.
Question #1: What are the primary economic considerations that separate acquisitive growth from organic growth?
When you are looking at a business you need to be able to decide how best to quickly develop sales. As much as private equity traditionally focuses on EBITDA and cost cutting, sales are the key driver for organic growth and can even help solve the same problems. Often times you may have a business with a large amount of fixed costs, so when you increase sales, those fixed costs become a smaller percentage of your revenues and you improve your margin overall. One key method of increasing sales is by acquiring those new revenues, which would be the primary argument for an acquisitive approach.
Question #2: How do you manage the pitfalls that could be associated with acquisitions? For instance, company culture or employee issues?
Simply put, it is not easy. When you are taking multiple companies and smashing them together, you are bound to have some challenges. A lot of times people have been operating based on their preconceived notions or the “old way” of doing things - sometimes this may be the right answer, but not always. In some cases, organizations have operated with their heads in the sand and therefore are resistant to change. The best ways to get over that are to first, be honest and open with your employees; second, review all roles and employees to ensure that each individual is in the role that best utilizes their skills. Doing so may mean some employees transition out, but often it simply means that an individual would better suit the company if they changed roles. Taking an objective approach to these changes is key to help ensure buy in from all the employees to make for a smoother transition.
Question #3: What strategies can be used to better be prepared for the integration stage of the rollup cycle?
Perhaps the best thing that you can do is prepare, prepare, prepare. This is something that cannot be said loudly enough. Rolling up companies and mixing company cultures is often messy. Doing as much preparation in advance as possible cannot be understated. For instance, working with insurance agents to combine insurance policies, or working with a PEO to ensure that new employees are correctly on-boarded. These things take a long time and scheduling ahead will make the post-closing period much easier.
Question #4: When pursuing a rollup or consolidation strategy, how do you approach financial considerations? For instance, funding for further acquisitions.
Certainly one of the biggest considerations in this type of strategy is ensuring you have enough capital to execute the next few acquisitions. You need to make sure that you have enough capital in place to fund the initial closings as well as a plan for funding future opportunities even if you don’t have a clear pipeline just yet. It is important to have a cushion or sources that are easily accessible to execute on future transactions because sometimes you have to move quickly. You also need to take into consideration the costs to scale your growth and, if you are doing so via organic growth, you must consider total costs of sales trips and marketing expenses instead of purchase prices. Either way, ensure you have a runway to fund your growth and move as fast as your lucky breaks will allow.
Question #5: What tips could you provide for when knowing a rollup is the right strategy?
The answer is the same as it relates to both acquisitive growth and organic growth. Align your growth strategy with the product or service your company is offering. If you can grow quickly simply by putting more sales people to work, organic growth may be the most cost effective approach versus spending capital on new acquisitions. On the flip side, if your industry faces a much longer sales cycle, buying new accounts and revenues could move the needle more quickly and would thus argue for an acquisitive approach. Either way, base your decision on what will impact the numbers most quickly and show the most upside.