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What is a Roll-Up?


Roll -Up is a type of Merger&Acquisition strategy. It happens when smaller companies in the same market or industry sector are merged into one large entity. Reasons for consolidation include economy of scale, expanded geographical coverage, better name recognition and increase in value.

Merger of smaller companies happens in fragmented industries where there is no dominant company or where is one dominant player and none of the small companies can challenge its dominance. Usually it is the private equity firm that does investment thesis, using analysis to identify target companies for an acquisition. If you as an owner want to buy more smaller companies and merge them into one entity the deal is most often done as a combination of cash and equity in exchange for ownership stake at the acquired company. Before the deal is done there are several very important questions that need to be answered. Are the target companies good match? What additional products/services/value will be added? Is there growth opportunity for the new company? How will the management  team be structured? 

Roll-ups can sound good and easy on paper but in reality it can be extremely hard to successfully merge couple of companies with different company cultures, business practices and people and create value and reap the benefits of roll-up. The real challenge starts when the deal is done.It is a mistake to rush the process. Rapid and considerable change can lead to quitting of the staff. Taking things to slowly wouldn't produce desired results of synergy but multiple different companies under the same name.

When done properly roll-up will increase efficiency and profitability. By pulling their resources together companies can cut down operational costs and enjoy economies of scale - cost advantages experienced by a firm when it increases its level of output. In other words. the more you produce, lower the per-unit cost. Reason why companies in the same market merge together is because that gives the newly formed company opportunity to cross-sell - opportunity to sell additional product or service to a customer. Broader range of products/services that comes with consolidation enables cross selling. The same aggregation of services and resources increases value of the company and how it is perceived. This means company will attract more prospective investors and customers.

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