Buy and build…need your thoughts

It's a bit hard to respond because the way you are typing these comments is like someone texting on a Razr, but I'll give it a shot.

It sounds like your thesis was to essentially buy a 15% gross margin business that has 2% - 3% net margin, and then use a max leverage roll-up strategy to make the returns work. My first question would be - what are the growth prospects for the business on a standalone basis? If 100% of the growth has to come from acquisitions, you're in a situation where you have massive pressure to deploy into the roll-up, which would presumably be true for every other scaled player in the space. It sounds like you're not the first person to have discovered this playbook, so you're putting yourself in a situation where there will be upward pressure on roll-up purchase multiples and don't have any first-mover advantage to get in early and cheap on those roll-ups. That's a pretty big knock right there, and to get comfortable with that risk in the first place, I'd have to feel comfortable that the purchase price I'm paying for the business up front is at a low enough multiple that my "no acquisitions" case still generates decent yield.

However, the next problem that your post seems to indicate goes back to this net margin point - if this thing is generating 2% - 3% net, you have literally no margin for error. The fundamentals of the business itself sound extremely weak, and if anything goes wrong, you're suddenly going to face a cash flow negative proposition. I understand that you're saying this is a recession resilient sector, but things can still go wrong even in resilient sectors. So now we're in a situation where in order to feel comfortable with the no-acquisition case, I have to pay an even lower multiple to get comfortable with my downside exposure (I'm not even sure I'd ever get comfortable on a 2% conversion business given how quickly things can go sideways).

Of course, then the problem you face is that if you can get the business at a low enough multiple to justify the low growth and the low margin for error, what are you gaining from the roll-up strategy? You're not going to get much if any multiple uplift because the business is inherently a low multiple profile to begin with, so you're basically just investing in growth through an inorganic strategy, which isn't inherently a "bad" thing but introduces integration and sourcing challenges that don't exist in quite the same way when you are investing in organic growth. And, to another poster's point, executing on a roll-up strategy requires significant resources that, if your firm doesn't already have experience doing, would be daunting.

Long story short, it seems like the fundamentals of the business simply aren't good and that is enough to want to kill the deal. The only way it would make sense to me is if you are able to acquire this business, and all the future ones, at a 20% unlevered cash flow yield, which seems unlikely given the competitive landscape you sort of described in your post.