fuck poorly integrated rollup sell-side mandates. all my homies HATE unintegrated rollups
It is a certain type of hell to try to sell a portco that is just the combination of like 10 different companies that haven't been properly integrated.
PE funds, if you want to snap up small add-ons for 5x and sell it for 15x times FOR THE LOVE OF GOD INTEGRATE THAT SHIT. SAME ERP SYSTEM. SAME HR SYSTEM. ONE EXECUTIVE MANAGEMENT TEAM AT THE TOP.
it's bad enough trying to get this data for book / model prep, but I can't even fathom how much the company will be destroyed by a buyer's due diligence
just another day in the mid market
Tell me you’re selling an audax portco without telling me you’re selling an audax portco
Is that why their returns are so good? Make the next buyer do the work? Haha
I mean the entire point of rollup strategies is capital arbitrage it has nothing to do with integration, that is your problem
there is zero justification for arbitrage if it is not integrated into a platform. why wouldn't the buyer just snap up small companies themselves?
So they can arbitrage between their lower cost of capital and higher returning assets
Cool. Now go tell that to the lenders and try to explain why all the EBITDA adjustments for one-time acquisition expenses are valid.
What are you arbitraging though, like size? Things that are bigger get higher multiples than SOTP?
I'm sure the beautiful deck you build will present it very nicely as a seamless consolidated company, it will draw massive interest from the next group looking to perpetuate the roll-up, due diligence will be hell on earth for every single party involved but still not entirely deter the high interest, despite learning all the shortcomings of the unintegrated business the next sponsor will make mediocre attempts to rectify while continuing to add via acquisition because that's where the value creation lies, the problem will be exacerbated for 4-7 years until they're ready to sell, and the cycle repeats. Somewhere there is a freshman in college who thinks finance is interesting that has no idea that in 5 years his life will be destroyed for 8 months.
As long as the industry or segment in which the roll-up is taking place remains in vogue, there will be someone willing to write a bigger check and try to get their chunk of return out of it. Once it becomes less of an arms race, valuation will be more informed by integration.
Most PE funds are run by former IB-spreadsheet jockies who have no understanding of how a company actually works day to day (things like ERP systems, HR systems, etc). Hence, they also don't understand the inefficiences and risks of having these systems wrong can pose. Hence, a refusal to invest funds into this sort of integration.
Well isn't that what you hire consultants for? To advise on the integration?
They just become another voice telling people what to do and theorizing about what would be best, on paper. They don't actually do anything o rintegrate anything.
Nice try consultant
As someone working on the buyside for a target like this, i know this feeling. Fuck this shit.
buyer diligence request: "can we get [insert basic data request here]"
seller (aka my clown ass): "ok BuT iT wonT bE Pro FoRma For AcquIsiTIoNs"
I can't tell you how many times we have been asked to proforma only for the data to simply not exist.
I always wonder what the PE owners of these types of firms actually do. Just lazy.
Must be the easiest job in the world.
F*ck these firms and f*ck management teams that can't even forecast their business properly. /rantover
PS. Any MS that comes my way from the above will be from LMM or MM PE chopshop people.
"I thought the bankers build the projections?"
It isn't the job of PE to integrate the businesses. That's what management is for. The problem is that sometimes the PE firm is so focused on cost-savings and doesn't understand the importance of integration that they don't give management the resources to integrate the business.
What additional resources are needed for integration? Lets take a ERP for example, outside of potentially losing data, I don't see a risk to forcing a new add on to the existing portcos system.
Don’t worry it’s just as fun on the PortCo team. Sponsor breathing down your neck to keep pace with deal flow. Half the acquired mgmt teams are incompetent and fight amongst each other. Hire a bunch of worthless consultants that never properly integrate deals or fix issues (don’t worry about those costs, everything is an add-back). No idea if my 401k is vesting properly and my paycheck gets messed up every other month but hey at I can sleep well at night knowing my sliver of equity will materialize in the next 24 months.
Curious, what's the equity work out to in this situation?
Sponsors will stop once buyers stop paying 15x+ for these POS platforms. Look at car washes, HVAC, landscaping, pest control, etc. It is a complete joke, although many platforms have been hit significantly by higher interest rates. Many needed to inject more equity to save their platforms from beaching covenants, although this isn't publicized. There is pretty little downside in these strategies, as long as you aren't an idiot or over-lever.
I have seen so many shitty platforms that make zero sense with almost no synergy. It is actually nuts to me that anyone buys these. It's like you bought a bunch of 3/10 companies, didn't improve anything, and just glued them together to end up with some kind of C-tier Voltron made of dogshit.
It's a big reason I am not really comfortable raising a fund to a degree. Feels like you are forced into these deals at a certain size because you HAVE to deploy even when there is nothing worth buying…
Feels like you would be better off being patient and waiting for something beautiful worth allocating into. But I get the dynamics, need to deploy and keep racking up fees.
Anytime a bank markets something on “scale” you know it’s gonna be brutal.
“Unique asset at scale!” just means the PE firm took a bunch of small crappy companies to look like one big crappy company and some idiot buys it based on the fact that it looks big on paper. Truly makes me question the sanity of many pe firms out there.
Audax and plenty of others have gotten rich by taking advantage of lazy people at MFs and other big funds who just want to deploy $$ quickly and only care about top line revenue and a bogus pro forma adjusted ebitda
Private equity is a game of hot potato.
Yeah but normies are the potato
Speaking of poorly integrated roll ups, I'm being recruited by a PortCo for what is essentially a Exit Readiness Support type role with a dual focus on helping craft the equity story for an exit 1-2 years down the line and acting as modelling / finance support to different BUs.
Funnily enough they did mention that only 70% of the company is on one ERP and data at times has been poor and no pro formaing. Theyve historically been very acquisitive and can probably expect another 3-5 acquisitions (albeit small) down the line for their buy and build / bolt-on strategy (however strong organic growth too). The acquisitions doo however have rationale and map across their BUs/sector focus segments.
Is this likely to be an interesting role with good experience for further roles at PortCo level? Aim is to be Head of Finance/FP&A down the line.
Don't have IB or PE experience but have strong modelling / strategic finance experience and enjoy building 3 statement models. Btw they said that due to the various entities having quite different businesses they don't expect to need a group 3 statement model but just consolidate whatever EBITDA level business plans the entities submit. Does that sound right? Would buyers not want a 3 statement model?
Edit some extra details ~1bn in rev, maybe 3-5bn in EV. Speciality niche manufacturing. Owned by a top UMM.
Buyers will most likely want an operating model P&L, net working capital, and capex. I suspect they're saying 3-FS isn't needed because consolidating the balance sheet will be a pain
When the acquisition occurs, the financial due diligence team will absolutely ream you though. They'll ask for support to try to come up with a pro forma consolidated P&L. They'll need a consolidated balance sheet to identify debt-like items for the purchase agreement and net working capital will need to be consolidated to set a NWC target
Thanks. I suppose if my job will focus on exit support I'd be spending 12-18 months preparing all of this. On a 80% WFH basis could be probably quite chill and good experience and set me up pretty well for future PE PortCo roles?
Tell me you work at a small-cap bucket without telling me you do
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