Hi All,
I recently left my PE gig to try something more entrepreneurial. I built a thesis around rolling up certain assets in the healthcare industry that trade at low multiples (3-5x) which can be leveraged easily and can trade at up 10x once they generate large enough cashflows.
I managed to raise enough capital to execute the strategy and currently have one asset locked up and ready to get purchased, but I’m starting to get cold feet on the thesis as I am having a harder time than expected finding additional acquisitions. I know it’s highly fragmented and that there is a large amount of these assets, but I’m starting to find out that most are not as good as I thought they would be (i.e. not generating much EBITDA) so I’m not sure how many are valid targets. I'm slightly afraid I might end up getting stuck with only a few assets generating a few 100k in EBITDA and not be able to build to my exit strategy.
I’m looking for someone that has experience in rolling up small assets (100-500k EBITDA) to discuss what I’m doing and bounce some ideas – basically get a rational opinion on if what I’m doing is viable. I’m sure you can understand why I can’t really discuss my cold feet with my team or my stakeholders.
Thanks all,
Do you have operators in your team?
For me the biggest amber flag is that you say you find out that some assets are worse than you thought. We rolled up a bunch of 1m EBITDA companies who we knew extremely well and still the re-rating and synergies where worse than we expected (and additional central costs higher than expected). If only one of the assets would have turned out to be a crappy business (concentration, low margin contracts etc.) we would have lost money.
I would only roll up small businesses if you know the businesses inside out and really know what the synergies are. I mean who has to leave, what systems will be replaced. Down to a USD amount.
If you have a platform that has the product and you buy channel its a different story.
EDIT: it wasn't in healthcare but tech enabled / bus services / IT services
The owners are staying on board when we tuck in, we bid around 3.5x and have them roll 1x into the top co as preferred shares and they need to sign agreements to stay on board and manage their business for at least 2 years or face penalties on their rollover shares.
We are allowed to leverage up to 3x with our current debt agreement.. so we can basically buy these businesses without equity. Our investors are only debt for now, until we go after larger targets (1-3M EBITDA), but these trade at higher multiples (4-5x) so ideally we want to start by scrapping up 1-3M EBITDA on our own from these smaller shops before.
Synergies are mostly back office. Its in the service industry so we cant get any economies of scales on COGS. This sounds kinda shit, but I know some companies have done this successfully in the Dental space, which is mostly service also.
EDIT: When I said the assets are worse than I thought, I didnt mean the ones we are buying. I mean the market in general (i.e. we think there are 450 shops in our area and figured about 20% could be strong targets, but turns out it might be more like 5-10%, which may not necessarily be for sale)
Some insights I got recently talking to a mid-market M&A banker friend about roll-up's in fragmented industries like healthcare and mid-market retail
+1 SB - this is really good insight. Your second point is very valid. I have about 3-4 deals in play and they always seem to be on the edge of being signed, but they all seem to be waiting for us to close our first deal... its slowly driving me insane.
I've started contacting some of the larger players in hopes of securing a larger asset (a mothership), even if it means paying a bit more (5-6x vs 3-4x). The good news is that we have started building credibility in the market since we have bid vs some of these bigger players. We are basically pitching to these larger players that if we invest in them, we bring our floating deals all at the same time, which to me seems like some solid value add.
EDIT: Forgot to mention that I dont have the capital to acquire one of these larger players yet, but the plan is to get the loi signed and figure out the capital after.. hustle is real.
I would echo these thoughts.
Main thing for a roll-up strategy is to start with a platform that you then add the smaller pieces onto.
This way, you'll actually get synergies (consolidating suppliers, reduce duplicate management/back office positions), and the value lift is much more tangible (platform trades at 6-10x and you're buying at 3-5x). Furthermore, it's easier to finance the bigger group, and you can often get away with financing your bolt-ons 100% if your original platform is conservatively financed from the get go.
Bingo, you get instant value creation as well from consolidating into the platform because of how each additional dollar gets bought at a lower multiple, then gets re-rated as part of the platform. So even if you don't get huge earnings growth, you already have some returns in the bag.
It was really a coincidence to be honest. I was not particularly interested in the sector and was actually working at a tech focused PE shop.
I got very interested in learning about the sector after seeing a business up for sale generating roughly 200k EBITDA for sale for 500k. I figured, there would probably more of these opportunities and started reading up about the industry. I then spoke to a more senior guy at a healthcare PE shop about my idea and he decided he wanted to partner with me on it.. and ive been cold calling businesses ever since (roughly 4months so far).
I encourage trying it. Its stressful as fuck and I had no idea what I was doing at first, but im starting to get the hang of cold calling entrepreneurs and convincing them to meet with me.
@takenotes08" Thanks for your PM, I'm sorry to be a week late here, life has been busy.
I'm tight on time but from glancing through the thread, I think some of the later comments really unpacked the primary thing I could offer you.
If you aren't going into this with what I call a 'stem' asset lined up as the basis for your platform, you're doing it wrong. (Think of what a flower looks like.) Things may go well enough, but you've added an unnecessary burden on yourself.
You want a bigger player that you're forced to pay a higher multiple for simply due to where in the cap scale it sits. If you buy that 'stem' at (illustratively) 6x knowing that the space is highly fragmented and littered with businesses at 25-50% the EBITDA that you can scoop up at 4x, you can then go acquire the 'petals' and win on two counts.
One, those same dollars in EBITDA immediately enjoy the multiple of the 'stem' business. Two, you're often actually able to recognize some (typically quite moderate, don't model too bullishly here) cost synergies.
I don't know the healthcare space at all so I happily defer to everyone speaking with way more knowledge than me on billing cycles and such shit, but regardless of industry specifics, your cost synergies are invariably going to be lower than you think they'll be.
Either way, something as simple as 10% margin lift when paired with multiple expansion can create some really beautiful outcomes.
This gets really juicy if you're smart (or connected) and put a credit facility on the 'stem' business that allows you to fully finance your 'petal' acquisitions. This is easier done the farther apart in size your 'stem' and 'petal' businesses are.
Illustratively, one of the first real winners I had doing deals independently was a business with over $100m in revenue. It was one of two leaders in a fairly fragmented space (top three players were 20% of the industry). It had >10 acquisitions in either LOI or NDA on its own before I got to it. I was shocked to see that the multiples they were paying were literally half or less of their own multiple. Sure, it was all peanuts in terms of size, but wow, if all you had to do was go find two dozen tiny guys with $10-20m in revenue and bolt them on, that's easy. Paired with the 'stem' business's organic CAGR >25%, it was an easily financed deal (both the leverage for the 'stem' and an unfunded revolver). That one is currently printing money and I'm very fortunate for how that on my track record has helped my career unfold.