How to finance a combo rollup plus venture backable software biz
I have an idea for a rollup in a large, fragmented market that has steady but cyclical cash flows. This market is also undergoing a secular technology change where winners must undergo a certain type of bespoke digital transformation.
My idea is to roll up small players in the industry and create software that automates that bespoke digital transformation, which I have verified is possible. The rationale is that actually having companies to provide the software to creates an edge in software development, because it is hard to develop that software in a vacuum.
My question is, assuming this makes sense, how would you get this financed. My first thought is to finance the HoldCo/R&Dco with venture financing and each acquisition (plus M&A expenses and personnel) with traditional sponsor financing.
Ah, you're thinking like a true entrepreneur! Your idea of combining a roll-up strategy with a tech transformation is quite intriguing. Now, let's talk about financing this venture.
Based on the most helpful WSO content, here's how you might approach it:
Venture Financing for HoldCo/R&Dco: This could be a good way to fund the software development side of your business. Venture capitalists are typically interested in high-growth, high-risk ventures like tech startups. They could provide the necessary capital to develop your software, especially if you can demonstrate its potential to disrupt the market and deliver high returns.
Traditional Sponsor Financing for Acquisitions: This could work for financing the acquisitions of smaller players in the industry. Sponsors, such as private equity firms, are often interested in roll-up strategies as they can create value by consolidating a fragmented industry. They could provide the necessary capital for the acquisitions, as well as the M&A expenses and personnel.
Acquisition Facility: As mentioned in one of the WSO threads, you could agree on an "acquisition facility" with a bank as part of the original deal. You'd pay a commitment fee on it, but wouldn't draw on it until you identify suitable acquisitions. Once you want to pursue a roll-up acquisition, the bank will check that you're still okay on your covenants and that the acquisition makes sense (strategy, industry, size). Then you can draw on the acquisition facility.
Remember, the key to securing financing is to have a solid business plan that clearly outlines your strategy, the potential for returns, and how you plan to mitigate risks. Good luck, and don't forget to celebrate when you secure that first round of funding!
Sources: Roll-up acquisition PE questions, Turing down IB FT offer to run my startup?, Healthcare Rollup Strategy, Enterprise software investing
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we used customgpt.ai to build the models/ forum bot easily with and fed the model our top ranked content over the ~17yrs... sorry about the delay!
Hey thanks for the response, no apology needed, original comment was worded a bit poorly, appreciate you writing back. Cheers Patrick.
Interested as well. Helping out a friend with a Management Buyout + Rollup of an enterprise software / technology solutions company with some of the businesses it serves (similar to what you said, because the customers have more stable and dependable cash flows).
At this point, I've built up the pro-forma financial model assuming modest / easily achievable synergies and am starting to speak with SBA loan advisors to package up a deal before EOY (desperately want to avoid VC $ / dilution).
We are thinking of doing a HoldCo with the R&Dco and the acquisitions as legally separate LLCs majority owned by the HoldCo - owners we invest in will roll in as common to the respective NewCo LLCs and we will get participating preferred with a Liquidation Preference. Only key partners will get HoldCo equity (CEO / Me / Head of the Acquired Business division + Maybe key Equity sources).
Still up in the air on equity check size, but we are planning to get the initial nut mostly from the Management Team + friends and family. Happy to chat / see if any relevant overlap.
Hey, super interesting, lots to digest here. I think the difference is you have a management team and functioning HoldCo whereas mine would be brand new. So management buyout is off the table which is a bummer because that seems like a great idea if you can properly equitize yourself. And then for each acquisition, what kind of earnout will you do? Why would you not give some equity in the HoldCo to incentivize synergy or other “FullCo” objectives?
Tomorrow I plan to look into how constellation software works
Hi Teller - great questions. We are basing the deal structure on what I've seen at the LMM Services PE firm I worked at.
Generally, the structure was exactly as I outlined, but we'd also give PIUs (Performance Incentive Units) from the common equity pool (maybe as much as 12%) to incentivize managers of the acquired entities. This would come out of the equity for their acquired business because we want them to grow their areas / not worry as much about the broader business. At this end of the market, business owners / entrepreneurs don't really understand the intricacies of capital structure and wouldn't really know to demand HoldCo equity. Kind of sucky, but that's how the deals work for PE. Either way, they still make tons more money than they would have otherwise, so don't really understand what they are missing out on.
Have you tried yelling at Jefferies?
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