Modeling roll up

When modeling a roll-up strategy with a large number of acquisitions, especially when the platform is relatively small, the key is to strike a balance between granularity and practicality. Based on the most helpful WSO content, here’s a structured approach to model this effectively:

1. Separate Organic vs. Acquired Growth

• Revenue Segmentation: Create separate revenue lines for organic growth and acquired growth. This allows you to track how much of the margin improvement or growth is driven by acquisitions versus the core business.
• Margin Analysis: Similarly, maintain separate margin profiles for organic and acquired businesses. This will help you analyze the impact of synergies and integration over time.

2. Acquisition Assumptions

• Acquisition Schedule: Build a timeline for the acquisitions (e.g., number of acquisitions per year, size of each acquisition, and timing of integration).
• Revenue and Margin Profiles: Assume an average revenue and margin profile for the acquired businesses. For example, if you’re acquiring facilities with $10M in revenue and 10% margins, reflect this in your model.
• Acquisition Costs: Treat acquisition costs like CAPEX. Include the purchase price, transaction costs, and any financing costs associated with the acquisitions.

3. Integration Costs and Synergies

• Overhead Reduction: Model a gradual reduction in overhead for each acquisition. For instance, assume a percentage of overhead is eliminated each year post-acquisition as integration progresses.
• Synergies: Reflect synergies such as supplier consolidation, back-office efficiencies, or economies of scale. These can be modeled as a percentage margin lift over time.

4. Financing the Roll-Up

• Debt vs. Equity: Decide how the acquisitions will be financed. If using debt, model the impact on interest expense and leverage ratios. If using equity, reflect dilution or additional sponsor contributions.
• Acquisition Facility: Consider including an acquisition facility in your model, where you draw down funds as acquisitions occur, subject to covenant checks.

5. Granularity vs. Simplicity

• Group Acquisitions: Instead of modeling all 30+ acquisitions individually, group them into cohorts (e.g., acquisitions per quarter or year). This simplifies the model while still capturing the overall impact.
• Integration Timeline: Assume a standard integration timeline for each cohort (e.g., 2-3 years for full integration).

6. Scenario Analysis

• Success Rates: Not all acquisitions may close or integrate successfully. Include a probability factor for acquisitions to account for deal failures or underperformance.
• Market Dynamics: Model scenarios where acquisition targets are fewer or more expensive than anticipated.

7. Key Outputs

• IRR and ROI: Calculate the IRR and ROI for the roll-up strategy, both on a standalone basis for acquisitions and for the combined platform.
• Margin Evolution: Track how margins evolve over time, distinguishing between organic and acquired contributions.
• Debt Metrics: Monitor leverage ratios and interest coverage to ensure the roll-up remains financially sustainable.

By structuring your model this way, you’ll be able to reflect the complexities of a roll-up strategy while maintaining clarity on the key drivers of value creation.

Sources: Healthcare Rollup Strategy, Roll-up acquisition PE questions, DCF Modeling Course ~ Pre-training text.pdf, NEW Financial Modeling Training Courses, https://www.wallstreetoasis.com/forum/investment-banking/modelling-has-to-be-the-biggest-misnomer-in-this-industry?customgpt=1