Tag Archive: private equity

  1. Roll-Ups: Lessons for Private Equity

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    Core Catalysts works with Private Equity (PE) firms across a broad range of types of engagement, from strategy to due diligence, through to integration planning and operational improvement. Recently we have worked closely with multiple firms on their strategies for industry roll-ups. From this, we have distilled several lessons we thought it would be worthwhile to share.

    Lesson 1: Industry fragmentation is your friend.

    Roll-ups work best in heavily fragmented industries: the fewer local, regional, or nationally dominant players, the better.

    The first reason for this is simple: the more businesses there are in an industry, the more acquisition targets there are!

    A less obvious reason is that acquiring “mom-and-pop” businesses can be far easier (and cheaper) than targeting even mid-sized industry players and is also less likely to lead to inflated valuations.

    Focusing on mom-and-pops also capitalizes on one of the key challenges these kinds of businesses face: succession. The most stressful part of every “mom-and-pop business owners’ journey is achieving a successful exit, in particular if family members are not interested in carrying it on. PE firms pursuing roll-up strategies can make attractive offers that guarantee a successful exit while also ensuring the businesses that have been built will carry on and prosper.

    Equally, once the roll-up has achieved some scale, it gets even easier to convince other sellers they are better off joining you than remaining stand-alone. This is only possible if there are no or few large players waiting in the wings to compete for deals.

    Lesson 2: Boring and predictable is good.

    Funeral services, car washes, waste management, and HVAC repair are all examples of boring and predictable industries that have proven lucrative for PE roll-ups.

    There are multiple reasons why boring and predictable businesses work well for roll-ups. These include:

    • They are easy to understand.
    • They are easy to value.
    • There is less competition for deal flow.
    • They are simpler to integrate.

    Put simply:

    • Stable, reoccurring revenue is like catnip to PE firms. These businesses are easier to model and lenders can be made to feel comfortable with proposed levels of leverage, making financing easier.
    • The investment case for a roll-up often includes achieving meaningful economies of scale (such as increased purchasing power, greater brand recognition, lower capital costs, and more effective advertising): simple businesses are easier to merge and integrate, making these “synergies” that much easier to achieve.

    Bottom line: boring industries can deliver outstanding ROI.

    Lesson 3: Having a great platform company really helps.

    A platform company is the initial acquisition or “core company” that acts as the starting point for other roll-up acquisitions in the same industry.

    Merging and integrating acquired companies is a lot easier when you have a high-quality platform company.

    Why is this?

    Well firstly, a high-quality platform company is a great educator: you quickly learn what works and doesn’t work within your original roll-up strategy and can hone and refine your entire approach (from target list to due diligence approach, all the way through to integration strategies and synergy targets).

    More importantly, a great platform company gives you access to high-quality management and deep industry and operational experience, expertise, and know-how that can be leveraged to complement and enable your ongoing roll-up game plan.

    Quality platform companies also have good systems, processes, and procedures that can be implemented, duplicated, or modified in acquired companies. Having a proven, replicable, operational blueprint and playbook is frequently an asset during the execution of roll-up strategies.

    In summary: high-quality platform companies can lead to a proven operational formula that can be applied to acquired companies during integration.

    Lesson 4: Don’t be too aggressive in your roll-ups.

    Speed and driving (necessary) change are important in roll-ups, but too much change, too quickly, can be bad.

    First, roll-up strategies must factor in people, and the fact that different companies (that you are trying to merge or drive synergies between) have different cultures and personalities.

    Equally, change and uncertainty can paralyze organizations.

    As mentioned previously, good roll-ups have a sound operational formula that can be repeated over and over during integration.

    This formula should include robust communication strategies and an implementation plan that adopts a reasonable pace and cadence that is sensitive to people and change factors.

    Practically, what this means is that initially, the roll-up plan should focus purely on rolling up financials into one entity (or achieving an effective enterprise level data view) while operationally keeping the businesses running separately and largely the same as they were pre-deal.

    Then, gradually, back-office functions can be harmonized, integrated, and/or consolidated as applicable, focusing on delivering the most bang for the buck.

    Only once this is done should front-office integrations (such as cross-training sales teams, centralizing company-wide branding, etc.) be considered.

    Avoid the pitfalls:

    • Doing it all at once will most likely not work out as planned, and could result in disgruntled staff, key employees quitting, and revenues falling far short of plan (endangering debt service).
    • Think long-term (and don’t be greedy): loyal customers will sense that something is amiss if prices are increased too quickly and too much, new add-on products, services, and upgrades are suddenly aggressively marketed, or if service levels and availability are decreased significantly from what they’ve been used to.

    In roll-ups, there are many sure-fire ways to damage and destroy the very brand equity and customer loyalty that made these businesses good acquisitions in the first place. The consolidated company should be a vast improvement for each individual company involved, and for the key stakeholders each company relies upon.

    Making sure that any changes being implemented are actually improvements (versus taking advantage of potential reductions in competition), implementing them gradually, and focusing on maintaining and building employee and customer trust are all critical in roll-ups.

    Lesson 5: If you don’t love integration, roll-ups are not for you.

    PE firms are meant to deliver superior financial returns to their investors. PE firms are typically well-versed in all aspects of financial engineering and bring hawk-like focus to important considerations like cash flow and capital allocation.

    However, success in roll-ups is often less about finance and more about operations. Folding companies under one umbrella (back-office, front-office, or both) effectively demands that the acquirer become a merger integration specialist. They need to be willing to roll-up their sleeves, get involved in the operational fundamentals, and drive the day-to-day blocking and tackling and front-line work required to drive change and deliver effective integration.

    Even with good company level management in place, time and time again it has been proven that a strong appetite for operational challenges and a passion for integration (and doing integration right) are critical success factors for roll-ups.

    If you don’t have the right integration resources in-house, make sure you contract with partners who can bring the experience, expertise, and knowledge needed.


    • Lesson 1: Industry fragmentation is your friend.
    • Lesson 2: Boring and predictable is good.
    • Lesson 3: Having a great platform company really helps.
    • Lesson 4: Don’t be too aggressive in your roll-ups.
    • Lesson 5: If you don’t love integration, roll-ups are not for you.

    If you need help with your roll-up strategy, or would like to learn more, please reach out!

    Mark Jacobs, Client Service and Delivery

  2. Working With Private Equity

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    Reading an article about Kansas based Payless Shoes this weekend, I was reminded of a presentation I recently gave to local financial executives about what they needed to know when working with Private Equity (PE) firms, challenging perceptions versus reality.  

    The article portrayed Private Equity firms in a very negative light, telling a story of how, in one two-year period, Payless’s PE owners were able to deliver $249 million of EBITDA, $352 million in one-time dividends, and made $94 million in interest payments, but that this (and not the rapidly changing retail landscape, international trade factors, and management missteps) led to multiple bankruptcies and the liquidation of all its US stores in 2019, putting 16,000 people out of work. After reading it, I was left with this question: Was this perspective fair and reasonable? 

    Typical reasons for wanting to work with PE firms include getting access to outside capital and other resources, monetizing an owner’s investment in their business, and allowing owners to achieve a successful business exit. So, companies with capable and experienced management teams, solid and consistent cash flow, limited customer concentration and other risks, solid growth prospects, and a willingness to be sold or recapitalized after a period of PE ownership are a good fit. Other reasons for wanting to work with PE, or companies without these characteristics, are generally the companies that do not prosper under PE ownership, and typically these issues would have influenced performance with or without Private Equity investment, and existed long before any acquisition. 

    My presentation focused on the fact that Private Equity is neither good nor bad. I made the argument that the issue most business people have with Private Equity is that they didn’t really understand it. 

    I went on to cover a few key points, which I have summarized below: 

    • Private Equity firms seek excellent investment returns 

     …and excellent investment returns are not always equal to making a company more valuable in the long term. I made no judgement about this, but I did make sure the audience accepted that PE firms are in business to make money for their investors. 

    • ‘Cash is King’ 

    Everyone says that they understand this, but after walking the audience through some PE acquisition, investment, and cash flow examples, the importance of thinking through business decisions in terms of cash required and returns on cash invested (how PE firms think) was emphasized. 

    • Embrace LBO (Leveraged Buy Out) Economics 

     The other takeaways from the examples covered were equally clear for all in attendance: Expect any PE owner to manage working capital aggressively, be disciplined with capital expenditures, and to ‘sweat’ the balance sheet HARD. 

     Knowing this, the key point I made was that Private Equity firms, and experiences with them, are entirely predictable, and can go one of two ways: if you understand how they work and know what to expect from the get-go, it’s far easier to get along with them, but if you are unprepared, there will be a steep learning curve and you will likely always be “behind-the-8-ball”. 

    The presentation concluded with: 

    The six things Private Equity Board members like to do:  

    1. Communicate Timelines and Milestones (as opposed to visions and expectations) 
    2. Engage Directly with Management (as opposed to engaging only with the CEO) 
    3. Seek Information Updates as Needed (versus only relying on regular, scheduled reports) 
    4. Exercise a bottom-up scrutiny of initiatives (versus only approving top-down activities) 
    5. Support management in the “how” (not only in the “what”) 
    6. Be present, active thought leaders, even if not asked (as opposed to only communicating incentives and consequences) 

    Common occurrences in relationships between Private Equity and PE owned businesses:  

    1. Founders and Key Employees: the PE firm will want to keep them around after the sale, with “earn outs” common 
    2. Leadership Turnover: some of the Management team will not like the changes, and will quit, leave, or be fired  
    3. Debt: PE firms use debt to maximize their cash returns. This leverage may feel uncomfortable 
    4. No Sacred Cows: things you may have always considered important might not look that way to analytical PE outsiders. Everything is on the table for analysis 
    5. Assets will be made to ‘sweat’PE firms manage balance sheets and margins aggressively as they focus on cash-flow 

     The four secrets for success with PE Firms: 

    1. Be ‘Self-Sufficient’ within the first 90 days 
    2. There is no ‘Honeymoon Period’ (and the importance of a ‘fast-start’) 
    3. The importance of planning (obsessively) 
    4. Stick to (and deliver) the plans 

     At Core Catalysts we have significant experience advising Private Equity firms and helping companies work with them, from exploring Private Equity investment to performing (and preparing for) financial and operational due diligence, and from pre-acquisition planning to post-acquisition implementation and management. If you would like to find out more, please give us a call!  

    Mark Jacobs, Client Service & Delivery