What is a Roll-Up
A roll up is the consolidation of several small businesses under one roof, usually through a publicly held holding company. The concept works extremely well with mom and pop business owners. The roll-up strategy can be very successful if you have capable management steering the ship and an industry where the synergies for consolidation make sense. Roll-ups provide greater efficiencies such as merging back office accounting, marketing and purchasing. The roll-up also provides an exit strategy for mom and pop owners who are seeking to retire in the not to distant future. Being associated with a larger public company that is national or international in scope also adds credibility and transparency to current and future customers. Typically, a the holding company pays for an acquisition with a combination of stock and cash, and usually puts limits on how quickly the seller can liquidate the shares.
Early Roll-Ups
The earliest roll-ups were funeral homes such as SCI, and Loewen Group Inc., Vancouver, British Columbia; and trash companies Waste Management Inc. and Browning-Ferris Industries Inc., both now in Houston. They each acquired hundreds of mom-and-pop companies beginning in the 1970s and became famous growth stocks. Both industries grew exponentially until fundamental problems caused a hit in the 1990s — fewer than expected deaths along with greater use of cremation, and a glut of dump space, respectively. However it is important to note that the roll-up concept worked for these industries and their stock flourished for almost 20 years before a downturn.
Indeed, fortunes have been made in the roll-up game. US Filter Corp. had $17 million in sales in 1990. Nine years, 260 acquisitions and a big share-price run-up later, the company sold for $6.2 billion or $31.50 a share.
Both Waste Management and Service Corp. International gave investors hefty gains before cratering. And today, shares of Quanta and MasTec, two big consolidators that install telecommunications cables, have continued to be strong despite the taint of the sector. Among the lucky shareholders in each of those companies were former small-business owners who sold their companies for stock.
Roll-ups can be a benefit to small-businesses in some industries, as companies competing against each other for acquisitions have boosted the value of their businesses. United Rentals Inc., based in Greenwich, Conn., has paid cash to buy hundreds of small-equipment rental companies in the past few years — businesses that had few buyers lining up before the consolidator’s appearance. Contractors of mechanical equipment, who could have expected to get no more than book value for their businesses a few years ago, now sell for several times that amount in roll-up shares and cash, explains Michael Price, founder and president of First Mergers Group in Potomac Falls, Va.
But whether a small-business owner fares well when he takes stock in a public company is a big gamble. It is not uncommon for a roll-up company to soar in the public market for several years and then, when they company pulls back on its aggressive acquisition strategy, see its stock plunge.

Don’t Ignore the Business
Public companies that have a roll-up strategy can get caught up in the frenzy of deal making. It is easy to postpone the basics of instituting back office efficiencies, cutting costs and marketing when you on “on a roll” of consolidating an industry. Companies must remember the reasons they embarked on this type of a strategy in the first place. To create a large company that would be more profitable than a bunch of little ones.
Integration always posses a problem for the acquirer. Trying to centralize certain functions such as purchasing and inventory can be a daunting task. Acquirers are best served when they have management running the company on a daily basis and a separate team that is strictly focused on analyzing and integrating new acquisitions into the system.

It isn’t easy. Waste Management, 30 years into the roll-up game, is still trying to centralize its purchasing.

Cashing Out
If you are a mom and pop business owner considering being acquired by a public company with a roll-up strategy you need to examine your options. If you are in an industry that has few options for selling your business you will receive far more from the public company than from a private sale. Many would advise you to “take the cash” but the smart bet is to take a combination of both cash and stock, especially if you are one of the first acquisitions in the roll-up strategy. I would rather take stock in company that has just initiated its roll-up strategy than one that has been doing it for 10 years. There is greater risk on the front end but it more than justifies the reward on the back end.

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