Many business consolidation efforts built on a traditional “buy and build” roll-up strategy do not achieve their intended economic results. Additionally, traditional roll-up strategies transfer value creation into the hands of private equity or a large platform company, rather than vesting it with the participating companies.
What if there were a smarter and more equitable approach? The Partnership Roll Up™ (PRU™) is a customizable M&A strategy that minimizes risk and protects value among participants, mitigating typical roll-up stumbling blocks such as competing owner egos, disparate visions, a multiplicity of systems and processes, related party obligations, and inconsistent visions. The goal of this process is to avoid restructuring the airplane in flight while simultaneously attempting to take off and grow revenue and earnings. The Partnership Roll Up™ (PRU™) addresses all these issues.
The PRU™ starts with a single platform company and a consensus-minded owner in an industry that allows for geographic or service offering expansion. The strategy rests upon building a regional or national map with similar companies, or taking a strong core offering and adding new, ancillary services. This process is further enhanced when the parties know each other, whether from industry conferences, boards, or peer groups. A forcing function is also helpful. For example, consolidation in the supply chain or the customer marketplace will force a thought process that might not have been an acceptable alternative in the past. Ultimately, the key driver will be the ability to create critical mass, competitive differentiation, succession plans, and stronger teams – resulting in a larger organization with liquidity options that were not available to the individual SMB owner.
The platform company forms a new entity (“Newco”) in which all partner companies will have ownership, that initially is only a shell with a new business card. Partners will remain independent but will be committed to working together to align business processes and establish best practices with new KPIs and metrics. Shortly thereafter, the member board of directors will work together to chart the course toward a consolidation event. During this process, the member board will also evaluate new business opportunities or cost-saving efforts through Newco, funded by capital contributions of the partners. For example, utilizing a new business network with a national map in place, new opportunities may be available for Newco to pursue that previously were not an option for the individual entity, funded by a broader capital base through the many partner companies. The key to this process is making sure that all partners agree that the ultimate outcome is a tax-free merger into Newco, which will become the final operating entity while giving the owners more time to maximize their earnings before the future merger event.
The merger event is a well-thought-out transaction. All partners work together to develop a post-merger plan of integration, duplication elimination, function consolidation, and the establishment of new titles and responsibilities for owners. If done properly, the transition should be seamless to clients and customers. The accounting function is a good example of the evolution of an overhead function. Initially, all parties adopt a new chart of accounts and reporting format, resulting in great data for all partners to use for benchmarking and metrics. With the adoption of a single accounting system across all partners, each partner has its own accounting system on the day before the merger event, and each is a division of the merged system on the day after. Similar pre-merger alignment efforts take place throughout the partner companies in all functional areas: HR, IT, treasury, marketing, web, and so on. Post-merger, all eyes are focused on the roadmap to improved profitability and enhanced corporate value. Quickly, the profitability run rate of the newly merged entity will show improvement and thereafter liquidity options will be unveiled at levels of value that the individual partner owner could not achieve on its own. Available liquidity options include a sale, recapitalization, or distributions through continued private ownership.
In sum, the PRU™ turns the traditional roll-up game upside down and results in a significantly lower operational risk to a successful consolidation strategy – yielding enhanced revenue, improved earnings, increased valuation, and expanded liquidity options.