Roll-Up MergerDefined with Formula & More

Written By:
Lisa Borga

What is a Roll-Up Merger?

A roll-up merger, also called a roll-up, is a process used by investors or private equity companies to buy several small companies, generally in the same market, and merge them.

Combining the smaller companies into a new larger company puts the business into a better position to take advantage of economies of scale.

Combining small companies can cut down on costs, such as sourcing and distribution as well.

Another advantage of the roll-up strategy is the ability it can give some companies to cross-sell.

This new company can then sell a larger variety of products, thus increasing their revenue and often customer loyalty as well.

A roll-up strategy also has the benefit of allowing companies to increase their value without having to carry out operational improvements.

How a Roll-up Merger Works

Consolidation tends to occur as market sectors mature, and roll-ups tend to occur as a part of this progression.

The larger companies that result from these roll-ups can offer more products and services to consumers than the smaller companies were able to.

They are also often able to expand their area of operation while benefiting from increased name recognition and economies of scale.

Additionally, since larger companies generally have a higher revenue multiple, the private equity firm that has merged them can typically sell it for a profit or carry out an initial public offering.

Once a roll-up merger occurs, the owners of the companies that will be merged are given cash and shares for their ownership in these companies.

At this point, the smaller companies are put in a holding company.

Beyond achieving lower marginal costs, companies that are part of a roll-up merger can find they have better name recognition, access to new markets, and more exposure.

Additionally, the new company may also find it easier to get access to industry experts.

Succeeding in a Roll-up Merger

Those investors interested in a roll-up merger will likely find it’s not so easy to do.

It’s often very complicated to take several different businesses with different infrastructure, customers, and cultures and successfully merge them.

Then if the companies are not merged properly, the new company may not have the expected benefits, such as economies of scale and increased profitability.

Successful roll-up mergers tend to have certain characteristics in common, such as:

• Buyers that can identify a market opportunity, evaluate the companies, and then merge them
• Occurring in a fragmented industry without a dominant company
• A consolidator with a proven plan they used to create value in the companies they acquire

Roll-Up Merger Scenarios

Large companies typically dominate the markets they are part of.

This is often due to the large variety of products they offer and their brand awareness, along with the economies of scale they’ve achieved.

Marketplaces that do not have a dominant company are considered fragmented.

It is in these fragmented markets that investors have the opportunity to use a roll-up merger to consolidate the small companies in the market.

This merger can make the new company more productive and profitable by eliminating inefficiencies.

A roll-up merger can also be successful when a marketplace has a single large company that is hard to compete with.

Several small companies in this market could then be combined in a roll-up merger to form a new large company that could compete with the current large company.