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Work Plan

The first part of this work plan discusses the tasks required to get committed financing while the second part relates to the tasks involved in each individual acquisition. Your Rollups Team is critical in helping your effort.

Part One: Hunting for Capital

A rollup strategy requires strong financial backing, lining up the right providers of capital will have a great impact on the success of the strategy as it unfolds. Any investor you contact will be looking for an offering memorandum which explains why they should commit capital to your strategy. This memorandum should contain detailed information regarding the existing platform, management team, strategy, industry and its competitive dynamics and valuation analysis for typical acquisition targets. The memorandum should include the following sections:

  • Executive Summary
    • Platform Overview
    • Rollup Strategy and Opportunity
    • Requested Financing
  • Investment Highlights

    Describe the advantages of the company and benefits of investing in the deal. Highlights may include:
    • Competitive Position of Platform's Products or Services
    • Market Share and Customer Base
    • Rollup Opportunity - Fragmented Market, Low Valuations
    • Growth Opportunities
    • Experienced Management Team
    • Manufacturing
    • Barriers to Entry
  • Business Description

    Much of this section should validate and expand on the Investment Highlights
    • Introduction
    • Business Strategy
    • Marketing and Customers
    • Competition
      • Major Competitors
      • Market Share Data
    • Facilities and Equipment
      • Facilities and Equipment
      • Management Information Systems
    • Employees and Organization
      • Ownership
      • Management
      • Employees
  • Acquisition Opportunities

    This section should demonstrate that the industry is ripe for a rollup strategy
    • Competitive Landscape of Industry
    • Market Shares
    • Valuation Analysis
    • Precedent Transactions
  • Financial Overview
    • General Platform Overview
    • Revenue Analysis
    • Operating Expenses
    • Capital Expenditures
    • Balance Sheet

Be sure to research the investment criteria and experience of the equity sponsors that you plan to contact.

Obtaining the backing of a sponsor is an arduous process because the sponsor accepts the most risk for buying into the idea. While most sponsors see hundreds of investment ideas each year, there is a lot of capital out there looking for good investment opportunities.

After receiving committed capital from an equity sponsor, you have the capital to search for acquisition opportunities. It is probably unnecessary to arrange debt financing until the first acquisition opportunity has been signed up. Contacting debt providers will likely be handled by the sponsor due to their financial experience and contacts in the financial community. Lenders will expect to receive an information memorandum which expands on the offering memorandum by including information on the acquisition target.

Part Two: Acquisition Work Plan

The following are examples of the issues that management and the rollup team should analyze when trying to consummate each acquisition.

Industry Analysis

The rollup team should evaluate both the short- and long-term market potential for the combined company, including competitive pricing issues. This entails an analysis of the industry and competition, forecasted demand for the combined company's services, and a review of its potential customers. This analysis should be integrated into the revenue section of the financial model which is included in the information memorandum.

Suppliers

If the target offers some different products or services than the platform, it will be necessary to assess the future availability of supplies required for those products and pricing trends. If a substantial amount of leverage is being used to make the acquisition, it is important to assess the probability of suppliers extending credit to the new leveraged company. The conclusions from this research should be integrated into the income statement as well as the balance sheet ratios of financial model.

Facilities and Equipment

The rollup team should evaluate the facilities and equipment of the target in order to determine what capital expenditures will be required following the acquisition. The conclusions from this research should be reflected in the capital expenditure section of the financial model.

Financial Modeling

In order to determine the amount and types of capital required for each acquisition, it is necessary to create a detailed financial model. This model will project the revenues, earnings and cash flows of the combined company and will account for any savings which are expected from folding the acquisition target into the platform's operations. The model should include a detailed income statement, balance sheet, cash flow statement, valuation, and set of assumptions. Also, any changes to the cost structure resulting from headcount reductions, increased purchasing power, access to new markets, etc. should be included and explained. The financial model will assist in evaluating the following issues:

Acquisition Viability

The model will help analyze the new company's prospects for raising and/or generating enough capital to properly invest in plant and equipment, service any debt, and provide a market rate of return to any equity that may be needed to finance the acquisition.

Fair Market Value

While valuation analysis will guide you in determining a fair price for the Target, the financial model will show if the acquisition makes financial sense. The model will show the effects of different capital structures, how much debt is prudent to finance the transaction and whether the acquisition is accretive under different operating scenarios.

Productivity Improvements and Cost Reductions

The rollup team should evaluate whether productivity improvements and/or cost reductions will be required to successfully operate the new company. If these changes are necessary, the rollup team should evaluate the potential areas where they can be attained, and their impact on the new company.

Acquisition Financing

The rollup team should determine the structure of financing that will be required to support an acquisition at any given price, and the ability of the new company to meet these financial obligations in the future. Having a solid financial model will be imperative to accomplishing this. This analysis should evaluate what types of financing will be available to the platform and the price and terms of each type of capital.

Preliminary Valuation of the Target

The foremost question in the minds of all parties involved will be how much should be paid for the acquisition. Before presenting a letter of intent to acquire the target, valuation analysis must be done. There are many ways to value a company, and a number of methods should be used to determine the purchase price, including:

  • Public company comparable valuation
  • Comparable transaction valuation
  • Discounted cash flow valuation
  • Financial buyer valuation

Submission of an Indication of Interest

If the platform chooses to proceed, the rollup team should prepare and submit an indication of interest to the Board of Directors or owner of the target. If the target is a private company, the owner will evaluate and negotiate the terms of the acquisition. If the target is a public company, the bid will go to the Board of Director's whose fiduciary responsibility to the shareholders is to receive the best deal possible. Upon receipt of an unsolicited bid, they have the option of soliciting competing bids.

Negotiation of the Letter of Intent

If an indication of interest has been submitted and the parties wish to enter into a letter of intent, the rollup team should assist in negotiating the letter of intent. Major elements of the LOI include the proposed purchase price, environmental indemnities if appropriate and the terms and dates of the exclusivity period. Following a signed LOI, the due diligence process will begin.

Raising Financing

Most rollup strategies have obtained committed equity and debt capital before entering into an LOI to acquire a company.

Due Diligence

All parties interested in providing capital to the acquisition transaction will perform due diligence. The scope of the diligence will involve many aspects of the target's operations, including:

  • A financial audit
  • Validating clients and markets for the target's products
  • Legal diligence, such as contracts, by-laws, incorporation documents, etc.
  • Environmental liabilities

Definitive Purchase Agreement

The rollup team should assist management in negotiating the various contracts which establish the terms of the acquisition. This includes:

  • The definitive purchase agreement
  • Employment agreements with key managers at the target whose continued involvement is desired

Coordination

Because there are many players in each acquisition of a rollup strategy, it is important to have a leader who can orchestrate the financial institutions, partners or investors, valuation firms, accountants, legal counsels to the lenders, partners and investors, and any other professional advisers who may be required for the transaction. This is often the Equity Sponsor. Management's focus should not be diverted from running its business and the strategic considerations of the acquisition effort.