10 Businesses to "Rollup"
A rollup is a private equity strategy. The. private equity firm (or any large investor) buys a bunch of companies in the same industry. They are "rolled up" into a bigger company.
Because the companies they buy are small, they can buy them for a cheap multiple, like two or three times earnings.
But when the rollup is big (let's say they bought 20 companies) then the multiple goes higher, 10-15 times earnings. So they can sell at the higher multiple even if they didn't do anything to grow the companies.
Example: You buy 10 laundromats. Each laundromat makes $100,000 in earnings so you buy each one for $300,000. When you buy 10, you've spent $3,000,000 for all of them and now you are earning $1,000,000. You can immediately sell (in an ideal world) the combined company for $10,000,000 because the multiple goes up. So you make a profit of $7,000,000. It's a very reliable strategy.
But it gets even better. If you buy 10 laundromats you can increase profits by getting bulk deals on washing machines, detergent, etc and you can also get more profits by combining all accounting, paperwork, etc.
Here are industries that are good for rollups. They have to be very simple to run (not personality-driven but familiar businesses that have a standard way of operating) and ideally they should be largely recession independent.
If you are building a business and want to sell it, see if there are rollups in your industry.
In 1998, I sold my web services business to a rollup. By the way, that was a horrible industry to roll up because income wasn't steady and reliable.
And in 2004 I helped sell a mental health hospital to a rollup that's public: United Health Services.
Even in Covid the laundromats stayed open.
2. Parking Lots
Very simple to run.
A hospital is basically a building with a bunch of beds and staff to manage the beds. The staff are medical professionals. But you grow a hospital by growing the number of beds. Each bed is valued, depending on the services the hospital offers, at about $200 per night per bed.
Hospitals get a lot of synergies to increase profits. You can share doctors across multiple hospitals, back-end insurance work, etc plus the bigger the hospital system the better the brand, increasing customers.
4. Small e-commerce businesses
There are a lot of small, mom-and-pop e-commerce businesses that make between $100,000-$200,000 in earnings. These are always fertile rollups.
I believe the public company, Demand Media (bought by a private equity firm I think) was an ecommerce rollup.
You can find small ecommerce businesses to buy on flippa.com or empireflippers.com
5. KDP businesses
I described this type of business in a prior note.
6. Small banks
When small banks become bigger banks they get more access to capital so can offer more services and do more investing to increase profits.
7. Self-storage businesses
People are always moving, up or down, and need places to store their stuff. Again, lots of back-end synergies.
8. Franchises of mature fast food businesses
I don't know this for sure but I see some investors buying up apps on the sites I mentioned above.