There are two ways to grow a company. Well there are more, but two main ways.
You can spend ten years building it one customer at a time, or you can build a platform and strategically acquire companies that already have customers, revenue, employees, infrastructure and cash flow.
The second approach is the roll-up strategy, and when it is executed correctly, it can dramatically accelerate both growth and the potential value of the company.
But there is an important distinction: a roll-up isn't simply a shopping spree.
The objective isn't to own more companies.
The objective is to create one better company that is worth more than the sum of the companies you bought.
That distinction is where sophisticated investors make their money.
The Basic Roll-Up Strategy
A traditional roll-up begins with a platform company.
The platform is the business that provides the management team, brand, technology, accounting, financing, sales infrastructure and corporate structure.
The company then acquires smaller businesses—often called bolt-ons or add-ons—within the same industry or a closely related market.
Imagine an investor acquires a company producing $2 million of EBITDA for 5x EBITDA, or $10 million.
The company then acquires four competitors, each producing $1 million of EBITDA, at 4x EBITDA.
The investor has acquired another $4 million of EBITDA for $16 million.
The combined company now produces approximately $6 million of EBITDA before synergies.
If the larger, professionally managed platform ultimately deserves an 8x multiple, that $6 million could represent approximately $48 million of enterprise value.
The difference isn't magic.
It comes from scale, operational improvement, reduced risk, growth and potentially multiple expansion.
That is the basic mathematics behind multiple arbitrage.
But investors should be careful abo
