As Seen in CFO Studio Magazine Q4 2016 Issue
Boosting the ROI from a roll-up
Expect more roll-ups as baby boomer entrepreneurs decide to sell.
Roll-ups involve the acquisition of several businesses over a short period of time. A one-stop shop can be created if the acquired businesses are complementary. Geographic coverage can be accomplished if the acquired businesses are competitors. Either way, a roll-up is an ambitious, capital-driven path to growth. The corporate CFO is typically expected to lead due diligence, conduct valuations, and find cash. It is equally important for the CFO to remain engaged after the deal(s) are signed.
Imagine what is involved when multiple businesses are acquired quickly. In addition to the strain on capital, integration involves people with divergent philosophies, companies with varying cost structures, and customers with different expectations. Former business owners/entrepreneurs won’t respond well to micro-management or nagging. Entrepreneurs choose to participate in a roll-up in large part because they crave strategic discussions, effective global marketing, competent financial management, and rewarding peer relationships.
If you are the corporate CFO during a roll-up…
Once deals are made, the priority is the generation of profit from the combination of the acquired businesses. Integrating disparate businesses takes time (therefore money), so most corporations make only minor adjustments during the first year. The corporate CEO uses the first year to evaluate the leadership of purchased companies. Frankly, the CEO can quickly feel like the foster parent of squabbling children who all crave more attention.
The corporate CFO is asked to standardize and centralize accounting to look for possible cost efficiencies. In my experience, the first year is more productive when the CFO delegates documentation and analysis of past and current performance to the Controller. That way, the CEO, the CMO, and the CFO can all focus on creating the future. Together, they will consider important questions about what kind of customers will value a one-stop shop, which capabilities of the individual companies can be leveraged, and how pricing should be approached for bundled services.
In a publicly traded corporation, there will undoubtedly be pressure from shareholders and Board members. It is less likely that the corporation will make questionable decisions when the CEO, CFO, and CMO confer and involve the entrepreneurial leaders of the acquired companies. For example, it could be tempting for one executive to conclude that everyone should back off of marketing and sales to focus on the top few customers to squeeze out as much short-term profit/cash as possible for the corporation. With three future-focused corporate executives, the risks associated with taking a shortsighted approach like that would at least be discussed. Forcing the entrepreneurial leaders of acquired businesses to live with bad decisions erodes credibility, trust, communication, and profit.
Leaders of acquired businesses are often susceptible to “seller’s remorse.” Their financial livelihood and professional reputations ride on their decisions to sell. Being part of a corporation with lousy marketing, inconsistent rules, and/or hidden agendas can lead a former president to just focus on his/her earn-out. They can become reluctant to accept more responsibility. And they can become paranoid that valuations impacting earn-outs will not be computed fairly. That reaction can be prevented if the CFO provides transparency, consistency, logic, and fairness.