Roll Up or Buy and Build strategies are attractive to private equity firms because they enable rapid execution of an investment thesis as well as a way to build scale and achieve financial, operational and strategic synergies all in a relatively short period of time.

While the Roll Up or Buy and Build thesis is compelling, it must be executed thoughtfully in order to avoid a dangerous outcome full of risk and cultural combat. In this post I’ve identified many of the areas you should be focused on to make sure your buy and build strategy is executed successfully

Platform readiness checklist in advance of roll-up play:

Back Office Readiness for a Roll Up Strategy

GL Platform & Chart of Accounts

The platform company’s Chart of Accounts should be reviewed and scrubbed to ensure that not only is the COA for the base business correct, but that any revenue or expense categories contemplated in target acquisitions are created (by someone within the business to reduce 3rd party expenses)

The platform company’s GL system should be checked for ability to create new company codes or profit center IDs (by the internal team) and to mirror the COA for the original platform

Accounting Consolidation should be done within the system, not in excel.  Ideal state is to have BS/IS/CF all system generated (whereas many cash flow models are built outside of the accounting system)

Payroll & Benefits

Payroll should be integrated into the GL ASAP to minimize the admin requirements of making separate journal entries, especially in a business where intra-month labor visibility is desired. Benefits info/detail should also be fed directly to the GL. End state should be one payroll system with benefits data integrated feeding GL directly

Purchases

Bill.com or other payment technologies should be implemented to increase automation and improve visibility and controls into expenses (should have one system for this)

Blackline (financial automation)

Best-in-class accounting reconciliation software (inexpensive) that plays well with most ERP/GL platforms.  Relatively low cost to implement and can be cost-neutral vs. labor cost within the business (especially as it automates reconciliations like bank, receivables etc.)

Synergies

Should target the extraction of labor-related synergies from the back-office asap (within first 90 days).  Setting this target will orient everyone towards getting the 80/20 done quickly

Technology

A cyber security audit should be performed during DD or immediately thereafter and the target’s environment should be brought within the structure of the platform. End point protection and employee training should be executed within first 5 working days of transaction close. Insurance policies should be adapted to include coverage for acquired businesses prior to close of add-ons

Perform review of target’s systems and tools across the board and develop a plan to rationalize them into the platform’s tools and systems

Insurance

General Insurance should include a set of policies that “wrap around” the target day one of close until the date of policy renewal (Willis and others will do this). Health Insurance should be left alone until renewal date of the company’s policies and then brought under the same framework as the parent company, including 401K, etc.,

Front Office Readiness for a Roll Up Strategy

Ability to perform revenue and cost analysis in one system. Recommend installation of inexpensive system like Tableau or PowerBI that will enable management to quickly add target company’s data to the parent company’s normal workstreams of analysis and review

Supply Chain Analysis

Look at common vendors for opportunities to improve terms, or move spend from target company’s vendors to parent company’s vendors, or vice-versa pending terms, conditions and scalability of target’s vendors. This should be an exercise that results in improved payment terms and lower costs

Press and Public Relations

Determine who benefits from external publicity (customer-facing, community, etc.) and unintended consequences of it (competitors using acquisition to win businesses away, giving competitive intel to competitors, etc.). Develop a robust internal communications strategy to explain to target company employees what will change and what won’t – give them maximum certainty day 1

Share the reasons that the target was acquired, in a manner that makes both parent and target feel “part of the family” and avoid second class citizen dynamics.

Human Capital

Org chart integration is one of the most important aspects of target company integration. Evaluate lines of reporting to ensure that communication up and down the chain is kept intact. Keep a level of autonomy within the acquired businesses (unless it is very small) while indoctrinating it with the cultural elements of the platform that make the business feel like “one company”. Mix teams as much as possible immediately – this will lessen the chance that “us vs. them” dynamics emerge

Harmonize pay scales where relevant as well as incentive schemes – even if this results in slight dis-synergies, it is worth it as you’ll eliminate “us vs. them” thinking and the goodwill has intangible value as well

Facilities and Footprint

Be aggressive about footprint consolidation to reduce fixed cost unless the facilities play an important customer-facing or supply chain / distribution role, or house the employee population acquired (employees that are intended to be kept)

Pricing Analytics

Evaluate pricing methods, especially if there is significant overlap in the market between products.  The goal should be to have logic/rationale for any discrepancies in pricing, and to use the intelligence of both businesses to maximize profits and market share where possible.

Platform Capabilities To Ensure Exist

Ensure that HR, Finance/Accounting, Sales Operations and Purchasing functions are stable and methodically driven before pushing “go button”.

HR (benefits, trainings, handbooks, employee engagement, payroll etc.). Finance (speedy close, insightful reporting, forecasting, ability to roll up data).

Purchasing (bid processes, supplier terms & conditions managed, etc.). Sales Ops (customer bidding, margin management, pricing, etc.)

Build additional 1.0-2.0 FTE capacity within platform – you’ll need it as you get going on the plan

Accounting team (controller) and finance (FP&A) to reduce burden on platform business for consolidation and harmonization of reporting. The platform company should be able to assess short term impact on covenants, liquidity, working capital, cash etc. on its own without support from financial sponsor to make strategy scalable.

Communication out to the business is key (in advance of…). Explain the strategy so employees are not surprised by M&A discussions, or think they are the target of the M&A itself.