One of the characteristics that most entrepreneurs I've known seem to share is curiosity. There's little challenge - and therefore, little fun - if we've "been there" or "done that." We are interested in learning new things. We are willing to try something that's never been tried before. That's part of what makes us entrepreneurial.
Take roll-ups, for example. Not the fruit kind. The business kind.A roll-up is a relatively new, emerging concept in structuring fast-growth ventures. It occurs when a number of medium-size companies are consolidated - or "rolled-up" - and an initial public stock offering is made based on the newly formed consolidation.
Actually, it is all done at one time - that is, the consolidation and the going public. As nearly as I can tell, roll-ups have only been done about 20 times. But reports of the success of these 20 roll-ups are enough to make me - and many other entrepreneurs - curious.
Let's say there are five mortgage brokers, all generating between $5 to $10 million in sales. The owners/entrepreneurs are tired of the phase of business they are in. They would like to sell out or merge, be acquired or something, but they don't know how to do that. All they know is how to start and grow a business to the size they are at.
What's the next horizon for them? Perhaps it is this new thing, called roll-ups. But what is their next step? This is why I was anxious to talk to Fraser Bullock, whose Utah County-based company, Alpine Consolidated, engineers these roll-ups. In 1997, for example, Alpine Consolidated orchestrated the organization and offering of Travel Services International, a consolidation of six travel and cruise companies. The result has been a new industry leader that is currently trading on the NASDAQ exchange for about $37 per share.
According to Bullock, several key factors need to exist before a business roll-up can be considered a practical possibility:
- There is a proliferation of local and regional competitors - or, in other words, a fragmented market.
- The industry is highly profitable.
- There is the potential for fast growth within the industry.
- There is the potential for economies of scale - or synergies - among the competitors who will be joining the consolidation.
- None of the companies participating in the roll-up is publicly held.
"The objective of the consolidation or roll-up is to take an industry that is fragmented, with no dominant leader, and to create an industry leader overnight," said Bullock, a graduate of BYU's MBA program and a former founding partner of Bain and Company's venture capital firm, Bain Capital. "The potential benefits to the companies involved include higher valuations, increased liquidity, long-term capital gains and stock appreciation."
Other potential benefits from a successful business roll-up include: national and global branding; cross-selling within the consolidation; the opportunity to share best practices and technology between companies; rapid growth through acquisition; and, the purchasing, support and supply advantages of scale.
There are significant benefits to one and all. Of course, these benefits are only available to entrepreneurial companies for which consolidation is a practical option - which seems to me to be a fairly limited number of companies.
A significant additional benefit for consideration, especially for the one-owner company is the difference in tax ramifications for the owner.
A cash acquisition, even with new tax bill changes in capital gains to 20 percent from 28 percent, can hurt emotionally and financially if a check for say, $2,000,000, needs to be written to Uncle Sam on a $10 million sale.
With a roll-up, not only will the amount of money the entrepreneur receives be much higher, but the capital tax is virtually eliminated.
I believe the roll-up offers another important harvest option worth considering for the entrepreneur. Or at least, something worth being curious about.