Buy Like Private Equity: How to Use Bolt-ons and Roll-ups in Your Acquisition Strategy

Branden Schmidt August 16, 2021

Buy Like Private Equity How to Use Bolt-ons and Roll-ups in Your Acquisition Strategy

There’s a new type of strategy entering the online mergers and acquisitions (M&A) space, and it’s something that was expected, with more investors and private equity (PE) firms moving into this industry.

For those performing their second or third acquisition on our marketplace, you may have heard the term “bolt-on acquisition” used in traditional business transactions (often referred to as a tuck-in acquisition). This type of strategy was first made popular with investment funds and PE firms thanks to the simplicity of acquiring an established company compared to building one from the ground up. This has continued to play a large role in the acquisition strategy that many investors take in order to grow their portfolios rapidly for the fastest possible return on investment (ROI).

Flash forward to today, and you’ll notice that a growing number of PE firms and aggregators are looking to acquire smaller companies for strategic benefit.

There are numerous ways to do this, but in this article, we’re going to focus on two powerful acquisition strategies: the bolt-on acquisition and the roll-up. In many ways, they are similar, but when applied to an online business acquisition strategy, they can help realize synergies and empower companies to scale rapidly.

Before we dive into some real-life examples of each of these acquisition strategies, we should cover some ground terms so we’re clear on what they mean.

What Is a Bolt-on Acquisition?

A bolt-on acquisition is a type of acquisition in which the acquiring company merges the acquired company into a division of the acquiring entity. This acquisition is meant to help the acquiring company gain a competitive advantage without the hassle of building this product, feature, or service themselves. This approach is not only a huge savings in time and resources for the acquiring company, but may also open the doors of possibilities to a new niche, industry, or geographic location as a whole for far less than it would cost to build out on their own.

Private equity will typically implement a bolt-on acquisition to bring value to its portfolio as a whole. This type of acquisition is usually collaborative (both companies benefit from the acquisition) and may include a strategic play in order to gain:

  • New product lines
  • New customers
  • New geographies
  • Intellectual property

Knowing what a bolt-on acquisition is will give you a clear idea of the strategic plan as to why a large portfolio buyer would consider an acquisition or not, based on the benefit it provides their existing assets. Often, these investors are looking to skip the start-up time and dive head first into targeting a specific audience once they gain the smaller company. Investors are not just looking to acquire one business at a time either; some may be looking to acquire a collection of smaller assets that all complement each other in some way (think the same niche, industry, or related service). This is when a roll-up strategy will most likely be put into action.

What Are Roll-up Acquisitions?

Roll-up acquisitions are similar to a bolt-on strategy, with a few minor differences. Where a bolt-on acquisition might prioritize gaining new market, industry, or service advantages that they did not originally have, a roll-up may look within the niche for opportunities. Roll-up acquisitions, on the other hand, will usually include a larger company acquiring several smaller businesses that are all within the same niche or industry already.

A Side-by-Side Comparison of a Bolt-on and a Roll-up

Let’s use an example here to make these differences a bit clearer. A pet company may look to acquire several products from multiple brands, all within the pet niche, to add to their portfolio. They would use a roll-up strategy to acquire all of these products in one acquisition, since the businesses being acquired are all within the pet niche, and could strengthen each other via a shared audience and product offering.

In the case of a bolt-on acquisition, the strategy of choice might look like an Amazon FBA owner expanding their reach by acquiring a content site that already has a strong following. This following may or may not be within a new industry or niche, but ultimately provides an open door for growth without the resources or capital required to build this channel from scratch.

The Benefits of Roll-up and Bolt-on Acquisitions

The biggest benefit of acquiring a business using either a bolt-on or roll-up acquisition strategy is that these types of acquisitions are considered lower risk on the relative scale of the larger acquiring entity. What we mean here, is that it might be considered lower risk acquiring an asset that makes up 10% of your portfolio earnings compared to acquiring an asset worth over 50% of your entire portfolio. Due diligence, growth predictions, and other forms of vetting a potential acquisition are all key functions to help the acquirer ensure that they are making a wise investment decision.

As PE firms and online business acquirers know, the compounding effect of adding multiple cash-generating assets over time will only increase their portfolio’s value, even while taking inflation into account. Other benefits to these types of acquisitions include:

  • A fast-track way to expand geographically
  • A larger pool of smaller companies to choose from
  • Relative ease of integrating smaller companies compared to larger ones
  • Ability to quickly expand an audience and customer base

Let’s get into how you can implement these strategies yourself.

How to Execute a Roll-up or Bolt-on Acquisition Successfully

The first step in executing your own roll-up or bolt-on strategy is to determine what your end goal with the acquisition will be. Are you primarily focused on acquiring a business or brand within a niche in which you already have a market share? Or, will you be looking to expand your portfolio of products and services into completely new territory?

Having a clear understanding of your business goals will give you a roadmap for locating your next acquisition. Once you have your business goals in mind, you can then start to formulate which type of monetization or niche the business you are looking to acquire should be in.

Write down a list of your top three monetization types, niches, or industries, and during your five-minute due diligence check, exclude any businesses that don’t meet your criteria. If you are not sure how to build a criteria list, make sure you schedule a call with one of our business advisors, who can walk you through this process from start to finish and get you headed in the right direction.

Deal flow is everything when it comes to locating a business that will bring new levels of added value to your portfolio.

Finding your next acquisition is much easier when you use a platform like the one we offer, which provides you with the most deal flow in the online business M&A space. Once you have located your next acquisition, you will want to move strategically.

The key to executing a proper roll-up or bolt-on acquisition successfully is realizing what you’re scaling opportunities are before you acquire the business. How can you and your existing operations team scale this new addition to the company as quickly as possible in order to gain an ROI sooner rather than later?

These are all the fine details that you should have planned out prior to entering any type of negotiation process and gathering this information before making a final decision is critical to your success. If you don’t have a detailed plan on how this addition to your portfolio will pay for itself within a given timeframe, you may want to look for an acquisition that stands alone versus having to work within an existing business.

Strategy Changes Around the M&A Space

Traditional PE is well known for acquiring larger physical assets. Recently, online businesses have started to catch the attention of larger PE firms that have noticed the value and potential ROI the online business space offers. Billions of dollars in funding and capital are ready to be deployed, now more than ever before, and with new competition comes new growth strategies.

Where PE was traditionally looking to acquire digital assets from our marketplace that were in line with their current portfolio of products, we are now seeing their investment strategy shift to the idea of considering businesses that would normally be outside of their expected wheel house.

In the past, an Amazon FBA buyer would have only considered an asset with the same monetization—FBA (or an ecommerce brand or product line)—but now, we are seeing that instead of acquiring a new product line, they look to gain a bolt-on acquisition within a completely different monetization or platform altogether. This is becoming a normal occurrence for SaaS portfolio owners as well, as they are beginning to acquire more content-based businesses to build a media empire, not just a portfolio of helpful software solutions. In building a media empire, the SaaS portfolio company becomes an authority in its entire industry, not just one solution mixed in with the plethora of other startups.

Taking a new approach to acquiring outside the traditional acquisition roadmap for PE and acquirers alike, these investors are looking for new ways to gain a new location, audience, and product type in new ways that will continue to shift in the near future.

Building Your Own Empire Through M&A

Bolt-on and roll-up acquisitions provide a proven method of adding value to your portfolio of businesses within a shorter amount of time. Using some of the recommendations detailed in this guide, you should now have a better understanding of how you can go about performing your own roll-up or bolt-on acquisition.

No matter which strategy is aligned most with your business goals, following this guide will get you on your way to acquiring smaller businesses, just like PE, to build an empire of your own.

If you would like to get things moving in the right direction, set up a call to discuss your acquisition strategy with one of our business analysts today. They can set you up with everything you need to ensure your bolt-on or roll-up goes as smoothly as possible.

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