Joining Others or Going It Alone
By James Lavelle
Successful businesses are comprised of effective people working in teams and teams of people working together to achieve the goals of the entire organization. The comparison of great teams in sports to working groups in business has been made time and time again. And it isn’t theory; it is fact. The activity of assembling a team of people who work effectively in a business context has similar barriers and opportunities to a team of people working effectively together to win at sports. In the early stage of the evolution of a business the founder(s) most critical decisions are centered on the skills, abilities, strengths, weaknesses, experience and expertise of the individuals hired to do the job. At the same time personal attributes like character, personality, demeanor and interpersonal conduct have considerable influence over how the new hires will work together as a team.
From Me to We
When done effectively, the coordination of team tasks and activities helps to advance the business efficiently and achieve the most challenging strategic initiatives. Managing these teams through periods of dynamic growth is both challenging and exciting. To this extent, businesses that have been successful in building strong teams go farther faster than those that don’t, which should be obvious. Where it becomes a little more complicated is, as the business grows, retaining a spirit of collaboration, team spirit and acknowledging successful outcomes in a way that empowers and inspires everyone involved.
So why am I telling you this? Founders, leaders and early investors of small to mid-sized private companies use a combination of judgement and intuition to make decisions that result in successful outcomes. Although they may consult key advisors and members of their team for perspective and input, they ultimately rely on their own judgement and intuition to decide. As an example, when I previously served as CEO of large publicly traded company, I delegated a good deal of the decision process to my direct reports but, in cases in which a final decision had to be made, I had the last word. In every organization, someone has to be designated as the individual who makes the final decision.
When founders, leaders, and early investors consider the idea of joining others like themselves in a put-together structure, one of their primary concerns is how will decisions be made for the business they’re individually bringing to the transaction as well as how will decisions be made for the entire new company as we move ahead. Stated, who will work for whom. After all, they’re evolving from a situation in which they’re in total control to one in which control is shared. For this to be acceptable to any successful business leader the benefits of shared control must be truly compelling. In addition, the idea of a transition from being the leader of a smaller team to being a ‘partner’ in a larger team is an idea that’s acceptable, and even desirable to some, but of no interest to others. And now a commercial message from Oreon: We have designed our put-together arrangements in a way that provides our founding company leaders with a majority control of the new company simply because they own the majority of the company’s equity. By design Oreon’s approach to the company’s governance for the board of directors and for our operating entities are, in the majority, controlled by our founding company leaders by way of their equity ownership and business acumen.
The most critical success factor in any consolidation company is the compatibility of the people involved. Oreon spends considerable time and resources researching the market, identifying companies that match our ideal profit and talking to /meeting with the owners/leaders/investors or as many companies as we can before selecting the group we feel to be well suited to our put-together arrangements. If a single individual in the group is ‘on a different page’ than everyone else we quickly identify the issue and eliminate them from our group. Our entire focus is facilitating the alignment of interests. Our goal is, from the outset, to establish a team spirit among everyone involved in order to take advantage of all of the benefits that team effort and collaboration provide.
Learning From One Another
I believe there to be great value in the activity of learning throughout life. By active learning I mean taking the initiative to expand our knowledge, perspectives and experiences by engaging in intellectually enriching pursuits. These pursuits may be in the form of travel, reading, using digital media to explore and inquire about areas of interest and to engage others in ways that we exchange information. Learning new things continually enriches us in countless ways.
In the working world, if we’re open to it, learning from others is fulfilling, informative and empowering. In the case of Oreon’s approach, we know the process we follow to bringing leaders and their businesses together provides everyone with the opportunity to interact with an entirely new group of individuals all of whom have a great deal in common. This common ground, based on their aligned interests in bring their businesses together within a single structure, is an amazing foundation that opens a universe of new ideas, approaches, knowledge, information and experiences to everyone involved
One of the most important aspects of Oreon’s process to bring about a successful put-together transaction is identifying and selecting individuals that will be compatible with others in terms of personality, character and communication. But compatibility on these terms is foundation to other factors like drive, motivations, ambition and a number of other factors that help to quickly establish common ground. Add to these aspects of the individuals involved is their willingness to learn new things from their new partners in the Oreon arrangement. In the many conversations I’ve had with business leaders and their key staff over the years one of the strongest indications of compatibility is the expressed desire to grow and to learn.
I had a meeting a few weeks ago with a fine, intelligent, successful business leader in a market Oreon is currently working in. He said he likes his business but, in essence, he’s “figured it out and doesn’t find it to be challenging any longer” because he wasn’t learning anything new. I replied by telling him that I view my role in bringing people like him together to learn and grow together, to be among the most fulfilling things I do in life. I’m hoping he decides to join as we bring people like him and companies together. I’m fond of the saying, “It takes a lot of good ideas to make a great idea” because it’s absolutely true. This is key to Oreon’s approach to helping to enable a successful outcome.
Building on Success
Minimizing downside risk is another reason why successful businesses and their leaders consider joining others in a put-together structure. As many people see it, sharing risk across a larger foundation of assets and resources provides insulation from most worst-case scenarios. At the same time there is sharing among the relationships of everyone involved, offering an entirely new and ever-growing universe of possibility and opportunity. One of the most significant ways that a combination of compatible leaders and their businesses reduce risk is centered on the fact that larger scale through the combination of assets results in a stronger balance sheet. This provides the new company with sources of capital that are accessible at lower cost and on better terms than the individual companies are able to negotiate on their own.
I’ve asked the leaders of many companies if they spend their time raising money to fuel their growth. They usually answer the question by saying, “I spend most of my time raising money.” I next ask, “If you didn’t have to raise money, how would you spend your time?” Over 95% of respondents say they’d spend their time building a larger market for their companies and on customer service. With this in mind, consider a group of 10 leaders working as new partners, all focused on supercharging their businesses individually and collectively and having all the working capital they need to accomplish their goals and achieve their greatest personal and business ambitions.
We feel downside risk is limited with a group of driven, experienced, motivated partners working together to expand market share. As you can see by my examples, they go hand-in-hand. A couple of years ago a participant in one of Oreon’s put-togethers said, “You know Jim, I’ve given a good deal of thought about joining the group. Over the past few years I’ve been building my company I frankly don’t know many people who have a concept of what it takes to build and manage a company. The reason I decided to join is that I’m looking forward to be part of a group of people who truly understand what I do and with whom I can share my ideas and energy.” His quote expresses the reason why many leaders feel that, by joining others, they can benefit in meaningful ways.
All of the topics I’ve addressed in this document have the impact of accelerating growth. What usually follows accelerating growth is creating wealth and providing liquidity. In Oreon’s case, what we’ve found is that our founding company leaders and staff, when working together in teams to achieve a greater goal, have the effect of 1) minimizing risk, 2) accelerating overall growth, 3) providing short, mid and longer-term equity appreciation and liquidity and 4) creating wealth. These are the results we expect in every put-together arrangement we organize.
Why Would I Combine My Business With Others?
By James Lavelle
Recently I was talking with a fairly senior guy at a well-known private equity firm about the complexities of putting independent companies and their teams together into a common structure. He said, “In my experience the more companies you involve in the merger it becomes exponentially more difficult. And the brain damage that goes along with it is substantial!” I told him, in my experience, there’s no question that all the moving parts can be difficult to manage but it can be done. He used the reference “It’s like herding cats” which I’ve heard before when referencing rollups and put-togethers.
I’ll be the first person to admit there are innumerable complexities encountered when executing these merger transaction structures. On the other hand, having a great deal of experience in these matters helps to advance the process of coming together in a way that avoids the so-called brain damage and brings all of the parties together with a view to achieve a mutually beneficial outcome. In response to the fairly senior guy at the well-known private equity firm I mentioned above, I replied, “In my experience successfully executing rollup and put-together transactions requires a little art and a little science”.
The Art and Science of Combining Successful Businesses
The science is relatively straight forward. It involves the mechanical aspects of integrating the business activities of each company into a central operating structure but not interfering with the strength of their sales and marketing or diminishing their brand identity in any way. The central operating structure, and the staff that’s put in place to conduct the support services, is designed to 1) relieve each of the companies of the responsibility of conducting back office functions like finance and accounting, human resource records and administration, legal support, mergers and acquisitions, information technology and systems support and 2) coordinate all of the resources and assets of the business activities of the new enterprise in order to move the business forward.
The art of successfully executing these transaction structures is more complex. It involves introducing variables that are far more difficult to manage; the variability of personal interaction. Consider the fact that, on its face, combining a successful business and all of its staff and investors with others is mind bending to begin with. How in the heck do you get any of them to agree on anything? As I said in one of my previous posts, it all starts with having a clear alignment of interests for all of the parties involved. With a foundation of clear alignment of interests, the art of building consensus, enthusiastically supporting and participating in a collaborative effort, driving value by way of working together to achieve a mutual and common vision of what is possible elevates everyone to their highest purpose and performance. It’s about bringing inspired, driven people together to achieve something greater than anything they could achieve independently.
Above all, the most important thing to do is improve on the successes that have already been created. It is vital to enhance their competitive advantage through the increase in leverage that comes along with sharing resources, assets, sales and marketing and, generally speaking, scale. The benefits of scale cannot be over stated. The benefits of scale present new opportunities in a number of ways. One such opportunity, because of the aggregation of finances of the businesses that have merged into the new company, provides for availability of more growth capital at a lower cost on better terms than as a smaller independent company. A larger entity tends to have more choices.
Mine Is Better Than Yours
Over the years I’ve heard countless successful business leaders tell me, “I’ve decided I’m going to bring a number of companies in my market together in different parts of the US and create a bigger, more competitive business” and to them I say, “Good luck with that.” There are a number of reasons why it’s a really hard thing to do without an independent voice guiding the process.
The first reason is that successful leaders and their companies operate on the belief that their company is better than the rest and they’re smarter than the rest. This being the case the first question is “Who’s going to work for whom”? In addition, they all feel their companies are more valuable than the others so the question is “How do you fairly value the companies in these deal structures in a way that will give comfort to everyone involved”? Add to these considerations how about, “I understand how the equity will be allocated but how are we all going to be paid and will we be signing employment agreements with the new company”? There are many more questions that can pose challenges to everyone involved if there isn’t at least one party to the deal that’s independent, impartial and knows how to manage the process to achieve a successful outcome.
This is where the importance of balancing the financial and management interests of all of the parties is critically important. The size, scale and financial strength of each of the participants to a put-together transactions should be within a relatively narrow band of valuation. Having one or two parties that are larger than the rest skews the value and therefore the influence disproportionately. People tend to work more effectively as ‘partners’ if they feel their influence and control is relatively equal.
What Will My Investors Say?
Investors in small to mid-sized independent companies are risk takers. In many cases these are individuals, family offices or small institutional investors who measure the opportunity for a considerable return against the possibly they’ll lose most or all of their money. The way they mitigate their downside is by having a considerable voice in what happens next in the management of the business. Alternatively, they may be investing because they have so much confidence in the company and its management they don’t feel such direct involvement is necessary but, in most cases, will still require some level of oversight on their part as a condition to investing.
This is particularly true of investors in companies whose leaders believe that joining a consolidation company in the formation stage is in their best interest. Normally company investors believe their investment decision has been based on their belief the company’s prospects for growth and therefore their return is to go it alone. However, in my experience, when investors are posed with the prospect of converting their stake in a smaller, independent company into a stake in a much larger company all things being equal, their response is one of enthusiasm and support.
Most investors have very little knowledge or experience investing in companies involved in rollups and put-togethers. Although it’s not a common practice, many companies in a number of industries have been constructed by a group of smaller companies joining forces in a new company then acquiring more to gain competitive advantage. These companies have been both privately financed and publicly traded. Some have been spectacularly successful most notably in health care, waste management, transportation, information technology, business services, retail and distribution, manufacturing and a number of other industries.
Us Versus Them
I’ll digress here for a moment to address a subject I’ve heard many times in the past from investors and that is the distinction between “hard dollars” and “soft dollars”. Hard dollars are defined as money, currency, cash and any other label you place on invested capital. Soft dollars are defined as the time, energy, effort, risk and peril you’ve invested to advance the business until the investor showed up at your door.
The investor will do everything possible to convince you that their hard dollars are worth considerably more than your soft dollars. Without regard to all that the company has done to achieve its success, the investor will either imply or state that their investment is worth more than what’s been invested before diminishing what’s been accomplished in order to elevate their value and importance to the company going forward. If this happens to you I strongly suggest you hold your ground, reinforce your self-respect and look for another investor.
Assuming you already have investors in your company, they should expect their stake to be diluted by new investors that follow. That’s normally the way it works. Even if you’ve prepared and presented the best plans the world has ever seen, to the new investor, their position will be to discount your “ambitious outlook” in order to reduce their risk and increase their return which will likely be at your investors expense. This will definitely be the case if 1) you really need the money and 2) you’re running out of time to get it. Alternatively, if you plan ahead and “invite” a select group of investors to take a look at your “opportunity” you may have more success in having an alignment of interests with your next investor(s).
In a rollup or put-together the equity and debt capital require to advance the business is conducted in the central group of the new company. This enables the founding companies and equity holders to enjoy the benefits of larger scale by attracting more capital at a lower cost than any of the individual companies could attract independently. Add to this, the continuous pressures on the leadership of the independent company to raise more and more capital is relieved allowing for the new business priorities to focus on achieving competitive advantage and increasing revenue, profit and cash flow. Over the years I’ve asked many business owners, “How much of your time to you spend raising capital or worrying about raising capital”? The answer is usually between 90% and 95% of their time. My follow up question is, “What would your priorities be if you didn’t have to raise money any more”? The responses are, nearly unanimously, “I’d spend the time building market share and gaining competitive advantage”.
In my next post I’ll share some of the less obvious reasons why joining others in combining business interests 1) minimizes downside risk 2) accelerates overall growth 3) provides near-term stockholder liquidity and 4) creates wealth.
Sellers vs. Buyers
By James Lavelle
In my previous submission I asked the question “Who owns this Company”? My answer to this question depends on whether the sponsor retains the majority share of the new company’s equity or the founding companies retain the majority of the equity. Today I want to more fully answer this important question and why it’s relevant to any independent business owner contemplating involvement with a sponsor doing a rollup or a facilitator (also known as a ‘promoter’) in a put-together structure. But, before I get to this I’ll make a few comments on sellers and buyers of businesses.
The Seller vs. Buyer Dilemma
Having been personally involved in dozens of merger and acquisition transactions I can tell you, with a high level of confidence, the activity of selling and buying a business is stressful. Let’s start with the fact the counter parties to a transaction are coming at it from two diametrically opposed directions.
In all cases, the seller wants as much as they can get for their business and the buyer wants to pay as little as possible. The seller has their reasons for selling that may be completely different than the reasons the buyer has for buying. When you think about it, how could such a process be anything but stressful. Then, to add more complexity to the mix, the interaction is all about money which has been a subject of contention for the ages.
If that’s not enough, the seller and the buyer hire lawyers to represent them thereby increasing the volume of the argument about what the term ‘value’ really means. I call the lawyers in these client matters to be “the stir-stick in the cocktail”. And that’s exactly what they do; they stir it all up in a way that, at times, only seems to exacerbate the stress by building animosity among the parties. It’s not surprising how, in many cases, the seller and buyer simply throw up their hands in frustration and walk away.
Now I’ll tell you how to minimize the stress. First, be very clear about several important factors:
- Are you (as the seller) planning to leave the business or stick around after the business is sold?
- Do you want to totally cash out or only take cash as part of your purchase consideration?
- Are you interested in accepting the buyer’s equity as part of the purchase consideration?
- If you take the equity, are you comfortable with the risk/return profile?
If you’re clear on these variables up front, you’re far more likely to make favorable decisions during the buy-sell process.
Look in the Mirror and Like What You See
In my experience, I have found that most entrepreneurs and company leaders have a good deal of confidence and take pride in their ability to use their judgement, skills and abilities to achieve success. They are used to having the latitude to engage their staff, customers, vendors and stockholders in ways that complement the culture of the company and perpetuate its progress. This being the case, the idea of selling out to a financial sponsor, or for that matter any buyer who requires them to relinquish control to a higher authority, is not very desirable. Although they understand that, during a period of transition, their knowledge and continued involvement is needed to maintain a measure of continuity, in many cases the spirit of what made the independent company great is either diminished or lost in the transition making integration more difficult.
Add to that, any meaningful change let alone a change in ownership of the company, is unsettling to all of a company’s constituents, particularly its employees. Even if the new owner is not planning to make staff changes in the near term, during periods of transition a company’s employees are directly affected. In order to avoid all of the complexities that the ripple effect of new ownership implies, even if there’s no change in leadership, planning well ahead of the completion of any merger or acquisition is vital. The most important thing to remember is that people don’t like to be surprised particularly when it involves their livelihood. On the other hand, taking the time to understand the sensitivities and impacts of the changes ahead on staff at all levels and bringing them along on the “journey” will change the dynamic from “Oh my gosh, what just happened?” to “We’re about to work together as a team to enable greater success.”
The Magic of “Together”
The difference between these two reactions is as disparate as the difference between a rollup transaction and a put-together transaction. When given the opportunity to collaborate with others with whom we have common interests and goals, the theme of what happens next is all about unity, partnership, sharing, collaborating, and reinforcing one another’s strengths and shoring up the weaknesses. I’ve said countless times that successful business is a team sport. High performance businesses are driven by high performance teams of people all of whom have critically important roles to fulfill as they work together to achieve their greatest success.
During my career I’ve interacted with hundreds of businesses as an employee, advisor and leader. My observations are based on real life situations and circumstances I’ve directly experienced. With this in mind, I’d like to take a moment and comment on what I have observed in the execution of rollup structures specifically. Financial sponsors, usually institutional investors like private equity or venture capital firms, are rewarded by the return on investment they generate to their investors. They conduct rigorous analysis and fact-finding before deciding to enter an industry or market. This analysis and fact-finding is typically conducted by junior staff who are charged with assembling what they’ve learned into a compendium of documents or a document that presents conclusions and recommendations.
We take a very different approach. We start by identifying markets that lend themselves to consolidation. We then determine the profile of the businesses that will fit together to, on a combined basis, create substantially greater value than any of them can independently. Next, we identify businesses and leaders of the businesses in these markets to determine, through our fact finding and analysis, if they will complement one another if they were all part of the same company. We spend a good deal of time talking to as many people in the market as we can to refine our approach and reach business leaders whose interests are truly aligned.
If the seller wants cash at closing but also wants to ride the equity wave of a new company with other like-minded leaders, we can do that. If the leader’s intent on making sure their employees have even greater opportunity as part of a larger enterprise, we can do that. If the leader is motivated to be part of the central operating group of the new company and be actively involved in expanding the business in an executive capacity, we can do that as well.
I like to say that Oreon Capital is in the business of solving big, complicated puzzles. I’m reminded of a conversation I had with a friend of mine a few years ago in which I said, “You know, I’m not good at very many things but I’m really good at putting great people and their companies together.” His reply was, “Yes Jim, but in order to put great people and their companies together you need to know how to do nine hundred things!”. I believe this to be true, which is why there aren’t very many firms that facilitate put-together transactions like Oreon Capital does.
Rollups, Put-Togethers, Combinations and Consolidation Companies
By James Lavelle
I’m presuming you know a little about what the terms on the heading of this blog mean which is why you were directed to Oreon Capital Ventures. I also presume you have an interest in knowing how the heck these deal structures work. I’ll go a step further and guess that you or someone you know has mentioned them and possibly even talked about combining their businesses with others. This being the case you’re doing a little research to learn more about how to execute a rollup, put-together, combination or consolidation company.
If I’m correct so far then you should continue following along because we have a good deal of experience and expertise in accomplishing what many people view as nearly impossible: successfully creating and building privately and publicly financed consolidation companies. There aren’t many of us around who do this; probably a couple of dozen or so.
Which is why, when you enter any of these words into a search engine, you’re directed to a list of articles, literature and regulations pertaining to the financial and legal nuances of these deal structures. Frankly, as I have done key word searches on these terms, I find it’s more confusing than helpful leading one to ask, “Is there anyone out there that can help explain this in simple terms”? And that’s precisely why we established Oreon Capital Ventures and Advisors. We can 1) explain how these deal structures work in simple terms and 2) provide a step-by-step approach to creating and building rollup, put-together, combination and consolidation companies.
What comes next is based purely on my own experience. Others may have definitions and approaches that differ from mine and, of course, that’s just fine with me. But, since this is my blog and not theirs, I’ll continue to share what I know.
Doing Your Homework
The starting point is identifying fragmented markets comprised of lots of small to mid-sized privately held companies and a handful of really big companies. I suggest the markets best suited to consolidation are relatively mature but, because of rapidly evolving technology, are undergoing rapid change. In order to ‘keep up’ and compete, business owners are posed with the prospect of investing more capital in their companies which they may or may not have.
I’d like to say a few words about raising capital in small to mid-sized privately-owned businesses. There are always (at least) two factors at work in these situations. One is the need for more money and two is the time it takes and the urgency around getting it. When you combine the business owner’s sense of urgency to raise money and the investors instinct to get as much as possible for their investment the result is, what I like to call, exploitation. Now, you may think exploitation is a strong word however, I can assure you, time works against the business owner and favors the investor. It’s as simple as that.
I mention this dynamic because it’s one of many factors that impact both owner and investor motivations, attitudes, behaviors, interests and plans as they move ahead. Ideally suited candidate companies for a consolidation have come to the point in time they feel that, under the ‘right’ circumstances, merging with other businesses to gain scale, share opportunity, mitigate risk and increase their value by being part of something greater to be desirable.
Another factor influencing the business owner’s interest in merging with others is the planning of an orderly exit from the business in a transition that optimizes the owner’s return on investment. This is particularly important if the business owner isn’t ready to retire in the near-term but is planning to do so in the next several years. As part of a larger growing enterprise, the business owners and their investors may be able to share in the increased value of the enterprise through the ownership of equity in the larger company as they move ahead. If they’ve taken cash and stock or only stock as purchase consideration in a merger into a bigger company, the tax impact may be considerably more favorable than if they sold the business for all cash. Simply put, the owner isn’t ready to cash out but is interested in, as I like to say, ‘riding the equity wave’ of an enterprise that’s comprised of people just like them.
There are many more factors inherent in fragmented markets and companies that compete in them that influence how rollup, put-together, combination and consolidation companies come together and grow bigger and more profitable however the factors I’ve mentioned here are high priorities. Another important thing to consider, as I have found, is that companies best suited to participate in these deals aren’t for sale which makes the activity of finding them to be both a challenge and an opportunity.
The fact-finding and analysis that goes along with preparing the specification of the market, companies (also called targets) and ideal profiles of those companies as participants in a consolidation is extensive but necessary. The ideal profiles should include but not be limited to:
- Industry profile
- Market segmentation analysis
- Owner’s motivations and interests
- Years in business
- Annual revenue, profit and cash
- Barriers and opportunities for future growth
- Merger integration risks
Once you’ve completed your analysis, preparing a roadmap to achieving a successful outcome brings what lies ahead into clearer focus. It also helps to narrow the pool of target companies thereby improving your chances of engaging owners whose interests and businesses opportunities are aligned with one another and coincide with the consolidation company plan and model.
Alignment of Interests
Aligning the interests of all parties in a consolidation is vital. It allows for a spirit of collaboration, partnership and cooperation that elevates the individuals, assets and capabilities of those involved and builds on their strengths. During the course of my career I’ve directed dozens of merger and acquisition transactions, many of them in consolidation company structures. Some have involved a number of businesses merging together contemporaneous to a public or private financing. Others have involved a single buyer and seller.
A simultaneous merger of a number of companies may seem more complicated than the merger of a single buyer and seller but it entirely depends on whether the interests of the parties are truly aligned or not. If their interests are aligned, the activity of bringing a number of companies together to create a much larger company is a thrilling accomplishment for everyone involved. And if their interests aren’t closely aligned or, if at the last minute one or several of the parties have a change of heart, the result can upset the entire apple cart.
The relationship between buyer and seller is, by nature, adversarial. The seller wants the buyer to pay as much as possible and the buyer wants to pay as little as possible. The parties hire the best lawyers they can to represent their interests and then, ‘let the games begin’. Although lawyers are important to the process I’ve been dumfounded time and time again when a counter-party tells me “I have to follow my lawyer’s advice and that’s that”! My response is, “The lawyers work for us, we don’t work for them. They’re here to help us to come to terms that are satisfactory to both of us. We decide, not them.” In addition, purchase and sale agreements today are ridiculously complicated and take an inordinate amount of time to understand, let alone sign. We at Oreon have come up with a solution to this that dramatically simplifies the negotiation of buy/sell agreements and, at the same time, accelerates the parties through this process at light speed.
Although give and take is inherent in the buyer/seller interaction, if both parties interests are truly aligned and they’ve generally agreed to deal terms in advance of a so-called negotiation, the friction of the entire process vanishes and the decision makers direct the lawyer’s activities to their most desired outcome. This shaves thousands and thousands of dollars off both parties’ legal fees. So, in the end, all of the parties to the merger are smiling and the lawyers are left to grumble about how much more money they could have made but for our clear alignment of interests.
Who Owns This Company?
The answer to the question “Who owns this company?”, by my definition, is different for a rollup than a put-together. A rollup is usually initiated by an institutional investor or a ‘platform company’ usually called the ‘sponsor’. Their approach is acquiring like-kind or complimentary businesses either one-by-one in a series of acquisitions over a relatively short timeframe or bundle and purchase several companies together at once. In any case, the sponsor pays cash for a majority interest in the acquired business, may provide some stock as purchase consideration in the new consolidated company but, the sponsor is the owner of the new and improved company.
This being the case the business owner, who has been the leader of their own enterprise in advance of the sponsor’s purchase, now finds they’re the sponsor’s employees. I’m not suggesting this is a bad thing but rather that business leaders are usually driven by experience, instinct and judgement which may be discounted or overruled in their new environment. Conformity and compliance by the new employee are usually secured in the form of employment agreements with non-competition provisions for a year or two while the sponsor takes over. Usually, in these cases, the alignment of interests is focused on cashing out the former leader and their stockholders relatively quickly.
A put-together transaction has a number of distinguishing factors from a rollup. In the absence of a sponsor, the put-together’s leader is commonly called a ‘promoter’. The promoter acts a facilitator in bringing a group of businesses, their leaders and investors, together in a simultaneous merger and public or private financing. The group of businesses called ‘founding companies’ merge into a new company the promoter has created expressly for this purpose. The founding company leaders and stockholders receive some cash but mostly common equity at the closing of the merger and, as a result, the founding company owners and their stockholders own the majority of the new company.
The outcome of a put-together establishes a new larger company, comprised of a number of smaller companies, in an ownership structure that benefits the founding companies to the greatest extent and aligns their interests through their new company ownership to drive individual success for the collective good. In addition, there’s a good deal of operating uplift to be gained by sharing assets, resources and relationships other founding companies bring to the table, all of which is coordinated and managed by the ‘central group’ of the new company.
The difference between what I’m describing as a put-together versus a rollup are remarkable and highly differentiated. In both cases we’re combining and consolidating the smaller businesses into a larger one. In both cases the result will be 1) larger scale 2) competitive advantage 3) greater access to capital at a lower cost on better terms 4) moving burdensome back office activities to a central group allowing the founding company to focus on driving marketing and sales of their products and services 5) incorporating corporate governance that coincides with the major equity holders of the company. But the ownership and governance of the put-together is largely driven by the founding companies in a put-together while ownership and governance are controlled by the sponsor in a rollup.
In both cases an important part of the equation when combining these businesses is centralizing operating and administrative activities to improve overall efficiency and reduce cost. The operating structure is called ‘’hub and spoke”. The hub of the wheel is the central operating group where a variety of back office support, communication, finance and accounting, information technology, treasury, legal affairs take place.
The spokes are the businesses that have merged into the new company. Each business becomes a profit center of the new company which frees them up to focus their efforts on selling and marketing.
So, in answer to the question “Who owns this company?” it depends on the deal structure and the interests of business owners and their investor. In a rollup the sponsor owns the company and in a put-together the founding company owners own the majority of the company.
In my next blog I’ll be providing information on the ‘glue’ that holds consolidation companies together. I’ll also share my perspectives on the execution of a mergers and acquisition strategy that adds more and more value and substance to consolidation companies to fuel their growth.