PE Roll-up Arbitrage

A framework for how private equity firms execute roll-up strategies in fragmented industries, specifically looking at a dental practice acquisition example.

Core Roll-up Strategy

• Buy businesses at 7x EBITDA multiple
• Consolidate multiple locations/practices in same geographic area
• Sell entire portfolio at 15x EBITDA multiple once reaching scale ($20-30M EBITDA)
• Value creation through multiple arbitrage - small businesses sell for less than larger ones

Operational Optimization Playbook

• Add additional service providers
  • More dentists to eliminate patient waitlists
  • Additional hygienist chairs (~$10k investment) to increase hygiene revenue
• Optimize insurance billing
  • Implement specific procedures to maximize insurance reimbursements
  • Standardize billing practices across locations
• Create internal referral network
  • Route specialty procedures (braces, root canals) to owned specialists
  • Keep revenue within the PE portfolio vs external referrals

Acquisition Team Structure

• "Good cop" - Industry veteran CEO
  • Well-respected figure in the industry
  • Handles relationship building
  • Explains benefits to potential sellers
• "Bad cop" - Experienced COO
  • Handles numbers and negotiations
  • Background in PE and M&A
  • Focuses on deal terms

Deal Structure Benefits for Sellers

• Can retain real estate ownership
  • PE firm becomes tenant
  • Provides ongoing rental income stream
• Allows for lifestyle improvements
  • Reduced work schedule
  • More vacation time
  • Less administrative burden
• Clean exit opportunity
  • Simple transaction process
  • No need to shop around to multiple buyers
  • Professional acquirer with clear process

The key is combining multiple arbitrage with operational improvements to create value at both the individual practice level and portfolio level.