For those Private Equity (PE) firms employing a rollup strategy, it’s critically important to develop a systematic, repeatable process to onboard acquisitions quickly and get a clear understanding of the true financial and operational status of the business.

Contents

• Why PE firms are embracing the rollup strategy
• The critical role of finance and accounting
• Common challenges of the rollup strategy
• What you need: The four building blocks of a rollup F&A platform
  1. Integrated and extensible best-of-breed software stack
  2. Experienced F&A personnel with a range of skillsets
  3. Robust statutory and management reporting
  4. Centralization, standardization and automation
• Consero’s Rollup Platform for PE Firms

For a growing number of PE firms, the “rollup platform” provides the foundation for financial reporting and operational standards to improve visibility and accelerate acquisition returns.

Download Now

In this eBook, we’ll explain how PE firms like yours are using rollup platforms to apply systematic processes to financial and operational functions. Aligning the people, processes and technology of acquisitions in less than two months—instead of a year or more—PE firms can scale the business quickly to achieve growth targets.
Read on to find out how you can bring visibility to hidden costs, inefficient processes and unnoticed opportunity to realize the returns on investment faster.

Why PE Firms are embracing the rollup

Bain’s 2019 Private Equity Report found that nearly 30% of PE firms are employing a rollup strategy. The rollup, where multiple small companies are acquired and merged, allows PE firms to build economies of scale through a single brand supported by shared sales, marketing and operations. To grow the business effectively, the administrative infrastructure and reporting systems should be standardized across the acquired operations. The ultimate value of the business is created through a much larger entity that will produce higher profits and command a higher valuation multiple upon exit.

How Consero helped large acquisition-driven business establish a rollup platform and accelerate acquisition returns.

A large provider of systems and applications management software backed by a private equity firm had some significant problems managing the major changes to its business that regularly occurred due to incorporating rollup acquisitions into its business model. With an emphasis on adding smaller operations, a number of issues tied to standardization, visibility and prompt completion of accounting activities arose. The Houston-based business turned to Consero for help streamlining accounting practices and realizing better results – including increasing its valuation – following a series of rollups that pushed its accounting infrastructure to the breaking point.

Understanding the many accounting problems facing the business

The business had recently completed the acquisitions in the legal and functional sense, increasing its value to $300 million, but had not fully integrated accounting processes between all the new entities under its umbrella. It had four more companies in the acquisition pipeline, which only made the problem more severe considering the 6-12 month optimization timeframe. All of the individual organizations had their own systems and workflows that were incompatible with the core company and each other. Generating consistent reporting was difficult, if not impossible.

Accounting relied on an outdated Great Plains system that couldn’t effectively manage various vital tasks.

• Revenue recognition was fractured to the point of needing to use offline Excel sheets to complete this foundational activity, and deferred revenue wasn’t captured correctly.
• The company had freelance accountants dispersed in an inconsistent, unsustainable manner.
• It lacked A/P and expense automation capabilities.

With so many issues that needed to be addressed on a constant basis, the accounting team didn’t have the bandwidth to make substantial improvements. Without bringing on a dedicated acquisition integration team – an especially costly proposition and one that’s difficult to utilize efficiently in the long term – the business had little hope of deploying an efficient and effective rollup play.

With the company’s business strategy built in significant part on rollups bringing a greater number of smaller businesses into the fold over time, and a desire to expand to provide related services alongside their software, the need to make significant, positive change was clear.

Going forward, a Finance-as-a-Service model could provide finance & accounting support that is:

• Flexible
• Consistent
• Scalable

An effective solution that adapts along with the company

An organization focused on rolling up smaller companies will have regular peaks and valleys when it comes to integrating new acquisitions and adjusting and improving accounting processes accordingly. Consero’s provision of Finance as a Service allows for seamless adaptation along with scaling staff and support as needed. The company can operate between acquisitions normally, then capably adjust during periods where a new acquisition needs to be brought up to speed and integrated into the larger operation. Currently, Consero has 17 accounting professionals on staff, split between senior leaders and frontline staff.

Another valuable element that Consero brought involved implementing a new technology stack to align all of the constituent businesses. With Consero’s combined experienced and knowledgeable implementation team, the company saw some major improvements. It can now ensure vital accounting needs like reporting are completed in a consistent, highly visible fashion across all of its constituent entities. That includes all of its rollups, including a recent $100 million acquisition, as well as the $300 million holding company.

The substantial benefits that come with Finance as a Service

With a methodology including: centralize, standardize and automate, the Consero team established a 30-day implementation playbook for adding acquisitions into the new tech stack. This is a transformational change that greatly reduces stress on in-house staff and leaves them free to address the many other M&A concerns that need their attention. With a well-oiled machine in place, future additions will be a simple, standardized process. Consero has staff trained in the necessary processes to quickly and accurately complete this process. With so much of the effort centralized, standardized and automated, costs, reporting and scalability all improve. Phase 1 of the project alone involved savings of 63%.

Similarly, the CFO of the private equity firm backing the business and the company’s own senior accounting staff no longer need to dedicate significant attention to the technical needs of the rollup process. Instead, they can focus on strategy, investment considerations and future rollup targets, which is a key driver of value.

Instead of the internal accounting team trying to manually complete revenue recognition and compile incompatible reporting from across the many constituent companies, the business now enjoys standardized reporting with automated dashboards and real-time visibility via Consero’s financial console, appropriately named SIMPL. This is true now and will remain so into the future, as additional rollups are quickly and reliably added to the tech stack.

Before

• Unreliable finance staff.
• Outdated finance & accounting system.
• Fractured revenue recognition.
• Difficulty closing the books.
• Due diligence was a burden.
• Time to optimize was 6-12 months.

After

• Trained finance team is able to scale as needs change.
• Modern cloud-based software stacked for all financial needs.
• Standardized and automated processes.
• Ability to adhere to standard two-week close.
• New acquisitions have a timely and effective process in place.
• Optimized in 3 months.

With Consero taking the lead on staffing related to integrating rollups and managing core considerations like automated reporting, A/P and expenses, the company enjoys another major benefit: Significantly reduced recruitment, training and management costs. With a well-designed and reliable model, as opposed a fluctuating model, it is much easier to anticipate and budget for accounting needs. The Consero internal team for this client is up to 17 people. If the client chose to staff in-house rather than leverage Consero, it would have cost a significant amount in salaries and benefits for a full complement of employees. Consero offer the same level of expertise and ability at a fraction of the cost (30-40% less than in-house).

How else has Consero helped?

• The books are closed on time, reporting is accurate and consistent and consolidation is an automatic process.
• Due diligence is no longer a burden, it’s easily worked through.
• Along with addressing specific issues tied to incorporating rollups into the parent company and managing staffing concerns, the business now has a more accurate, timely and effective accounting function in place.

The value of Finance as a Service to this large company and many others like it is clear. With a dependable partner providing top-notch, customized finance & accounting support that scales with business needs, executives can be confident their organization is in the best position to realize a number of benefits:

• Improving finance & accounting processes
• Reducing associated costs
• Enhancing operational insight
• Providing enhanced infrastructure
• Shortening the monthly close complexities and timeframe

All of this is possible with the right outsourced partner. To learn more, get in touch with Consero today.

When a private equity firm carves out a business unit from its parent company, they’re left having to build a new infrastructure for that stand-alone entity. Bill Klein, President and Co-Founder of Consero Global discusses effective steps to fast track the building of a finance team for the new business.

Corporate carve-outs might be a popular acquisition tactic for private equity groups, but that’s not because they’re easy. Whatever the potential upside, GPs will need to build all the functional teams that the parent company provided, all while trying to execute on the strategic improvements that were the rationale for buying the business in the first place. And given the private equity lifecycle, time is of the essence.

And of the various functional teams to be assembled, GPs know that the accounting and finance department is vital, but often they underestimate how hard it is to get the right people, systems and procedures in place. This is why Bill Klein of Consero argues that a finance-as-service model might be the best way to meet the needs of a carve-out investment.

Whether the GP is carving out a single business line or several business units from a parent company, they face the same dilemma. “GPs negotiate terms for the carve-out company to be reliant on the parent company’s systems, software and staff for their finance function when the deal is done,” says Klein. “They can’t begin building that finance department prior to close, for fear of eating those costs if the deal falls through.”

So, on day one, the GP faces the prospect of having the carve-out company build a finance and accounting function from scratch. Klein explains: “The Oracle system the unit is currently using probably doesn’t make sense for the stand-alone business, and since most large corporations centralize such functions, the carve-out is left without staff or software to handle it.”

The high cost of starting from scratch

Normally, the GP will negotiate terms for the parent company to continue to provide the finance department, but there are a number of downsides to this arrangement. “The carve-out is left paying a fee for these functions as their CFO or finance lead scrambles to choose systems and hire their own staff,” says Klein. “But it’s safe to say that spun out business unit will never take priority over a current unit when the accounting staff is pressed for time, and these departments aren’t built for customer service, so there can be communication snafus and delays in getting answers.”

As these hiccups arrive, the carve-out business still needs to find the best way to build that finance department from scratch. “Private equity firms know how important it is to get the finance function up and running, but it’s not among their strategic priorities. It’s another task to be done on that very long checklist after the deal is signed.”

But there are real costs to underestimating the time and skill necessary to create a finance function. “No talented CFO wants to focus on the basic tactics of a finance department, the aggregating and reporting of financial data. The longer it takes to get the department up and running, the longer it takes for that CFO to make a strategic contribution to the company.”

If the carve-out CFO is starting from scratch, building the finance team involves a lot of unforeseen roadblocks. They are going to have to tackle five key steps, and each have their own hurdles:

1. Recruit and hire people
2. Research and architect systems
3. Map the processes to the system (this could be far harder than choosing a system, since a system’s capabilities might not instantly fit with the exact process needs of the business)
4. Integrate and train users on that system
5. Configure the system, move the data and test it

The strategic value of starting with a partner

This is where a service provider like Consero can make a real difference. They allow the carved-out business to plug directly into their outsourced finance department. This means they get to skip right to the final step of that 5-step process. “We tend to get a department up and running within thirty to sixty days, while building a finance function from the ground up can take nine to eighteen months,” says Klein.

As the deal team negotiates the terms of the carve-out, Consero can make an initial assessment of the project. “Prior to close, there are limits on the information we can access, but we take a high-level view of the business, focusing on discovering its revenue model and financial structure,” says Klein. “Once we know that, we have 80% of what we need to get started because we’ve so much experience doing this.” Contrast that with a controller that’s hired during a traditional build-out, who might have built a finance department a few times, if at all.

This isn’t to say that Consero relies on a one-size-fits-all model. “There are policies and processes unique to the business which we can tailor our systems to do, but if the accounts payable department is truly “unique” then something’s very wrong,” says Klein. “There’s no need to reinvent the wheel each and every time.”

And Consero’s institutional knowledge helps them design short cuts and best practices for fast tracking the introduction of finance teams to clients. “For example, we make a list of critical vendors, who, if aren’t paid, would cut off services or supplies critical to the business,” says Klein. “In the wake of a deal closing, invoices can get lost in the shuffle, but with this list, we know what vendors to pay, even if the bill didn’t reach the right person.”

This speed and expertise allows the GP to focus on what they do best: create value at the newly independent company through a series of strategic initiatives. But the best laid plans have little chance to succeed if the financial data they’re based on is wrong or slow to arrive. And every GP knows it’s not the plan, but the execution that drives returns.