The Case For Cash Flowing Businesses
We pass by them everyday . . .
Patchworks of local businesses providing essential & basic services to our communities.
Ever thought about how to participate in the exit strategies of those business owners?
I hadn’t . . . until now.
My long term real estate clients have urged me to investigate other sectors where they can continue investing via private equity syndications. They like the passive nature of syndications and tax efficiency it’s designed to provide. Given the higher interest rate climate, they are looking to diversify into industries that provide immediate cashflow.
After speaking with folks in my private equity community: investors, sponsors, capital allocators, accountants, financial planners & colleagues in my investment mastermind group, I re-discovered an investment model that is worth considering . . .
Roll Up Strategy
A business growth approach in private equity where an LLC acquisition of multiple companies operating in the same industry. This strategy is commonly employed to increase market share, achieve economies of scale, and enhance operational efficiencies.
Roll-ups focus on acquiring businesses that provide similar products or services, which can lead to a stronger competitive position and potentially higher profitability.
I say re-discovered because this is a similar strategy my Self Storage partners have been running for years. They acquire and consolidate 20-30 self storage facilities owned by mom-and-pop operators. By enhancing revenue and optimizing operations the portfolio attracts larger buyers like REITS or other private equity funds.
How it Works
When an accredited investor invests in an operating business, they are effectively buying a piece of the business. This means they benefit directly from the profits generated by the business's day-to-day operations.
The monthly cash flow comes from the business’s ability to consistently generate excess revenue after all expenses, including any debt service, have been paid. As an investor, you're not actively managing the business but benefiting from the expertise of the operators and managers running it.
The deal structure might also include a preferred return, which guarantees that investors receive a minimum return before profits are shared with the business managers or sponsors.
How Is Value Created?
Rollups involve acquiring multiple companies along the supply chain or within the same industry, typically with the goal of increasing scale, operational efficiency, and market control.
What Happens At The Exit?
At the end of the investment cycle, typically after 3 to 7 years, the business may be sold or recapitalized. The profit from the sale, known as the capital event, is distributed to investors after paying off any debts or financial obligations.
This profit, often referred to as the equity multiple or internal rate of return (IRR), represents the total return on the investment, combining both the cash flow received during the holding period and the capital gains from the sale.
For example, if a business was bought at a 5x EBITDA multiple and sold at a higher multiple after increasing its profitability, the investor reaps the benefits of that appreciation in value. This exit strategy is how investors might realize substantial gains beyond the regular cash flow they’ve been receiving.
However, if the business struggles to meet it’s business plan or operates at a loss for an extended period, it may diminish the investor's profit upon exit. This is why selecting businesses offering essential services run by experienced operators is crucial criteria when evaluating any deal.
How Do Rollups Compare With Multifamily?
Multifamily value-add syndications create value primarily through property improvements, rent increases, and operational efficiencies.
Roll-up strategies involve acquiring and merging companies within the same industry, creating synergies to boost operational efficiency and expand market share, ultimately driving cost savings, increased pricing leverage, and higher valuation multiples at exit.
Here are some sectors I found compelling:
Healthcare Services
Clinics, dental practices, urgent care centers, and specialty hospitals are a non-discretionary needs, ensuring consistent demand regardless of economic conditions. Many services are insurance-covered, reducing the risk of non-payment and enhancing cash flow reliability.
The stability of healthcare facilities make them attractive acquisition targets for larger healthcare networks or private equity firms.
Parking Facilities
Parking garages and lots, especially in urban areas, generate consistent revenue through daily and monthly fees. Monthly contracts with local businesses and commuters provide predictable income, while dynamic pricing during peak times maximizes profits.
Exit strategies include selling to: municipalities, REITS, pension funds & real estate developers for land conversion projects.
Senior Living Facilities
Senior living & care facilities, including assisted living and nursing homes, offer stable demand driven by the growing needs for elderly care.
These facilities benefit from reliable monthly payments, often backed by Medicare, Medicaid, or insurance. High regulatory standards create barriers to entry, limiting competition.
Institutional interest and industry consolidation present ample exit opportunities for investors.
Storage Warehouses
Storage warehouses, especially those serving logistics and e-commerce, offer consistent revenue through long-term leases.
The rise of e-commerce has driven demand for these spaces, as online retailers need room for inventory, order fulfillment, and returns management.
Their stability and growth potential have made them attractive to institutional investors like REITs and private equity firms, creating opportunities for valuable exits.
RV Parks and Campgrounds
The growing popularity of the RV lifestyle, driven by retirees and digital nomads, makes this sector appealing.
These properties offer diverse rental rates & options—nightly, weekly, or monthly—catering to everyone from vacationers to long-term residents. Amenities like pools, Wi-Fi, and convenience stores add extra revenue and camper loyalty. RV Parks typically require minimal staffing reducing overhead.
In tough economic times, RV parks remain resilient, offering affordable vacation options compared to pricier hotels.
Here is a simple explainer video on how rollups work:
Bottom Line?
Roll-up strategies offer accredited investors a unique opportunity to gain exposure to essential cash-flowing businesses that can provide stable and predictable returns. By focusing on non-discretionary sectors like healthcare, senior living, and storage facilities, investors can diversify their portfolios while benefiting from the operational efficiencies and market leverage that come with consolidation.
While these investments carry risks, particularly in execution and business performance, the potential for higher exit multiples and steady cash flow make roll-up strategies a compelling addition to traditional real estate syndications.
As always, it is crucial to thoroughly vet operators, sectors, and deals to align with your financial goals and risk tolerance. The roll-up approach might just be the key to unlocking growth in this higher-interest-rate environment while maintaining the cash flow investors seek.
Disclaimer: The information provided in this article is for educational purposes only and does not constitute financial, legal, or investment advice. Investing in private equity or any cash-flowing business carries inherent risks, including potential loss of capital. This article does not endorse or recommend any specific investment, business, or strategy. Readers should consult with their own financial, legal, and tax advisors before making any investment decisions.