“Networking is not about collecting as many cards as you can – it’s about starting relationships.” — Melitta Campbell
What is private equity roll-up?
This type of strategy happens when you have a bunch of gas stations or car washes, and you roll them up to sell for a higher multiple.
Today, we’re going to talk about how it works.
This has become one of my favorite strategies for cash flow, appreciation, and diversification.
Let’s jump into it!
1. How Does It Work?
The private equity roll-up strategy starts with something like a business.
You’ll have a car wash, gas station, or dental practice and sell it for around 8x to 10x earnings.
This amount is usually the same if you have one car wash or five car washes.
But if you have 50 car washes that are very similar, you can often sell them for 15x to 25x earnings.
You can sell something for 2x to 2.5x the amount with a private equity roll-up strategy.
Now, you may be wondering:
Who is actually buying these properties?
Private equity and large Wall Street investment groups that are looking for cash flow and diversification.
They don’t want to spend $10 million on one gas station.
They want to spend $500 million on 50 gas stations.
A private equity roll-up lets you group properties together, allowing for economies of scale and growth.
We’ve done this through Tommy’s Express car washes.
There are many benefits of investing in private equity roll-ups.
The first one is cash flow.
This strategy really allows investors to get cash flow along the way.
There’s also appreciation.
When you’re building a car wash, the value typically goes up as you develop the business.
There’s some financial leverage involved in roll-ups.
Leverage usually involves taking some debt on either the land or the property.
If you have some leverage, that allows you to use the bank’s money to grow your wealth.
Another benefit is higher multiples at the sale.
Instead of 8x to 10x times earnings, sometimes you’ll get 15x to 25x earnings.
You make a lot more money simply by grouping properties together.
Finally, there are generally higher returns in private equity roll-ups.
We’re seeing return projections anywhere from 18% to 30% in these deals.
There are a lot of upsides to this strategy.
2. How Can Investors Get Involved?
So, if you like what you’re hearing, now the question becomes:
How can investors get involved?
The first thing is finding deals.
You need to be out networking, talking to people, going to meetups and conferences.
You’ll meet other investors and hear about opportunities to invest.
When you find out about these opportunities, that gives you the option to invest.
There are groups like ours that offer deals you won’t find unless you network.
If you look at private equity roll-up assets, there are a lot of avenues to explore.
The assets could be laundromats or franchises – anything with a similar system can be used.
It makes a much more scalable strategy versus investing in 20 different car washes that each run their businesses differently.
If you invest in properties with similar systems, management, and equipment (like a franchise), you can find that are scalable.
3. What Are the Risks?
An important question to ask whenever you invest is:
What are the risks involved?
What are the ways that you could lose money?
If you don’t understand the risks in a deal, then you haven’t looked hard enough.
In any deal, there’s always a risk.
There are always ways you can lose money.
It’s important to do your due diligence.
It’s important to vet the team, the deal, and the market.
This process can take some time.
You could go visit the property, read financial reports, and/or ask questions to the people involved.
It really comes down to the team’s performance ability.
If someone involved has done tech sales for years and they’re going into car washes all of a sudden, that can be a tougher sell.
In conclusion, take a look at this amazing strategy.
Find a deal that works for you, look for the risks, and go for it!
Now I want to hear from you.
What are you seeing in the private equity roll-up space?
Are there any other strategies working well for you?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.