Introduction to Roll-Up Modeling

Introduction to Roll-Up Modeling

Introduction


You're planning or evaluating a consolidation and need to know whether serial acquisitions create real value - that's what roll-up modeling does: it builds a combined financial forecast that shows how multiple small targets become one scaled business, quantifies synergies (cost saves, cross-sell lift), and tests timing and financing choices; in practical terms it directs deal sequencing, integration budgets, and exit planning. Typical users are private equity sponsors, strategic buyers (corporates with M&A-driven growth), and corporate development teams running internal build-outs or bolt-on programs. The model's primary outputs are a pro forma P&L showing combined revenue and EBITDA, a detailed cash needs schedule (purchase cash, working capital, integration) and investor return metrics-commonly targeting 20-30% IRR and a 2.0-3.5x equity multiple over a 4-7-year hold, with initial equity often around 20-40% of deal value; here's the quick math: ten $5m-revenue targets can become a $50m platform that materially changes exit valuation. What this estimate hides: sector multiples, debt cost, and integration execution drive most outcome variance, so models must stress-test financing and 90-day integration plans to avoid defintely costly surprises.


Key Takeaways


  • Roll-up modeling quantifies whether serial acquisitions create value by forecasting a combined business, synergies, and guiding deal sequencing, integration, and exit planning.
  • Primary outputs are a pro forma P&L, a detailed cash (purchase, WC, integration) schedule, and investor return metrics (target IRR 20-30%, 2.0-3.5x equity multiple), all of which must be stress-tested.
  • Deal structuring and timing matter: target selection (revenue, EBITDA, multiple), purchase-price split (equity, debt, seller financing, earnouts) and close/effective dates materially affect pro forma results.
  • Modeling mechanics require standalone forecasts, pro forma adjustments (normalize EBITDA, eliminate one‑offs), consolidation entries, and quantified phased synergies (cost and revenue) with realistic ramp and downside scenarios.
  • Robust financing and covenant planning (debt pricing/amortization, covenants/DSCR), working-capital/integration cash planning, and sensitivity/valuation analyses drive go/no‑go decision triggers (minimum IRR, covenant cushion, integration KPIs).


Deal structure and sequencing


You're picking targets and setting the deal mechanics that determine whether the roll-up makes money or just makes work for you. Direct takeaway: pick targets with repeatable margins and simple integration needs, fund deals with conservative debt, and calendar the close/effective dates into every cash and covenant test.

Target selection criteria: revenue, EBITDA margin, growth, multiple


One-liner: choose targets that fit the platform's scale and integration capacity.

Start with hard screens: revenue band, margin, growth, and transaction multiple. Practical ranges for mid-market roll-ups in 2025 are: revenue between $5m-$150m, EBITDA margin preferably above 15%, and organic revenue growth generally > 8-12% to justify acquisition friction. Target multiples you'll pay typically fall in the 6x-9x EBITDA range for stable businesses; higher growth or strategic fits can command > 9x.

Steps to score targets:

  • Score revenue scale and seasonality
  • Score core EBITDA margin and margin durability
  • Check growth runway and customer concentration
  • Estimate implied purchase multiple and accretion/dilution
  • Flag integration complexity (IT, customers, contracts)

Here's the quick math: a target with $15m revenue and $3m EBITDA bought at 7x implies a purchase price of $21m. What this estimate hides: working capital swings, one-time adjustments, and carve-outs that change EBITDA and the multiple in the purchase agreement.

Purchase price split: equity, debt, seller financing, earnouts


One-liner: structure price with enough equity cushion to absorb integration and downside.

Default capital stacks in 2025 middle-market roll-ups use a mix of bank debt, sponsor equity, seller notes, and contingent consideration. A pragmatic split to budget for is 40-60% bank debt, 25-45% sponsor equity, 0-15% seller financing, and 0-25% in earnouts tied to performance. Interest pricing for senior debt markets in 2025 typically sits around ~8-10% all-in for unitranche/leveraged loans in the mid-market; plan covenants around DSCR and leverage band testing.

Concrete example and quick math: for a $21m purchase price (from above), a 50/35/10/5 split equals:

  • Bank debt: $10.5m
  • Equity: $7.35m
  • Seller note: $2.1m
  • Escrow/fees/earnout reserve: $1.05m

Best practices:

  • Use seller financing to bridge valuation gaps and align sellers to integration
  • Cap earnouts with clear KPIs and measurement windows (12-36 months)
  • Stress-test debt service at +200-400bps and -10-20% organic growth
  • Negotiate limited locked-box or interim working capital mechanics to reduce post-close disputes

Limit: earnouts help close valuation gaps but defintely add complexity-model three outcomes (0%, 50%, 100% payout) and their equity waterfalls.

Timing effects: close dates, effective dates, and pro forma period


One-liner: timing drives pro forma numbers, cash needs, and when synergies start to count.

Differentiate close date (legal transfer), effective date (economic transfer), and reporting period used for pro forma statements. Common approaches: effective date equals close date, or effective date is the start of the next fiscal period. That choice affects earnouts, working capital true-ups, and pro forma P&L recognition. Typical diligence and negotiation timelines run 60-90 days, and integration to realize material synergies usually takes 6-36 months.

Practical steps for timing in the model:

  • Build a deal calendar with signature, funding, close, and post-close milestones
  • Model partial-period P&L: count only days owned in the close month
  • Include working capital true-up mechanics and a holdback/escrow schedule
  • Plan interim financing between signing and close and include its interest in pre-close cash need
  • Set measurable earnout windows and the effective date for KPI measurement

Here's the quick math for pro forma: if combined run-rate revenue next 12 months is $60m but you only own the target for half the close month, pro forma Year 1 = platform revenue + 50% of target month revenue, adjusted for seasonality. What this estimate hides: delayed customer retention, delayed synergy capture, and tax/timing quirks that shift free cash flow.

Immediate action: Finance - build a transaction calendar, three-scenario cap table, and a 13-week cash bridge by Friday.


Financial modeling mechanics


You need models that stand alone, then a clear, auditable way to fold them together so deal decisions rest on real numbers. Here's the direct takeaway: build clean FY2025 base models for each target, apply conservative pro forma fixes, then consolidate with explicit eliminations and minority accounting.

Build standalone historical and forecast models for each target


Start with a three-statement model (income statement, balance sheet, cash flow) for at least the last three fiscal years and a forward-looking 5-year forecast. Pull audited or management-prepared FY2023-FY2025 statements and map line-by-line to a consistent chart of accounts.

Steps to follow:

  • Reconcile bank balances and cash flow for FY2025.
  • Normalize revenue drivers: price, volume, churn, new logos.
  • Project margins by line: gross margin, SG&A as a percent of revenue, and EBITDA.
  • Forecast capex, working capital, and tax rates using FY2025 as the pivot year.

Example: a target with reported FY2025 revenue of $50,000,000 and EBITDA of $8,000,000 (16% margin). If you assume 10% revenue growth in year one, year-one revenue = $55,000,000. Here's the quick math: $50,000,000 × 1.10 = $55,000,000. What this estimate hides: seasonality, one-off backlog, and billing cutoffs that can swing cash by months.

Best practices: build monthly detail for the first 12 months if close is mid-year; use driver-based models (customers × ARPU) for subscription/recurring businesses; keep an audit tab that links every assumption to source documents.

Apply pro forma adjustments: normalize EBITDA, remove one-offs


Pro forma adjustments make EBITDA reflect run-rate economics, not accounting noise. Treat them as items that would not recur post-close or that change because of the transaction.

Common adjustments to add back or deduct:

  • Owner compensation above market - add back to EBITDA.
  • Nonrecurring legal or restructuring costs - add back.
  • Related-party transactions priced above/below market - normalize.
  • IFRS vs. US GAAP variances that materially affect EBITDA.
  • Transaction costs and discretely chargeable items - exclude from run-rate EBITDA.

Example adjustment: FY2025 EBITDA = $8,000,000 includes a one-time litigation expense of $1,000,000. Normalized EBITDA = $9,000,000. Also model the PPA (purchase price allocation) amortization: if you assign $6,000,000 to intangible assets with a seven-year life, annual amortization = $857,143. What this estimate hides: tax effects and deferred tax liabilities from step-up; include a deferred tax line linked to the PPA.

Practical rule: require documentary support for each add-back and cap total aggressive add-backs at what a conservative buyer would accept. If management insists on adding back every "one-off," push for supporting invoices or contracts.

Consolidate statements and record minority interests and eliminations


Consolidation is arithmetic plus accounting policy alignment. Convert each target to the acquirer's accounting basis, choose an acquisition effective date, then roll up line items while eliminating intercompany flows.

Key consolidation steps:

  • Align accounting policies and fiscal year-ends to the acquirer.
  • Sum like line items across targets to create pro forma revenue and expenses.
  • Eliminate intercompany revenue, COGS, receivables, payables, and intra-group loans.
  • Apply PPA: record fair-value step-ups, post-close depreciation/amortization, and related deferred taxes.
  • Record non-controlling interest (NCI) for partial ownership and present NCI in equity and NCI share of net income in the P&L attribution.

Concrete example: you acquire 80% of Target A. Target A FY2025 net income = $4,000,000. NCI share = 20% × $4,000,000 = $800,000. Consolidated net income includes $4,000,000, but show $800,000 as attributed to NCI; parent's share = $3,200,000. If the acquirer and a target reported $2,000,000 and $50,000 in intercompany revenue FY2025, eliminate the full $50,000 in consolidation.

Timing and close-date effects: create a pro forma period that reflects the effective date - if close is 1-Nov-2025, build a partial-period FY2026 pro forma that combines acquirer actuals through 10/31 and target onward from 11/1. Always show a column with pro forma adjustments and a reconciliation back to reported numbers.

Next step: Finance - produce a consolidated FY2025 pro forma P&L, balance sheet, and cash flow with eliminations and NCI by Wednesday; include supporting schedules for each adjustment and source doc links so auditors and lenders can trace every number. This is defintely non-negotiable.


Synergies, cost savings, and revenue uplifts


Quantify cost synergies: SG&A, procurement-assign phased savings


You want a clear, auditable plan that ties each dollar of claimed savings to an owner, a timing bucket, and a one-line action. Start by separating one-off cuts from sustainable run-rate savings.

Steps to build the savings schedule:

  • List line items: SG&A, procurement, facilities, IT, G&A
  • Assign owner and action: e.g., consolidate HR systems, renegotiate supplier A
  • Estimate gross savings by line and % of baseline spend
  • Apply phasing: months to realize, ramp profile, and implementation cost
  • Net savings = gross savings - one-time implementation cost

Example quick math: three targets with combined FY2025 SG&A spend of $60.0m. Assume procurement savings of 3.0% and SG&A rationalization of 10.0%.

Here's the quick math: procurement saves $1.8m (3% × $60.0m), SG&A saves $6.0m (10% × $60.0m). Implementation costs $2.5m, so first-year net run-rate uplift = $5.3m.

What this estimate hides: overlap between line items, headcount severance timing, and tax effects. Always model gross-to-net waterfall and tag each line with audit evidence (vendor quotes, org charts).

One-liner: tie each $ to an owner, a date, and a supporting doc - or drop it.

Revenue synergies: cross-sell assumptions and realistic conversion rates


Revenue synergies are attractive but often overstated. Build them from top-down addressable market to bottom-up conversion steps: reach → engagement → conversion → retention.

Practical steps:

  • Define addressable overlap: customers common to both or reachable via distribution
  • Estimate outreach rate (% customers marketing can reach in 12 months)
  • Set realistic conversion rate (pilot data or industry proxy)
  • Model ARPU (average revenue per user) uplift and churn impact
  • Run channel and sales-cost sensitivity

Concrete example: combined FY2025 customer base of 40,000, average ARPU $1,250. Target cross-sell reach 25% in year 1; conversion 8%.

Here's the quick math: reachable customers = 10,000 (25% × 40,000); new customers = 800 (8% × 10,000); incremental revenue = $1.0m (800 × $1,250) in year 1. Apply retention and upsell in years 2-3.

Real-world adjustments: account for channel conflict, pricing cannibalization, sales incentives, and incremental CAC (customer acquisition cost). If CAC > LTV (lifetime value), pause the roll-out.

One-liner: prove cross-sell with a pilot that shows conversion ≥ your model assumptions.

Ramp and risk: timeline and downside sensitivity


Model synergies with phased ramps and conservative downside cases. Use three lanes: base, optimistic, downside - each with timing and probability.

Implementation best practices:

  • Phase savings over 6-36 months by activity type
  • Assign probability to each synergy line (70% core, 40% high-risk)
  • Include one-time costs and working capital hits up front
  • Stress-test covenant and cashflow under delayed realization
  • Require monthly KPI tracking for first 12 months

Example ramp plan: procurement savings: full realization at month 9; SG&A headcount: 60% realized by month 6, 100% by month 18. Revenue cross-sell: 20% of run-rate in months 1-6, 60% by month 18, full by month 36.

Downside sensitivity: model a 50% hit to synergies and a 6‑month delay. If base synergies = $7.3m, downside delivers $3.65m and often requires additional cash of $2.0m for integration costs and slower AR improvements.

What to watch: if onboarding takes > 14 days for customers, churn risk rises; if supplier renegotiations stall, procurement wins disappear. Track 5 KPIs weekly: synergy burn, incremental revenue, CAC, churn, and integration cash spend.

One-liner: plan for a delayed and halved outcome - then act if results diverge.

Finance: build the phased synergy schedule and a downside sensitivity (50%/6‑month delay) into the combined FY2025 model; owner: Head of FP&A, deliver by Friday.


Financing, cash, and covenant planning


Debt schedule, pricing, and covenant tests


You're structuring acquisition debt; get the schedule and covenants tight before signing - pricing, amortization, and DSCR (debt service coverage ratio) drive feasibility. Quick takeaway: keep first‑year cash interest and amortization within your 13‑week plan.

Start with a tranche map: revolver, term loan A (short amort), term loan B (bullet), and a mezzanine or high‑yield piece if needed. For an illustrative $500,000,000 enterprise buy (2025 fiscal-style example), a typical split is $300,000,000 term loan B, $100,000,000 term loan A, and $50,000,000 revolver.

Price with a floating reference (SOFR) plus spread; in models use a base example of SOFR + 350 bps for senior secured and 9.0% cash pay for subordinated paper. Set amortization schedules: TLA amortize 3-5% annually first three years, TLB bullet at maturity year 6-7. Build interest step‑ups and PIK (payment-in-kind) toggles as separate scenarios.

Embed covenant tests in the schedule: leverage (Net Debt / EBITDA), interest coverage (EBITDA / cash interest), and a minimum liquidity floor. Example maintenance covenants: leverage ≤ 4.5x, interest coverage ≥ 2.0x, and minimum unrestricted cash of $10,000,000. Always run covenant waterfall by quarter, not annually.

  • Map tranches to cash waterfall
  • Model fixed vs floating interest
  • Stress covenant quarterly
  • Price refinancing and fees

Here's the quick math: if pro forma EBITDA is $125,000,000, Net Debt $450,000,000 → leverage ~ 3.6x. What this estimate hides: seasonality, one‑offs, and working capital swings can swing covenant ratios fast.

Working capital and integration cash needs


You'll need upfront cash beyond purchase price; model both working capital gaps and integration costs explicitly. One-liner: run a 13‑week cash and a 36‑month integration burn schedule.

Calculate working capital as days metrics or percent of revenue. For a combined LTM revenue of $600,000,000, use conservatively: receivables 40 days, payables 45 days, inventory 60 days. That implies a working capital requirement roughly 10-12% of revenue, or about $66,000,000-$72,000,000. Reconcile historical seasonality and vendor payment terms.

Estimate one‑time integration cash (systems, severance, consultants, branding). Use phased buckets: immediate (0-6 months), medium (6-18 months), and run‑rate (post 18 months). For a mid‑market roll‑up with $500,000,000 purchase price, typical upfront integration cash is $10,000,000-$25,000,000, with annual run‑rate savings earned thereafter.

Best practices: fund upfront needs with revolver capacity or seller notes, not working capital lines; reserve a contingency of 10-20% on integration spend; and align earnout payouts to cash flow milestones. If onboarding takes >14 days, churn and billing delays raise working capital needs - plan accordingly.

  • Build 13‑week cash
  • Model WC by days and percent
  • Phase integration costs quarterly
  • Hold 10-20% contingency

What this estimate hides: vendor holdbacks and tax timing can add unpredictable cash drains in months 1-3 - model them separately and stress test.

Stress tests, covenant breach scenarios, and refinancing plans


Assume shocks and have action paths. One-liner: prepare three ordered remedies - liquidity, covenant amendment, and refinancing.

Run scenario matrixes: base, downside (organic sales -20%), and severe (-35% + interest rate shock +200 bps). For each, recalc EBITDA, Net Debt / EBITDA, and DSCR. Example: base EBITDA $125,000,000 → leverage 3.6x. Downside EBITDA $100,000,000 → leverage rises to 4.5x (borderline). Severe EBITDA $81,250,000 → leverage ~ 5.5x (breach).

Define immediate responses for breaches: (1) draw revolver to maintain liquidity, (2) request covenant holiday or waiver and model fee/extend cost, (3) enact restricted payments and hiring freezes, (4) pursue amendment for covenant reset tied to earnout or equity cure. Quantify costs: lenders often charge amendment fees of 1.0-3.0% of principal plus higher spreads.

Design a refinancing playbook: earliest market window, minimum cushion target (leverage ≤ 3.0x at exit), and acceptable refinancing economics (all‑in cost target ~7.5-9.0% for mid‑market in 2025 illustrative). Prepare lenders with a 90-120 day diligence pack: 13‑week cash, 24 months management P&L, integration KPIs, and waterfall of synergies.

  • Scenario: -20% EBITDA
  • Action: draw revolver, cut capex
  • Amend: model fees 1-3%
  • Refinance: prep 90-120 days

Limits: amendment options depend on lender mix and collateral; equity cures dilute return but buy time. Finance: build the 13‑week cash and debt amortization model; Treasury: draft covenant remediation plan by Friday.

Valuation, returns, and sensitivity analysis


Valuation approaches: DCF, comparable multiples, precedent roll-ups


You're deciding how to value a multi-target roll-up and need a defensible range, fast.

One-liner: use a DCF for intrinsic value, comps for market anchoring, and precedent roll-ups to test deal realism.

Practical steps to run each approach:

  • Build a 5-year forecast of revenue, EBITDA, capex, working capital, and taxes.
  • DCF: discount free cash flows (FCF) at your WACC (example used below: 11%), use mid-year discounting, and set terminal value by either a perpetual growth rate (2-3%) or an exit multiple.
  • Comparables: collect current public comps and recent M&A multiples for similar revenue/EBITDA and geography; use median and 25th/75th percentiles as your band.
  • Precedent roll-ups: analyze 3-5 prior roll-ups in the sector to check realistic synergy capture, integration timelines, and multiple expansion observed post-close.

Here's the quick math for a simple DCF example: start with FY2025 EBITDA $45.0m, convert to FCF by subtracting taxes and sustaining capex (assume FCF ≈ EBITDA × 0.70 → first-year FCF ≈ $31.5m), grow FCF 5% annually, discount at 11%, terminal via 8× EBITDA or 2.5% perpetuity. What this estimate hides: interest schedule, true working capital swings, transaction fees, and carve-outs - they move value materially, so model them explicitly.

Returns: calculate IRR, cash-on-cash, and exit multiple sensitivities


You need a clear answer: what equity return does this roll-up produce under realistic assumptions?

One-liner: compute purchase EV, net the financing, project EBITDA and debt paydown, then derive equity exit and IRR.

Concrete worked example (FY2025 baseline figures):

  • Purchase price: assume 7.5× FY2025 EBITDA of $45.0m → EV = $337.5m.
  • Financing: $200.0m debt, equity = $137.5m.
  • Operational plan: organic growth +5% p.a., phased synergies added (0%, 3%, 6%, 8%, 8%

    Conclusion


    Core checklist: realistic synergies, financing headroom, integration plan


    You're finalizing a roll-up and need a tight checklist that decides go/no-go in hours, not weeks. Takeaway: validate synergies, confirm financing room, and lock an integration owner before signing.

    Key checklist items - use these as hard gates:

    • Quantify achievable synergies by line item
    • Hold financing headroom for covenant wiggle
    • Set an integration leader and budget
    • Agree KPIs and reporting cadence
    • Confirm tax and accounting election impacts

    Benchmarks to use as facts: target a post-synergy IRR of 20-25% and an equity multiple of 2.0x-3.0x; expect to capture 50-75% of projectable synergies within 12-24 months; budget integration spend at 1-3% of combined revenue upfront. Here's the quick math: if combined revenue is $100m, a 2% integration budget equals $2.0m. What this estimate hides: one-offs, transaction taxes, and slower-than-expected customer migration.

    Operational gating rules (apply before close):

    • Require signed data room access and 90-day historical GLs
    • Require third-party validation of top 10 customers
    • Require executable financing commitment letter

    Immediate actions: build combined model, 13-week cash view, sensitivity sets


    You need working models and a cash plan the day after close. One-liner: build the combined P&L, cash flow, and sensitivity matrix now - not later.

    Step-by-step immediate actions:

    • Map and merge chart of accounts
    • Build standalone 3-year forecasts per target
    • Create pro forma consolidation template (monthly)
    • Prepare a 13-week cash flow with bank-level detail
    • Run three core sensitivity sets: base, downside, upside

    Modeling best practices: normalize EBITDA for recurring adjustments, model synergies phased monthly (example: 25% in Q1, 50% by month 6, 100% by month 18), and link cash interest and principal to the debt schedule. For the 13-week cash view, detail collections by customer cohort, payroll timing, and integration outflows. If collections lag >14 days, flag immediate liquidity need - defintely escalate.

    Owners and deadlines (example cadence):

    • Finance: combined model and debt schedule in 5 business days
    • FP&A: 13-week cash view in 3 business days
    • Strategy/Ops: synergy roadmap and KPIs in 7 business days

    Decision triggers: minimum IRR, covenant cushion, integration KPIs


    You need binary triggers that map to actions. One-liner: set thresholds that automatically shift from execute to mitigate or stop.

    Core financial triggers to hard-code into deal documents and internal scorecards:

    • Minimum post-synergy IRR: 20%
    • Minimum equity multiple: 2.0x
    • Maximum leverage (Debt/EBITDA): 3.0-4.5x
    • DSCR (debt service coverage): maintain > 1.3x covenant cushion
    • Liquidity trigger: 13-week runway ≤8 weeks → require board review

    Operational integration KPIs and remedial actions:

    • Synergy capture: 70% of plan by month 12 - if below, deploy contingency budget
    • Customer retention: 90%+ of top 20 customers - if below, prioritize retention team
    • ERP / billing cutover: complete by month 6 - misses trigger escalation
    • Employee churn in target roles: > 15% by month 6 → retention incentives

    Decision logic examples: if projected IRR < 20% even after upside synergies, pause equity funding; if DSCR falls below 1.2x, enact equity cure or bank covenant waivers; if synergy run-rate < 50% at month 12, shift to integration rescue (Ops lead + added budget).

    Next step: Finance - draft the combined model and 13-week cash view and deliver to Deal Lead by Friday. Operations: prepare synergy workstreams and owner list by Friday.


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