212 - Roll-Ups vs. Holdcos: Understanding the Key Differences and Benefits with Dzmitry Miranovich

0:00I dabbled in a holdco, but I realized really quickly that I hated it because there's a lot of context switching. And unless you're at scale and have management teams, the execution is on you. And it's really hard to have expertise in five different businesses. I think of holdcos as like an inch deep and a mile wide and rollups as an inch wide and a mile deep. But there are a lot of people who look at Warren Buffett. He's got a holdco. I want to be like Warren Buffett. Warren Buffett has multi-billion dollar positions and he's not the one who's actually running these businesses. It's very different when you have a holdco and you are responsible for operational execution.

0:31This was absolutely the best explanation I've ever gotten from anybody on how to look at a rollup.

0:39Dimitri, I am so freaking excited to talk to you today. I've been trying to get you on for over a year. You have a rollup that you're working on right now, a veterinary clinic. You have over 20 of them. And I think people are very curious about this rollup holdco model, especially when they haven't done it before. and they have a lot of, I guess, ideas about what it actually is. What is, in your opinion, the worst thing about a holdco company or rollup? And what do you feel like is the best thing? Let's start with the worst first. Yeah, well, thanks for having me on. So holdcos and rollups are, in my mind, are very different.

1:15I think some people might be using those terms interchangeably. Generally, in my mind, when people say a holdco, they refer to an organization which has some sort of corporate overhead, corporate systems like a finance organization, HR organization, recruiting organization, and so forth, but then owns assets which are independent of each other, right? There might be a veterinary business, there might be a HVAC company, there might be a software company. Sometimes Holocaust have very little overhead as well. Sometimes they have a lot of overhead, but that's the model, right? Yes. Yep. Businesses that are different in nature from each other.

1:52in roll-ups the idea is that you buy or partner with a handful of businesses in the same industry and the more similar they are to each other the better it is right we're talking about gp vet clinics right as opposed to you know for example our roll-up we're doing gps or general practitioner veterinary clinics we do not do urgent care we do not do emergency we do not their specialty. Now, some more clinics might offer occasionally one of the services, whether it's specialty urgency, urgent care, it gets a little nuanced, but the idea is that you're acquiring businesses that have a very similar model.

2:33And, you know, in other industries, you can be doing commercial HVAC, residential HVAC, and those are quite different for each other. So in the role of ideas that you buy a bunch of businesses that they're similar to each other, And there is some overarching reason why it makes sense, right? Why one plus one plus one is equal to three or at least three, but ideally more than three, right? Because the important fact to realize is when you put those together, you also have dissynergies, right? Like you have corporate overhead, you have corporate costs, you're professionalizing those businesses in many ways, which actually costs money, right?

3:10like running proper payroll and accounting accruals, things like that, all of that costs money. And so there is a level of the synergy. And so it's very important to have a thesis whereby, again, 1.1.1 is at least worth three or more. And so there is often some, well, actually there is rarely a revenue synergy component. It could be some, and there might be better ways to run revenue, right? So just grow those faster. There is often some sort of cost synergy component, right? And that could be margins, could be better ways of running those businesses, better SOPs, better operating procedures, so forth.

3:53And then there is also the aspect of diversifying risk or mitigating the risk, right? Like each of those businesses that you partner with or buy are inherently very small businesses that they're prone to risks. It could be loss of a key person. It could be geographic risk of being subject to hurricanes or weather or whatnot. So when you put them together, you diversify that the way. You put systems in place to mitigate those risks. You might have a recruiting organization, like a recruiter and a sourcer at the parent company level, which individual clinics just cannot afford or individual companies cannot afford.

4:29I think of hold codes as like an inch deep and a mile wide. and roll-ups as an inch wide and a mile deep. But there are a lot of people who look at, oh, Warren Buffett, he's got a hold co. I want to be like Warren Buffett. Well, Warren Buffett has$20 billion positions and he's not the one who's actually running these businesses. It's very different when you have a hold co and you are responsible for operational execution than when you are someone like Warren Buffett who has enough resources to hire out the depth and the bench of the team in order to execute really, really well. What made you decide to go the roll-up route?

4:59Because for people who are listening, typically what happens in a roll-up. The idea, the thesis is, look, we can go out and we can identify an industry and we can raise capital. And with that capital, we are going to go and buy a bunch. We'll have a platform and then we'll be able to consolidate and centralize either some of these things, the synergies that you were talking about. We'll either centralize some services or we'll use those synergies to achieve better margins. But then you grow and at scale, you have cost efficiencies that you couldn't otherwise achieve by bootstrapping. However, you have to raise money and you kind of go into other investors and they're putting money into your business.

5:32So there's some level of, I don't necessarily have full control, even though I am operating as an entrepreneur. For you, why decide to go the roll up? Why not decide to maybe buy a business first, operate that, grow it, and just rinse and repeat? There are several things to it, right? In a full-commodo, you're inherently buying a bunch of different businesses and different industries, right? So I think it's fundamentally difficult or not necessarily difficult, just takes time to get really smart in an industry, right? To get really good at something. Totally agree. Totally agree. And so in my mind, like, so we've been doing this for three to four years and I can tell like, you know, in my prior job, I worked for a large investment firm, you know, I covered several different industries including veterinary services.

6:20And so I knew the industry well, I thought. But then it turns out, like sitting in a Manhattan, you know, high rise office building and like, you know, looking at numbers and thinking, oh, I know this industry really well. Turns out that it doesn't really give you the creds to know the industry. When you actually step into the role, you're like, oh, my God, like this is so different. Like the reality is so much more complicated than questions that we used to ask don't really matter. there's those questions that we should have asked and we've never asked because we didn't even think about it. What were you doing at Carlisle?

6:55So when you say you were sitting and looking at a spreadsheet, like what functions were you actually doing? Yeah, so I was an investment professional. I worked in the private credit side. So we did everything from junior debt to senior debt, specialties, direct lending, everything in between. So we were investments in several vet consolidators and also like dental and physical therapy and dermatology and many other industries, right? But I guess to your point, now that I know what I know, I think it would be incredibly difficult to just say, okay, I'm going to buy an HVAC business one year and then next year I'm going to buy a vet business and next year I'm going to buy a dental business.

7:33I think it's perfectly fine if you have a management team to run those businesses and you're partnering with someone who knows those industries really well, which oftentimes is the seller. right? If that's the whole setup, I can get behind it. I think it makes sense why people do it, how people do it. And like independent sponsor model, in some ways is sort of doing that, right? Except that there's no common ownership. I dabbled in a holdco. I mean, we didn't have a ton of companies, but I realized really quickly that I hated it because there's a lot of context switching. And unless you're at scale and have management teams, the execution is on you.

8:10and it's really hard to have expertise in five different businesses. It's very difficult if you don't have a thesis. I think the hold codes that I've seen be successful is they may not be rolling up a vertical, but they've identified something where they say, oh, we look for businesses that are lagging on technological adoption specifically with AI. And then they'll go and they'll kind of apply that broadly. And they have a centralized team that has one specialty. And so that becomes sort of the differentiator. But if you were like me and just a shotgun approach, like, oh, this is a cool tree trimming business.

8:43And, oh, this is a cool digital agency. Or this is a cool RV park. That thesis kind of fails because there is no thesis. And you really have to understand what you're doing. Yeah, unless you have a very strong management team that runs each of those businesses, right? And typically to have that, you need to be buying assets of certain size, right? Those companies have to be big enough to afford the dedicated management team, right? And dedicated management resource. And so, yeah, I mean, I think whole commodity could totally work. It's just, you know, you have to be mindful of that. Like, in my mind, then, like, I decided, you know, I looked at several industries, I, you know, evaluated them based on certain parameters, so I'm happy to kind of dive into that.

9:29And I decided, okay, this is the industry I want to go after, like, let's dive in, right. And I felt that in the industry, it turned out that, you know, my knowledge was a lot more like a spreadsheet knowledge than actual knowledge. But then, you know, I learned and I think, so if you ask me, like, what is the key quality that's, in my mind, is a predictor of doing this? Well, I hope we're doing it well, it is just like, basically blocking and tackling, right? That's just having, and someone told me that a serial roll-up founder is now they've you know acquired and sold several you know raws and spoiler industries it was the same thing he said to me it was like it's just blocking and tackling you just gotta persevere just gotta dive in learn you'll face a lot of new problems a lot of new things that you've never dealt with before and maybe that's just quite frankly any business and you just have to tackle them one by one and you know stay positive and you know do it so So video is cool, but I have what scientists call a face for radio.

10:30And so it's even cooler is long form audio via my podcast and my newsletter. Nickonomicspod.com. Go there for free. Subscribe to my newsletter. It's one email per week. Super tactical. And then go to my audio podcast. I do three to five episodes a week, depending on how curious I am. And it's stuff like this. It's all free. No sleazy sales pitches. Nickonomicspod.com. Let's go high level and then we can go granular on vet clinics. what makes a good industry to do a roll-up in or at least you know what are the key characteristics that you look for to say i could do a roll-up in this space so it has to be fragmented right so it has to be there has to be ideally thousands of individual small businesses all pricing within the industry is there like a concentration percentage that you look for because obviously there can be thousands of businesses but you have one company that has 80 of the market that's not fragmented.

11:22Yeah, exactly. That wouldn't work. I'd say if industry is over 50 % consolidated, I probably wouldn't go for it. There is very rarely one company that's a large percentage of the entire industry, at least in the US. In some Western European markets, it's more common. For example, VetMed in Europe, in the UK, there's one company that's, I wouldn't say 20 to 25 % of all vet clinics in the UK are owned by one company. It's a much smaller market, much easier or quicker to consult it. In the US, the largest player probably owns a single-digit percentage number of all vet clinics across multiple brands.

12:01The flip of that would be electronic medical records, for example, like in the hospital systems, epics dominating, or in the skilled nursing space, or home health and hospice, the EHRs, it's probably not a space you're going to go do a roll-up in just because there is heavy consolidation but in the clinic space you mentioned like physical therapy occupational therapy home health hospice there's a lot of fragmentation in those spaces there's not a ton of consolidation yeah yeah so i'd say like vertical erp software there's a bazillion of them right there is swag dental dermatology physical therapy made it like trampoline park there is fitness gyms right there's degrees of consolidation in nature that's right so that's interesting so you would even look at that as like that's an erp so actually the erp market is all of these different ehrs and back-end systems that are managing these businesses so you could actually do a roll-up potentially in that space that's yeah that's cool i've never thought of it like that yeah and people doing that like versical erps like they would buy erp for like meat processing and the erp for like a cookie factor and erp for they're fully integrated and they're managing everything and they can apply to like almost any industry but they're just overbuilt and they're not like workday applies to almost any industry but there's not a lot of specificity to your particular business okay sorry i got us off track so the first one is fragmentation fragmented market let's say you know it's arbitrary to be fair it's arbitrary right less than 50 % consolidated but it's important that when you look at the overall market you also need to look at what's your addressable market.

13:39Like for example, HVAC, right? There's like a bazillion HVAC companies in the US and most of them or many of them are single technician specialist and a truck. And that's the entire business. And it still counts as an HVAC business. Now that will never get acquired. I mean, it's very difficult to wrap your head around acquiring something like that because it's too small in terms of revenue, it's concentration risk with one that's called provider specialist, right? So you need to narrow it down from all the businesses in this specific industry down to which can be actually acquired or partnered with, right?

14:19And then you need to look at the fragmentation of that pie because oftentimes you might realize, like for example, dental industry, I mean, there's all kinds of stats floating around of consolidation in the dental industry. But if you look at the addressable market, I mean, I think it's 60 to 80 % consolidated, right? And so it's important to look. So fragmented industry, then fragmented addressable part of the industry. So that's number one. And then the extension of that is you want to have a long runway for consolidation, right? You want to be able to do this for 5, 10, 15, 20 years, because that's what supports your multiple arbitrage.

15:00You buy your individual asset for X EBITDA, you sell it for 2X or 1.5X, right? And those kind of ratios differ. And in the perfect world, your roll-up thesis should not depend on multiple arbitrage. Your economics, your operational value creation should drive returns. And that's what we strive for internally. But, you know, you want to have this kind of multiple arbitrage as a sort of chair on top. And quite frankly, that chair could be more like a pineapple dig. So that's support and that's supported by runway for consolidation, right? Because the longer the runway, the longer you can make an argument that you can be by buying down the multiple, right?

15:40So how do you measure runway for consolidation? Just what percentage of the market is consolidated and then how large the total adjustable market is? Yeah. Like in most industries you can find industry publications. Sometimes industry might have like a dedicated or like a blue cheap brokerage firm that all operates within that niche, within that industry. They would track those numbers and it's a whole bunch of estimates, of course. Right. But you know, you can get the sense of it, right? There is a, I'd say, you know, 10 ,000 units and 3000 are consolidated. Addressable market. Let's say 10 ,000 is the addressable market, right?

16:173000 are consolidated and 500 are being sold per year, roughly. Right. And so you divide that kind of 10 minus 3, 7 by 500, then you get your runway, right? So that's kind of the... And you'll never achieve 100 % consolidation. And you'll never achieve like 100 % consolidation, but maybe you solve from like, you know, that this case I'm talking about like from 30 % to like 60%. So that how long will it take for that 30%, 30 points of consolidation to happen, right? I've never heard of that equation. Let me split that back to you. So if there's 10 ,000 companies in an industry, 3 ,000 are consolidated.

16:59So there's 7 ,000 free agents. And you go to that blue chip brokerage. And let's say those are 10 ,000 that they're addressable. Those are the companies that can actually be acquired. Right. And then you go to that blue chip brokerage, or you talk to a few of them, and you kind of decide, oh, yeah, there's 500 a year that are being sold. If you divide that 7 ,000 by 500, that's 14. So is that like, it's my runway is 14 years. Is that how you look at it? Yeah, exactly. Oh, now you will never achieve 100 % consolidation, right? So maybe you sold from like 30 % to 60, 70%, right? And so in this specific example, maybe it's not 14 years, maybe it's more like 10 years.

17:46But yeah, that's the exact math you kind of want to do in your head. Wow. The other ranges. is let's say that i did the math and it was seven years is it like that's good runway or is that not good runway i would look at things which are like 10 plus years okay you want a decade plus yeah dude that is fascinating i've never heard that before is that unique to you i don't know if that's unique to me it's i kind of look at everything from i try to kind of have those like mental shortcuts and like overused term models but i have not heard other people use that mental framework, but I'm sure other people do too.

18:23I think I just think that's a great way to quickly quantify it, right? Because I think everybody has that thesis is like, oh, well, we need a lot of runway in order to consolidate this market. But like, how do you even put a number on that? That's a very good proxy. I've never heard anybody doing that. And it makes total sense. Yeah. And it's also like fairly, all those numbers are fairly easy to get. Like it's, if you just spend like a few days digging into the industry, you'll find specialty publications, there's usually like some We have a specialty conference. There's, again, publication. There's some data website.

18:54There's brokers. You'll find a way to get those numbers, at least approximately. So fragmentation, I put total addressable market as a separate category. I know that you kind of put it in with fragmentation, but there has to be a market of some minimum viable size. The way I think about it, I'm sorry I'll interrupt you. Oh, please. I'm not necessarily thinking about it as a total addressable market, but I want to see that each company that you're looking to buy is at least of a certain size. Some industries are challenging, right? Because like an average business or like a median business in an industry is just tiny, right?

19:36That's maybe like 400 or 500k of revenue. And so it's just difficult to roll those up, right? Because again, when you put them together, they all require work in the back end, right? Like you're creating overhead structure, creating, so to say, corporate, we're called success center management team. And so managing 10 veterinary clinics that generate 1 million in the revenue is about the same effort as managing 10 that generate 2 or 3 million in the revenue each, right? And so ideally, the industry you're looking at has opportunity for you to buy companies or partners companies that are at least of certain size, right?

20:14So you want to get to a point where you can start off smaller, right? You can start off with, you know, companies with maybe a couple hundred K of EBITDA per acquisition, but you want to over time kind of move towards ones which are larger because again, Give me an idea. Is it top line that you're looking at? Or are you looking at like bottom line net income when you're deciding how big bottom EBITDA revenue matters to them and revenue is a proxy right but cash flow is what matters yes for sure for you in the vet clinics that you're looking at what was that number was it like hey they've got to be cash flowing at least five hundred thousand dollars a year or more less than that like where do you land early on we did not have that well established.

21:03I mean, I knew generally what companies look like in the bed industry or what clinics look like. The reality when you're starting on is like, it takes time to refine what your checklist looks like and what specific parameters to pay attention to. And so for us, like from day one, like we were really focused on partnerships, right? On personality fit, you know, doctors who partner with us, who sell to us, who stay on as co-owners, partners, because that's core to our model, like we have a co-ownership model. We didn't pay that much attention to size, just quite frankly, because it takes some experience to, and I realized it on paper, right?

21:47That, you know, you have corporate overhead, you're spreading it across locations. But until you're actually operating, when you operate, you start feeling it like very tangibly, right? that you do want it to be certain size because that's what helps support the overhead. Hey, I don't know if you remember this, but when we started this podcast, we entered into a social contract. I would spend time, energy, and money producing this podcast, interviewing these individuals and giving you insights into how to build, buy, start, grow your business. And you would like, subscribe, and leave me five-star review.

22:23Now, out of that, we both get to talk to really cool people and hear really cool insights. We both get a ton of value, but I just want to help you keep your word. So would you do me a favor? Will you go leave a five-star review for me on Apple or Spotify? It would really help. And if you want, even share this with a friend. Well, and like you were saying, it's very different when, excuse my language here, I call it spreadsheet porn. You're sitting in your office and you're like, well, if we just do 10 % this year and then we cut this cost and then we, oh, if we were growing this market and get this market share is like you can talk yourself into anything being a billion dollar company right so it's very different when you're doing the analysis that you're talking about where it's like okay i need for each individual location to be producing x does the vet industry do that oh yes it does okay great now i'm going to go get my first acquisition you're not necessarily at least from what you're saying it's like you don't need to go out and swing for the fences and get the biggest acquisition you can get you just need to get in the game so that you start getting some experience and understanding like, how does it actually work?

23:22And how does the spreadsheet translate to real life, so that you can go faster later? I think that's what you're saying. Yeah, absolutely. I would say, however, I've heard an opinion from someone where, you know, in the roll up, you want to get started as soon as possible, meaning, you know, get your first deal done as soon as quickly as possible, because once you have done it you know others will take you more seriously like deal number two three four five is much easier than till number one because you have got someone to trust you not having any track record basically i sort of disagree with that in a way that like we wanted to make sure that our deals you know we had very strong fit but culturally partnership wise like from day one right it might not have, you know, we didn't look at certain parameters, like maybe size as much as we're doing, looking at them now.

24:17And it's not to detriment of those clinics. It's just, you know, we wanted to make sure that we partner with right folks. That was focus number one, right? And so we could have focused on size, but that wasn't the most important thing for us day one, right? The most important thing for us day one was to partner with right people, because if your first or second or third acquisition turns out to be problematic, right? It just drags down the entire thing, right? Like, dude, I totally agree. I was talking to somebody last week, and they were, they want to do a roll up. And so they're kind of telling me their strategy.

24:52And they found this, it was in the I'm gonna make this up. It wasn't in the space, but I'm gonna say that it was is in the medical billing space. And they were like, Oh, it's a company, and they do a million dollars top line, and$250 ,000 bottom line, and I just want to get into the space. And I was like, that's way too small. You don't know anything about the space and this owner wants to retire, et cetera, et cetera. But worst of all, when the owner retires, you have to jump in and operate the business and there's no SOPs, there's no processes to get it going. So when you're doing that first acquisition, it's incredibly important to know what you need.

25:26Like if you had operated vet clinics before, maybe you get into the business and you don't necessarily need the owner to stay around or a good partner. Okay. But if you've never operated before, like you're saying, no, I need to have a partner. I need to have either systems or processes, or it needs to be large enough that I can go in and run it. And like that, to your point, that first acquisition is so important, but it's not necessarily one size fits all of how it has to look. Yeah, I totally agree. I mean, we've had a deal under LOI that we could have closed, I think for like six months before we actually closed our first partnership.

25:58We just walked away. We realized it's not going to be the right fit. And there's like some misrepresentation involved. And I don't think it's like any perhaps broker not doing a good job as opposed to any sort of like intentional misrepresentation. But, you know, it just wasn't for us, right? And so we walked away and we kept working. And then our clinic number one actually became clinic number one is awesome, right? It's really solid team, really solid partner, great practice manager, great doctors. And that's been great, right? Because of those people, the source references that's important.

26:35You will be making mistakes early on. Like it's inevitable. What? That's right. I've never made a mistake in my life. Everything I do is 100 % accurate, 100 % of the time. But in case ever such thing were to happen, you know, you did something wrong. it's really helpful to have people on their receiving end who are understanding and kind of work with you because it's challenging look i mean it's you're dealing with a lot of people you're dealing with a lot of individual you know companies clinics right and look it's inevitable there are third-party circumstances that you do not control right like like we're doing with this now right our audit is taking longer than you know we expected and you know it's first time audit to takes a long time like it is what it is right we don't control it and we have a great accounting firm we're working with like our team is on it but just taking long right and so you know it's people are waiting for their k1s and it's you know it's not a deal right it's not great optics and i'm like trying to manage it but at the end of the day like we're doing our best and the accountants are doing their best but this is just the reality that we're dealing with right and so just trying to, I think, maximizing the positive factor, meaning people that you can have a genuine conversation with and be direct and be like, like, look, listen, I'm sorry, this taken longer, or this didn't get done, or we were wrong.