Why I Love Rollups

By Richard Perlman, W’68, Chairman, Compass Partners, and founder and Executive Chairman, ExamWorks Group

Rollups are a subject near and dear to my heart: I am currently involved in my 3rd rollup over the last 16 years, during which time my business partner, our team, and I have acquired 100 companies.  What is unusual about my experience is that all three have been successful (although, as is typical of any business, there have been many sleepless nights along the way).

The basic concept of a rollup makes intellectual sense in that you should be able to take dozens of small businesses and, by combining them into one larger company, operate more efficiently.  The efficiencies should come in many ways: increased purchasing power, lower cost of capital, spreading headquarters costs over a larger revenue base, etc.  Despite the rationale behind consolidating a fragmented industry, most rollups are unsuccessful, and I thought it might be useful to attempt to identify the reasons for my experience as compared to the many that have failed. I believe the biggest reason for the excessive failure rate of rollups is a misguided big-picture strategy followed by poor execution.  In this post I will refer to my current company, ExamWorks Group, Inc., because I think it provides many real life examples of getting it right.

Let me deal with the big strategy issue first.  7 years ago, when my business partner Jim Price and I heard about the characteristics of the independent medical examination (“IME”) business, we got very excited.  IME companies examine claimants for insurance companies and other third parties to establish the veracity of workers’ compensation, automobile accident, disability and general liability claims.  Here was an industry that serviced some of the largest financial institutions in the world, had annual revenues in the U.S. of approximately $4 billion, had no correlation to the general economy, had above average profit margins, low capital requirements, attractive cash flow, and was comprised of 500-plus small companies with average revenues of $8 million.  When we heard all this both of our reactions were: “It’s too good to be true!” and “This is America—why hasn’t someone else tried to consolidate this industry?”

After several months of research verifying the attractive characteristics mentioned above, we also found that, in fact, a couple of others had previously tried to consolidate the IME industry and failed.  As we continued our research, the reason became abundantly clear.  The IME industry was made up of companies that operated in a localized geographic sphere, meaning a city, state or in a few limited cases, a few states.  They had grown their businesses often by building strong relationships within the local claims offices of their insurance company clients or the lawyers that represented them.  Additionally, they had built relationships with the doctors who served on their panel and examined the claimants.  In many cases, these relationships had existed for in excess of 20 years.  The prior two failures looked at this industry as a typical rollup where they tried to centralize these functions and significantly reduce headcounts to shrink overhead.  By doing so, they eliminated the heart and soul of these businesses.  Over a fairly short period of time, these moves lead to a serious decline in revenues that overcame any reduction in expenses and ultimately necessitated the sale of both these companies at fire sale prices.

When Jim and I understood this, we decided that our big picture strategy should be the opposite.  We would buy the best local companies in every market in the U.S. but leave all of that human capital in place.  The business was attractive enough that if our strategy worked, we would achieve revenue synergies while still not have to rely on cost cutting to create a successful enterprise.  The objective was to offer a national insurer a consistent product anywhere within the footprint of their claims offices with just one point of contact. At the same time, we would emphasize maintaining the same level of service and support on which the local companies had been built.

The second failing of rollups is poor execution.  Because we chose integration rather than centralization, we needed to standardize the way all these acquired companies operated in order to fulfill our vision of offering a consistent product to our customers.  Consequently, we migrated all the acquired companies to the same operating software platform, accounting and management information system and information security platform to provide better tools to enhance responsiveness and data security on the local level.

Lastly, we focused on the employees. I have always said that in attempting to blend many different privately held subcultures into one cohesive whole, the social and cultural issues are, in many cases, more important than the financial ones.  This is particularly important in a service business where there is no machinery, equipment or inventory.  In essence, “the assets walk out the door every night”.  Keeping the entrepreneurial zeal that made these companies so successful for so long is something we work at every day. We spend a lot of time explaining our vision and sharing our concerns for solving our customers’ problems with our employees on a systematic and regular basis. We encourage our senior management to personally visit each of our major global locations at least once a year and, in many cases, more frequently. Additionally, over the last 16 years and our multiple rollups, we have had a general philosophy of granting stock options to every employee in the company. Making everyone an owner has paid enormous dividends and, we believe, is one of the key elements to our successes.

Well, after a little over 5 years of buying and integrating 40 companies into what is now a global enterprise, the original big picture strategy is coming true.  ExamWorks’ consistent service and product offering is becoming more appealing to customers as they attempt to standardize their policies and procedures. For the first time ever in the industry, three major clients have awarded ExamWorks true national relationships. We believe that we are at the beginning of a systemic change in the IME industry from which ExamWorks is uniquely positioned to benefit.

I am clearly biased in my opinion of rollups based on our successful track record. Like every business, there are positive and negatives, but in approximately 5 years we have taken a thesis and created a thriving company with 2200 employees, operating in 4 countries out of 57 offices, scheduling almost 1 million exams for our clients annually, and with an enterprise value in excess of $1.2 billion. To say I am a fan of rollups is an understatement.

Note: This article reflects the personal opinions and experiences of Richard Perlman as an individual entrepreneur and educator and not the opinion of ExamWorks Group, Inc. or its officers, employees or directors.

PerlmanBio: Richard Perlman is the Chairman of Compass Partners, LLC, a merchant banking firm he founded in 1995 and the founder and Executive Chairman of ExamWorks Group, Inc (NYSE:EXAM) the global leader in the independent med medical exam industry. During his 40 year career he has acquired over 125 companies in a broad range of industries. He is a 1968 graduate of the Wharton School and received his MBA from The Columbia University School of Business in 1972.