Roll-up

What is a roll-up?

Roll-up (in German Bündelung) refers in company acquisitions to the merger of many small, usually similar companies into a group and, in financing, to the pooling of many small investors in a joint company. The first meaning, also called a roll-up strategy, concerns fragmented markets with many small providers and no large market leader. In the second, the joint company acts as a single shareholder in the financed company. Two everyday images: small shops that join under one management to form a chain, and a shared household that orders under one name and splits the bill internally.

The merger of companies is regulated by purchase and contribution agreements. The pooling of investors concerns the cap table, that is, the overview of who holds what share in the company. It is regulated in the articles of association of the joint company and in the company's shareholders' agreement.

Roll-up as consolidation of a market

A consolidator, that is, the one who pools the market, brings many small providers together into one group. This can be a financial investor, an entrepreneur or a strategic buyer from the same industry. Regional service providers, for example in building services, are typical. The businesses are acquired one after another or at the same time. In a simultaneous roll-up, the consolidator forms a holding company, that is, a company that only holds investments, and acquires several businesses on a common closing date.

The owners often receive part of the purchase price in cash and part in shares in the holding company. If they contribute their shares for this (share exchange), this may be possible without immediate taxation under the conditions of the German Reorganisation Tax Act (Umwandlungssteuergesetz). Tax advisers clarify this separately for each owner. Value levers, financing and competition law questions largely correspond to those of buy-and-build and are described there.

Specific risks follow from the large number of participants of equal rank. If an anchor company is missing, the leadership of the group has to be built first while the businesses are already being combined (integration planning). If, in a simultaneous roll-up, an owner drops out shortly before the closing date, the size, financing and ownership percentages of all the others shift.

Roll-up as pooling of investors

In financing, roll-up refers to bringing many small investors together in one investment vehicle, called a pool for short. This is a company whose sole purpose is to hold the investment. Use cases are groups of business angels, that is, private individuals who invest their own money in young companies, and investments by customers or business partners. The cap table and the list of shareholders (the list of shareholders filed with the commercial register) then show only the vehicle.

In the US market the term roll-up vehicle is common, and platforms there offer standardised vehicles. In Germany the design follows German company law. Related is the angel syndicate, whose members often also invest through such a vehicle.

Roll-up of investors: implementation in Germany

Pool GbR

The simplest to set up is a civil-law partnership (Gesellschaft bürgerlichen Rechts, GbR), whose partners are the investors and which itself holds the shares. Its partnership agreement regulates representation, internal majorities and the obligation to vote uniformly in the company. In practice it is often called a pooling agreement. The entry pooling agreement describes the narrower form in which the members keep their shares themselves and bind themselves only by contract.

Since 2024, a GbR can be included in the list of shareholders of a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) only if it is registered in the partnership register (Gesellschaftsregister), the public register for GbRs. The same applies to later changes to its entry in the list (Section 40(1) sentence 3 of the German Limited Liability Companies Act, GmbHG). The partners of a GbR are personally liable for its liabilities (Section 721 of the German Civil Code, BGB), for example for a contribution to the company that has not yet been paid in full. For larger groups, limited liability companies are therefore often chosen.

Investment GmbH or GmbH & Co. KG

Alternatively, the investors form their own GmbH. It is liable only with its assets and is represented by its management. In return, share capital, bookkeeping, annual financial statements and its own tax returns arise, and transfers of its shares must be notarised (Section 15(3) GmbHG). The GmbH & Co. KG is also common, a limited partnership with a GmbH as the general partner with unlimited liability. The investors there are liable as limited partners only up to the amount of their contribution entered in the commercial register.

Trust arrangement

A trustee holds the shares in its own name but for the account of the investors (settlors of the trust). Only the trustee appears in the list of shareholders. The settlors depend on the trustee's reliability. Because such arrangements usually contain an obligation to transfer shares, it must be checked in each case whether they require notarisation under Section 15(4) GmbHG.

Advantages, obligations and consequences for later rounds

The pooling shrinks the shareholders' meeting, the body in which the shareholders of a GmbH pass resolutions, and simplifies the shareholder structure. Resolutions on amendments to the articles of association and a capital increase must be notarised (Section 53 GmbHG), and in funding rounds all shareholders usually sign the participation agreement. Instead of many signatures and powers of attorney, a single representation suffices for the pool, and its votes are cast uniformly. Against this stand obligations and disadvantages:

• Costs. Formation, register entry, bookkeeping and tax returns of the vehicle cause ongoing costs.
• Transparency register. The vehicle must report its beneficial owners, that is, the natural persons who hold more than 25% of the shares or voting rights or control it in some other way, to the transparency register. If no one holds that much, the managing directors or managing partners are deemed to be the beneficial owners.
• Representation. Whoever represents the pool votes for all. Conflicts of interest of the representative must be regulated by the pooling agreement.
• Individual rights. Rights to information and inspection (Section 51a GmbHG) and minority rights from 10% (Section 50 GmbHG) belong only to the vehicle, not to the individual investor.
• Taxes. A purely asset-managing pool GbR is generally treated as tax-transparent, so profits are attributed to the investors. An investment GmbH is itself subject to tax. Gains from the sale of the investment remain 95% tax-exempt for it under Section 8b of the German Corporation Tax Act (KStG), and distributions to its shareholders are taxed again there. For the GmbH & Co. KG, the treatment depends on the structure.
• Supervisory law. A vehicle that invests the money of many investors in several companies according to a defined investment strategy may count as an investment fund under the German Capital Investment Code (Kapitalanlagegesetzbuch). A vehicle for a single investment chosen by the participants themselves is assessed differently.

For follow-on rounds, a pooled group is an advantage. New investors negotiate with few parties and also examine, in due diligence, the review before entry, the registration and the pooling agreement. On a sale, the drag-along obligation (drag-along), under which a majority can oblige the other shareholders to sell along, applies to the pool as to an individual shareholder. Internally, its representative must be authorised to assign. The obligation to vote uniformly works like a voting agreement.

Worked example: roll-up in the market and in the cap table

Consolidation of a market

A consolidator acquires six service providers at the same time through a holding company, each with EUR 0.5 million EBITDA (earnings before interest, taxes, depreciation and amortisation), at 5 times, simplified debt-free. The multiple is an assumption for the example. Each owner receives 80% in cash and 20% in shares of the holding company.

• Per business: 0.5 × 5 = EUR 2.5 million, of which EUR 2.0 million in cash and EUR 0.5 million in shares
• Total: 6 × 2.5 = EUR 15 million, of which EUR 12 million in cash, financed from EUR 8 million of the consolidator's equity and a EUR 4 million bank loan
• Equity of the holding company: 8 + 6 × 0.5 = EUR 11 million. Consolidator 8 : 11 = about 72.7%, each owner 0.5 : 11 = about 4.5%
• Group: 6 × 0.5 = EUR 3 million EBITDA. Dynamic leverage, that is, bank loan divided by EBITDA: 4 : 3 = about 1.3

Each owner was sole shareholder and is afterwards a minority shareholder with about 4.5%. The reinvestment gains only if the group becomes worth more than the sum of the businesses.

Pooling in the cap table

25 business angels invest EUR 1 million through a pool GbR in a GmbH with a valuation before the financing (pre-money) of EUR 4 million.

• Valuation afterwards (post-money): 4 + 1 = EUR 5 million, pool's share 1 : 5 = 20%
• List of shareholders: three founders and the pool, that is, 4 instead of 28 shareholders
• Follow-on round: EUR 5 million at EUR 15 million pre-money, new investor 5 : 20 = 25%, pool afterwards 20% × 0.75 = 15%
• Vote on the follow-on round: The pooling agreement requires two thirds of the pool capital for this. If angels with 70% vote in favour, the pool casts all its votes uniformly in favour. That is 20%, because the resolution is passed before the new investor joins

For the company, the number of investor signatures falls from 25 to one. The angels outvoted internally support the majority decision in return.

Distinction: roll-up, buy-and-build, pooling agreement and angel syndicate

• Buy-and-build: builds up an anchor company (platform) step by step through acquisitions, usually for a financial investor. The roll-up combines many similar businesses, in part without a platform and at the same time.
• Pooling agreement: in the narrower sense the binding of shareholders who keep their shares themselves and commit to uniform voting and disposal, often for inheritance tax reasons. In a roll-up, by contrast, the vehicle holds the shares.
• Angel syndicate: a group of business angels who invest together under the lead of an experienced investor. The syndicate describes the cooperation, the roll-up the pooling in the cap table. Often the two coincide.

Common mistakes

• Pooling only in the follow-on round. If the pool is formed only at the demand of a new investor, all small investors have to transfer their shares by notarial deed under time pressure.
• No representation rule. Without a provision in the pooling agreement, joint management and representation by all partners applies to the GbR in principle, and the advantage of pooling falls away.
• Drag-along not passed through. If the shareholders' agreement obliges the pool to sell along but the pooling agreement does not oblige the representative to assign, the consent of all pool members is needed at the exit.
• Inconsistent valuation in the market roll-up. If the businesses are valued on different yardsticks, owners with shares in the holding company feel disadvantaged.

Frequently asked questions

Must a pool GbR be entered in the partnership register?

Yes, if it is to be newly included in the list of shareholders of a GmbH or if its entry there changes. A pool that only bundles votes and holds no shares does not need the entry for this.

Are the investors in the pool still shareholders of the company?

No. The shareholder is the vehicle. The investors are shareholders of the vehicle or settlors and hold only an indirect stake in the company.

Can an investor leave the pool?

As a rule only under the rules of the pooling agreement. Common are a commitment until the investment is sold, consent requirements and rights of first refusal of the other members. There is no free market for pool interests. The right to terminate for good cause, however, cannot be excluded by the agreement of a pool GbR (Section 725 BGB).

Is a roll-up in company acquisitions the same as a merger?

No. A merger (merger) combines companies legally into one. In a roll-up, the businesses often initially remain separate companies under a holding company. A later merger is possible.

The Roemer Capital view

The pooling of investors concerns Roemer Capital above all when preparing funding rounds from EUR 1 million. If a company has earlier taken on many small individual investments, Roemer Capital checks whether the cap table can bear the negotiation with a new investor. It raises the pooling before the new investor demands it. The design as pool GbR, investment GmbH or trust is handled by the law firm.

In company sales, Roemer Capital encounters the other meaning when a consolidator offers a technology company entry into a new group. It then calculates for the owner what the shares in the holding company are worth alongside the cash payment. It also checks whether the owner's business was valued on the same yardsticks as the others.