If you’re a profitable, well-run SME, your business should command a good price, right? What feels like a low valuation for your business can be a bitter pill to swallow for SME owners. But unfortunately the market doesn’t always see it the way you do, even if you are a stable, respected and cash-generating business.
Rarely is this issue the quality of the business. More often, it’s a matter of becoming commercially attractive to the investors with the money to spend.
The value challenge for SMEs
Investors with money to spend want bang for their buck. The challenge for SMEs, is that they might be well run businesses with good profits, but without the scale of larger enterprises, they struggle to command the premium valuations that they desire. Their turnover and EBITDA are below the threshold.
Structure and governance can also be barriers for SMEs at the point of sale. SMEs can be over reliant on founders and owners, with key relationships and knowledge concentrated in one or two people. With those people looking for an exit, what does that mean for the business?
How wrappers and roll-ups change the picture
This is where M&A can move from being an exit tool to a value-creation strategy.
Wrappers and roll-ups involve combining several complementary businesses into a larger group structure. Rather than selling outright, founders often roll forward some or all of their value into the new entity, exchanging full ownership of a smaller business for a meaningful stake in a larger one.
In practical terms, this can address many of the constraints SMEs face:
- Scale is created immediately, improving the valuation profile of the combined group.
- Founder dependency is reduced, as leadership and risk are shared.
- Systems and governance improve, supported at group level.
- Access to capital increases, enabling further growth or acquisitions.
Importantly, the underlying businesses don’t have to be perfect. What matters is strategic fit, operational quality and the ability to work together.
Rothbridge wrappers and roll-ups
We were founded to help SME business owners get more value from their businesses through M&A. Having been there and done it ourselves, we know the challenge as business owners to get to a satisfactory sale.
We currently have a series of wrappers that we’re expecting to bring to an exit this year. We have a roll-up of construction businesses, creative agencies, performance marketing, recruitment, mar-tech and travel marketing.
We’ve got clear, platform-led groupings by sector, with the potential for additional businesses to join existing wrappers, and the ability to re-shape the composition of wrappers. Many of our owners are looking for exits and to maximise their valuations, but many are also using the M&A process for growth.
A route to value
When you’ve spent many years building the business, realising you might have overestimated its value is a challenge. But you are capping the value potential of your business by standing alone.
M&A, when approached thoughtfully, can unlock that potential. Not by rushing an exit, but by changing the structure in which the business operates.