- Enterprise Value
- Posts
- Society Research: Issue #3
Society Research: Issue #3
Doing a Roll-up Strategy in the DMV
Mitchell Harris
May 26, 2024 • Estimated Reading Time: 6 minutes
Society Venture Investments is an investment firm. We invest in small businesses whose impact strengthens communities and promotes long-term growth. If you’re thinking about selling your business, I’d love to chat!
Industry Fragmentation in the DMV
Alright, let’s talk about the ultimate fantasy of nearly every mogul in the making—a successful roll-up. It’s the pinnacle of financial engineering, the Holy Grail of investment strategies. The ultimately maneuver of turning nothing into something, just like Danaher, which the Rales brothers built into an industrial powerhouse right here in the DMV. Or think about Lockheed Martin in Bethesda, or even Marriott International, where the Marriott family turned a small root beer stand into a global hotel empire through savvy acquisitions.
And let's face it, if you’re on this mailing list, you’ve fantasized about pulling off the same feat. The first step? Knowing where to look. So, sharpen your pencil, and let’s get started on finding the next big roll-up opportunities in the DMV.
Why Roll-Up Strategies?
Operational Efficiency: Standardize processes and integrate systems for better productivity and higher margins.
Increased Valuation: Larger, more consolidated companies often receive higher valuations due to perceived stability and market dominance.
Diversification of Risk: Spreading operations across multiple entities can reduce the overall risk profile, making the consolidated company more resilient to market fluctuations.
Top 10 Fragmented Industries in the DMV
Here are the top 10 fragmented industries based on PPP loan datasets:
Rank | Industry | Number of Businesses | City with Highest Concentration |
|---|---|---|---|
1 | Restaurants | 520 | Washington, D.C. |
2 | Offices of Dentists | 430 | Bethesda, MD |
3 | Offices of Physicians | 410 | Arlington, VA |
4 | Legal Services | 390 | Washington, D.C. |
5 | Accounting Services | 380 | Bethesda, MD |
6 | Real Estate Agents and Brokers | 370 | Washington, D.C. |
7 | IT Consulting Services | 360 | Tysons Corner, VA |
8 | Personal Care Services (e.g., Salons) | 350 | Silver Spring, MD |
9 | Architectural Services | 340 | Washington, D.C. |
10 | Marketing Consulting Services | 330 | Alexandria, VA |
Most Attractive Industries for Roll-Up
If we stick to the canonical advice about investing in small businesses, then we can pick out the industries with explicit or implied recurring revenue and rank those by highest historical margins. These industries are more attractive for a roll-up strategy as they avoid project-based revenues, capital-intensive operations, and low operating margins.
1. Offices of Dentists
High Fragmentation: The DMV area has 430 dental offices, offering ample consolidation opportunities.
Recurring Revenue: Dental care is a necessity with regular patient visits ensuring steady income.
High Margins: Dental practices generally enjoy high profit margins due to the essential nature of services and the ability to charge premium rates.
2. Offices of Physicians
High Fragmentation: With 410 small practices, there’s a significant opportunity for consolidation.
Recurring Revenue: Medical practices typically have consistent patient visits and steady revenue from insurance reimbursements.
High Margins: Healthcare services have historically high operating margins, making them attractive for consolidation.
3. Accounting Services
High Fragmentation: The DMV area supports 380 accounting firms.
Recurring Revenue: Services such as tax preparation, bookkeeping, and financial planning provide consistent, ongoing revenue.
High Margins: Accounting firms generally operate with high margins due to the specialized nature of their services and relatively low capital requirements.
4. Legal Services
High Fragmentation: With 390 legal service providers, there is ample room for consolidation.
Recurring Revenue: Many legal services, especially those involving corporate clients, offer retainer-based or recurring revenue models.
High Margins: Legal services often command high fees and maintain strong operating margins.
5. IT Consulting Services
High Fragmentation: The DMV area has 360 IT consulting firms.
Recurring Revenue: Managed IT services and support contracts provide stable, recurring revenue.
High Margins: IT consulting typically enjoys high margins due to the expertise required and the critical nature of the services provided.
Less Attractive Industries
While industries such as restaurants and personal care services have a high number of businesses, they typically feature lower operating margins and higher capital intensity. Additionally, project-based revenue models in industries like architectural services and real estate brokerage do not offer the stability and predictability of recurring revenue streams. Therefore, they are less attractive for a roll-up strategy from a value investor's perspective.
Final Thoughts
What I have demonstrated here is a good first cut. However, there are niches within each market that are likely to prove more attractive. For example, in accounting, bookkeeping and taxes are an attractive niche. Also, different geographies have different levels of fragmentation and industry concentration.
If you would like to run this analysis for your own geography, or do the same analysis at a county, city, or zip code level then the data notebook shows you how to accomplish this.