How do PE firms structure roll-ups in the software industry?

How Private Equity Firms Structure Roll-Ups in the Software Industry

In the software industry, roll-up strategies have become a favored playbook for private equity (PE) firms seeking to generate outsized returns through consolidation. But while the concept may sound simple—acquire multiple smaller companies and integrate them into a larger platform—the execution is anything but. Behind every successful software roll-up lies a carefully engineered structure, balancing capital efficiency, operational integration, and long-term value creation.

This article explores how PE firms structure roll-ups in the software sector, from platform selection to integration strategy, and what founders and CEOs should understand if they’re approached by a consolidator or considering a sale into a roll-up.

Why Software Is Ripe for Roll-Ups

Software businesses—particularly those with recurring revenue models like SaaS—are ideal candidates for roll-up strategies. Their high gross margins, sticky customer bases, and scalable infrastructure make them attractive for consolidation. Moreover, the industry remains fragmented, with thousands of niche players serving vertical or regional markets.

PE firms see an opportunity to:

Achieve multiple arbitrage by acquiring smaller companies at lower EBITDA multiples and selling the combined entity at a higher multiple
Leverage shared infrastructure (e.g., sales, support, engineering) to reduce costs
Cross-sell products across a broader customer base
Accelerate growth through bolt-on acquisitions

But to realize these benefits, the roll-up must be structured with precision.

1. Platform Selection: The Anchor Investment

Every roll-up begins with a platform company—typically a mid-sized software business with a strong management team, robust infrastructure, and a defensible market position. This platform serves as the foundation for future acquisitions.

PE firms often target platforms with:

$5M–$20M in ARR (Annual Recurring Revenue)
EBITDA margins of 20% or higher
Low customer churn and high net revenue retention
Proven ability to integrate smaller acquisitions

Firms like iMerge often assist founders in positioning their companies as attractive platforms by refining KPIs, preparing for due diligence, and articulating a clear growth thesis. For more on this, see Exit Business Planning Strategy.

2. Capital Structure: Balancing Equity and Debt

Roll-ups are typically funded through a mix of equity and debt. The initial platform acquisition may be financed with 50–70% debt, depending on the company’s cash flow profile. Subsequent add-ons are often smaller and can be financed with incremental debt or equity from the fund.

Key considerations include:

Leverage capacity: How much debt can the platform support without constraining growth?
Equity incentives: How is management incentivized to drive integration and performance?
Earn-outs: Are sellers of add-ons receiving contingent payments tied to future performance?

As we’ve discussed in How Do I Handle Earn-Outs in the Sale of My Software Business?, earn-outs are common in roll-ups to align incentives and manage valuation gaps.

3. Add-On Criteria: Strategic Fit Over Size

Once the platform is in place, the PE firm begins sourcing add-on acquisitions. These are typically smaller companies—often $1M–$5M in ARR—that complement the platform’s product suite, customer base, or geographic reach.

Criteria for add-ons often include:

Recurring revenue with low churn
Minimal technical debt and clean codebase
Customer overlap or cross-sell potential
Founders willing to stay on or transition smoothly

Interestingly, PE firms may prioritize strategic fit over financial performance. A subscale but strategically aligned add-on can be highly accretive when integrated into a larger platform.

4. Integration Strategy: Centralize or Decentralize?

Integration is where many roll-ups succeed—or fail. PE firms must decide how tightly to integrate acquired companies. There are generally two models:

Centralized: Shared back-office functions (HR, finance, IT), unified branding, and consolidated product roadmaps
Decentralized: Portfolio companies retain autonomy, with light-touch oversight from the platform

In software, a hybrid model is common. For example, engineering and product may remain decentralized to preserve innovation, while finance and customer support are centralized to drive efficiency.

Firms like iMerge help sellers prepare for integration by identifying potential synergies and flagging operational risks during diligence. For a deeper dive, see Completing Due Diligence Before the LOI.

5. Exit Strategy: Recap or Strategic Sale

Roll-ups are typically built with a 3–7 year exit horizon. The PE firm may pursue:

Secondary buyout: Sell the platform to another PE firm at a higher multiple
Strategic sale: Exit to a larger software company seeking scale or product expansion
IPO: Less common, but possible for large, well-integrated platforms

Multiple arbitrage is a key driver of returns. For example, if the PE firm acquires add-ons at 5–6x EBITDA and exits the combined entity at 10–12x, the value creation is substantial—even before accounting for organic growth or margin expansion.

What Founders Should Know

If you’re a software founder approached by a PE-backed platform, it’s important to understand the broader strategy. Are you being acquired as a bolt-on or as a potential platform? Will your team be retained? How will your product evolve post-acquisition?

Key questions to ask include:

What is the integration plan?
How is the earn-out structured?
What role will I play post-close?
How will my team and customers be supported?

Working with an experienced M&A advisor like iMerge can help you navigate these conversations, optimize deal terms, and ensure alignment with your long-term goals.

Conclusion

Roll-ups in the software industry are more than just financial engineering—they require strategic alignment, operational discipline, and a clear vision for value creation. For founders, understanding how PE firms structure these deals is essential to making informed decisions about timing, valuation, and post-sale involvement.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.