Guide to Consolidation Strategy in Acquisitions

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The research fund model is a method of invest which allows entrepreneurs to take a unique path to business ownership. It is structured to help researchers (entrepreneurs who engage in the research fund model) acquire, operate and scale an existing business instead of building one from scratch.

By providing a quick path to business ownershipand CEO status, research funds have created a new breed of entrepreneurs – those who embrace the notion of plug-and-play.

A critical factor in the research fund equation is the economic benefit researchers might see for their efforts. Historically, this has meant a 32.6% internal rate of return and a multiple of 5.5x on the invested capital.

Related: How to Find Success at Research Fund Launches

Value creation

With competition brewing in the form of fellow researchers and even some traditional private equity funds showing interest in acquiring small businesses, how do researchers get their edge? They envision combining two or more businesses with synergies in terms of size, geographic coverage, key personnel, or supply chain advantages – in other words, a consolidation.

Programmatic Mergers and Acquisitions (MY), according to McKinsey“remains the least risky approach with the smallest performance gap and the largest share of companies that generate positive excess total shareholder returns (65%)” compared to large one-time deals, selective deals, or organic growth.

What does this mean for researchers competing at the smaller end of the corporate spectrum? This represents an opportunity to bring the tailwinds of M&A-based growth further downstream and into sectors it has not yet touched.

However, in a survey of 185 Entrepreneurship by Acquisition (ETA) companies bought by Harvard Business School graduates over the past decade, only 8% have implemented a consolidation strategy of buying multiple companies in the same vertical.


The timing and structure of research acquisitions is often limited to two years. Additionally, researchers are often freshly minted MBAs with limited operational and M&A execution experience, making adding an additional business target to acquire a daunting task. However, the advantages far outweigh the possible disadvantages.

Related: Research funds: what you need to know about this investment model


As this business strategy is inherently an operational game, key considerations when seeking a second (or more) target could include additional financial and operational synergies in the form of:

  • Improvements in capital structure thanks to the larger combined size of companies
    • Ability to incur additional debt at a lower rate
  • Reduction of capital intensity
    • Shared fixed assets, working capital and capital expenditures
  • Margin expansion through higher purchasing power and unit economics
  • Multiple arbitrage valuation
    • In the same vein as “greater than the sum of its parts”, businesses when combined often have a higher value than if they were to stand alone.

Related: Data Security and M&A Downside Risk

Choose an industry

With that, what can researchers do to further reduce the risks of research consolidation? The answer to this lies in a refined thesis. Researchers with professional experience in a specific industry (i.e. health care) have an inherent advantage in initiating research with a targeted thesis.

Finding an industry to engage in can be difficult for those with multiple passions. However, the following markers could indicate the correct fit:

  • Fragmented industrial landscape (i.e. medical, dental and veterinary practices)
    • Industries in which business owners primarily operate a single entity or location
  • Mature and standardized industrial operations
    • Companies that have relied on proven practices over the years
  • A large number of companies
    • Many companies serve a similar customer profile but in different geographies
  • A large number of companies included in the target enterprise value of the fund
    • Understanding the average value of a company in a target industry can help filter out opportunities that are too small or too big
  • Historically stable growth and sustainable profit margins
    • Businesses that have operated profitably for many years and serve customers who have (if B2B-based)

Choose a company

Zooming into a deeper layer, businesses characteristic of success in the research consolidation model touch a combination of the following:

  • Industry Competitive Advantage
    • intellectual property, proprietary software, etc.
  • Seller motivated to go out
    • retirement, change of succession plan, career transition, etc.
  • Historically stable recurring revenue
  • Strategic areas for growth
    • geographic expansion, marketing strategy, recruitment of key personnel, etc.
  • Alignment with the financial mandate of the research fund
  • Viable exit vision over a five to seven year horizon

Eight percent is a small but growing fraction of the ETA community that has chosen to go the consolidation route. As more seasoned traders and mid-career researchers get involved, the chances of a consolidation strategy becoming more mainstream will only grow. This next wave of research fund entrepreneurs could bring revolutionary methods in creative funding, operation and business growth – a win-win for budding entrepreneurs and seasoned operators alike!

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