Why is it that a single HVAC company sells for a 8x multiple, but when I put together 10 of these companies, they sell for a 16x multiple?

A few unsatisfying explanations

• Efficiencies of scale. This feels hand-wavy. Very industry dependent and very often BS.
• Size premium: there’s fewer rollups available to buy, yet demand for larger assets scale well (capital allocation scales uniquely well). So demand outweighs supply => maybe a 10% premium? Where’s the rest coming from?

In what ways is buying a single conglomerate different from buying the individual companies? As an investor, I have a claim to the same set of profits. Why am I paying a premium for the pre-packaged version?

It is something to do with idiosyncratic risk. As you piece together uncorrelated streams of income, there is less variance in the total income. As you increase size of your sample, variance in sample mean decreases. So buying a rollup means paying a premium to reduce uncertainty. We do this all the time.

So rolling up companies in a fragmented industry means getting paid for your packaging. You can actually get paid quite a premium for packaging. You aren’t directly creating anything in society but you enable efficiencies in capitalism (which will be financial rewarded).

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Update on December 31, 2025:

A (more financially savvy) peer pointed out to me that this understanding is flawed. My argument was based on the no-arbitrage assumption of financial markets: you can’t replicate a security’s payoff for a cheaper price.

Imagine you have three lemonade stands.

• Stand A and Stand B generate $100 every year and trade at a 5x multiple.
• Stand C generates $200 every year and trades at a 20x multiple.

Buying Stand A and Stand B costs $1000 with a $200 yield. Stand C costs $4000 and generates the same yield. Why would you ever buy Stand C? Because it takes twice the work to buy two companies. The $3000 premium generates the operational cost of consolidating Stand A and Stand B. So rollups are a purely operational play. Big asset managers will buy rollups because the alternative is a whole lot of junk work, which doesn’t scale well.

So this is closely tied to second explanation I had dismissed: a size premium. Again, capital allocation scales well: it’s the same effort to buy a $100Mn business vs a $100Bn business, so you would way rather pay for the $100Bn business than 1,000 $100Mn businesses. And that demand-side preference creates the willingness-to-pay for higher multiple.