LBO Playbook, Now With AI

PE firms used to be associated with billion-dollar corporate buyouts. More recently, however, they have been consolidating HVAC businesses, dental practices, veterinary clinics, car washes, and many other small, cash-flowing businesses.

Most of these businesses were locally owned and relationship-driven. Increasingly, they are being rolled up by PE firms, professionalized, leveraged, and managed with the objective of extracting every possible basis point of return.

The playbook is straightforward. Buy fragmented businesses at relatively low valuations, combine them into a larger platform, centralize operations, cut costs, raise prices where possible, and eventually sell the package at much higher earnings multiple.

The founder is typically replaced by a professional manager. But managers rarely have the same interests or incentives as owners. Roll-ups and franchising can create efficiencies, yet they often sacrifice the local relationships and entrepreneurial culture that made these businesses successful in the first place. The first casualty is often quality. Sales usually follow.

Now comes the next evolution of the model: AI.

Thrive Holdings (TH), a one-year-old holding company launched by OpenAI-backed Thrive Capital, is reportedly raising ~$2B from other VC investors including Altimeter, D1 Capital Partners, and SoftBank. Rather than relying solely on the traditional PE roll-up playbook, Thrive aims to make the underlying businesses genuinely more productive with AI.

TH acquires controlling stakes in platforms that have already consolidated dozens of smaller service businesses. It then deploys AI across the organization while allowing the original owners to retain meaningful equity and participate in the value creation.

One example is Current (formerly Crete Professionals Alliance), which has acquired 48 accounting firms that are now being transformed with AI. TH also invested $100M in Shield Technology Partners, an IT services company that has already acquired stakes in more than a dozen smaller firms. TH has indicated it intends to expand this model beyond accounting and IT into other service industries.

Conclusion

A typical small business can only be sold for up to 5x EBITDA. But after being merged into bigger AI-transformed business, it can magically sell for 10x+ EBITDA.

AI is becoming the latest ingredient in the multiple-expansion recipe.