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).