In a recent episode of the M&A Science podcast I listened to Sam Youssef Founder & CEO at Valsoft Corporation being interviewed by Kison Patel, covering the company’s growth by acquisition. There was so much in this 50-minute interview worth sharing I’ve done an executive summary to highlight the key learnings for aspiring acquirers. Valsoft has completed 60 deals in the last five years.
By way of background: Valsoft Corporation (private company) acquires and develops vertical market software companies through which each business can deliver the best mission-critical solutions for customers in their respective industries or niche. A key tenet of Valsoft’s philosophy is to invest in well-established businesses and foster an entrepreneurial environment that shapes a company into a leader in its respective industry.
Let’s unpack some of the gems.
Strategy
- Acquisitive groups are often undervalued by the stock market because it’s hard to predict if acquisitions can continue, be repeated to keep generating growth. There is a perception of buying growth with a limited strategic thesis. Sam asks, have you earned the right to be an acquirer? Can you run the target company better than the historical performance? Not that the company is badly run, in fact the opposite, but its more about what are you are bringing to the party?
- Acquisitions are for operators. As Sam states, knowledge of business has helped me be a better investor and a better acquirer. Knowledge of investing has made me a better operator.
- What’s the investment thesis? In Sam’s chosen sector, the vertical software space, his company has identified a compelling investment thesis (which applies to so many sectors in my view). Take the example of a well-run software company specializing in say process control. It may have hit a run rate of $20 million in revenue, making great margins but its growth is blocked because most of the potential new customers have been taken by all the other 1000’s of companies in the space.
An investment thesis emerges. Valsoft comes along to offer an exit and supply further funds for a roll-up for acquiring competitors, creating a platform company that has scale. Now with scale one can consider adjacent products that could be sold to those customers that find those products mission critical. Now you are creating a mini conglomerate in that vertical with a compelling story, great visibility of earnings and a fulfilling place for employees to build a career.
Storytelling
- As we’ve said many times in our blog posts when you are buying you are selling. The Valsoft team recognize that it’s not just about money. The acquirer is offering a decentralized structure, an opportunity to the selling leadership team to scale to the next level both organically and by M&A. Because they are not using traditional closed funds with an exit timeframe, they can offer long term stability. There is no pressure to exit within 5 to10 years.
- The strategy has the potential to make the target even more relevant to the customer, stickier, reducing churn and making it an exciting place to be for senior staff and talented employees.
- Acquisitions have purpose and the team feel totally involved in creating value.
- Valsoft recognizes that each target company is at a different stage of its lifecycle and the CEO is often struggling with how to take it to the next level, to keep the excitement, and to keep the team together.
Programmatic M&A
- By adopting a measured systematic playbook, the acquirer creates a deal machine that is constantly evaluating strategically aligned targets (Supported by insightful evidence from McKinsey published in 2021 and research published in 2006 by Gates, Zollo and Heimeriks).
- Learnings are shared in annual offsite retreats where portfolio company CEOs share what has worked and what missed the mark.
- Monthly Investment Seminars review all lessons learned from deals. Did we pay too much? Did we underbid? What went wrong with our process?
Operational Excellence
- But it’s not just about an M&A blueprint that underpins success, it’s an operational blueprint. By assessing 100s of software companies and understanding their economics, patterns of success are identified allowing Valsoft to create better operational playbooks.
- This excellence includes a traditional blind spot of CEOs in Sam’s opinion – the efficient allocation of capital. Too many CEOs are weak at this essential skill (some of that might be down to a reluctance to spend their own money). Valsoft bring deep investing skills to the party and are a disciplined allocator of capital whether for organic product investments or M&A, often using strict Internal Rate Return (IRR) models (which often ignores the fashion of a hot sector).
In summary, it’s nice to use a real case study to amplify and endorse good M&A practice!
We are always ready to open up a dialogue. Ian@TPPBoston.com or Kevin@TPPBoston.com
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