This week we feature an interview with a value acquirer who presents a totally different exit option.
As we’ve discussed in this newsletter before, around half of all mid-market companies will be acquired by a private equity group using some variation of a well-worn playbook: Using a mixture of debt and cash, a PE firm will buy a majority position in a successful company as cheaply as possible while getting the founder to roll some equity. They’ll then fix it up, stitch it together with some complementary businesses, and sell the collection of companies for a better multiple than they paid for the individual parts.
For the PE model to work, your company needs to be profitable enough to service some debt and big enough for the private equity group to want to go through the hoops required to get a bank to underwrite a loan (think $1M+ in EBITDA).
The Value Acquirer
There is another type of acquirer with a different playbook altogether. This week we released an interview with Joe Khoubbieh, the Chief Investment Officer at Valsoft, one of the most prolific acquirers of software companies in the last few years. In 2023 alone, Valsoft completed 25 acquisitions in ten countries. In total, Valsoft has acquired 95 companies and paid the founder 100% of their proceeds in cash in all 95 deals.
As their name suggests, Valsoft is a value acquirer, and their approach to buying a business is entirely different. They are acquiring a business to hold, not to flip. They want the profits your business can generate over the long run, so they’re more interested in how durable your profit is, not necessarily how big the market is. Therefore, the biggest criteria they use to evaluate a potential acquisition is not your TAM (total addressable market) but the churn rate of your recurring revenue: 5% per year is good in Joe’s eyes. Ten percent is a red flag, and much more than that is a deal killer for Valsoft.
In Valsoft’s case, they don’t use debt to buy a business, and they pay 100% cash up front. So what’s the catch? Value acquirers don’t pay as much as a traditional private equity group. Joe buys mostly small, sleepy software companies with incredibly low churn rates for two or three times annual recurring revenue, whereas most high-flying software company founders would hope to garner a much higher valuation for a business with such sticky customers. But that’s not the game Joe is playing. To hear how a value acquirer thinks about buying a business, listen now.
Clip of the Week
In this clip, Joe breaks down the Private Equity Playbook and describes the three requirements that make a private equity transaction work.
Quote of the Week:
“It’s okay for a business to be what it is. If it’s acquired 100% of the customers it can possibly acquire and it’s making as much money as it can, we’ll keep it.”
– Joe Khoubbieh
Chief Investment Officer, Valsoft
KWS Manufacturing Company, Ltd., a Texas-based business that specializes in making equipment like screw conveyors and bucket elevators for industries that handle food, chemicals, and wood, has been acquired by Kadant Inc., which provides various equipment and products for industries. KWS, which earned $45 million in the year up to September 30, 2023, was bought for about $84 million in cash, meaning Kadant valued KWS at 1.86 times revenue.