Buying a small software company or companies--following the Constellation model?

[netnet]

An private investor group I'm in had a presentation from a tiny company that was looking for funding to buy a small software company. They were not that impressive, but they did mention Constellation, which got me thinking:

 

Buying small mission critical software companies, (or maybe just buying one or two) seems to be a reasonable thing to do. Obviously the DD has to be good and the first buy has to be really, else one could be out of business, but buying in a small niche and living off of the maintenance contracts seems to be a totally fine way to go.

 

(Now with buying more than one integration could be problematic, etc. Plus the overhead burden for the first few, if it is a roll-up can be problematic, but adding professional management and reducing and consolidating costs could be really powerful.)

 

Thoughts??

[Guest notorious546]

An private investor group I'm in had a presentation from a tiny company that was looking for funding to buy a small software company. They were not that impressive, but they did mention Constellation, which got me thinking:

 

Buying small mission critical software companies, (or maybe just buying one or two) seems to be a reasonable thing to do. Obviously the DD has to be good and the first buy has to be really, else one could be out of business, but buying in a small niche and living off of the maintenance contracts seems to be a totally fine way to go.

 

(Now with buying more than one integration could be problematic, etc. Plus the overhead burden for the first few, if it is a roll-up can be problematic, but adding professional management and reducing and consolidating costs could be really powerful.)

 

Thoughts??

 

Ya, there could be a good opportunity. Private markets tend to have unique opportunities that are different compared to public investments. I'm sure there are some more illiquid type assets or streams that could be bought.

 

If you don't mind me asking what's the private investor group. I'd be interested in learning more how that works. You can PM me if that is preferred.

[Jurgis]

Sounds like a possibility in theory. In practice - well, the devil is in the details. Like with everything else, why would someone sell you a profitable business for cheap? And if they do, how certain are you about the niche, the sales, the contracts, whether it's not a melting ice cube, single customer risk, key personnel risk, etc.

 

I guess you can develop the knack for it eventually, but the first couple are likely to be learning experiences ... unless you buy in the middle of a meltdown from forced sellers when nobody else has cash to buy.

 

From the other side: you might as well ask about buying small premium chocolate companies, I hear they are great cash cows. ;)

(not a novel idea, there are companies who already are buying small chocolate companies, see BFCF/BBX filings ...)

 

[netnet]

Sounds like a possibility in theory. In practice - well, the devil is in the details. Like with everything else, why would someone sell you a profitable business for cheap? And if they do, how certain are you about the niche, the sales, the contracts, whether it's not a melting ice cube, single customer risk, key personnel risk, etc.

Devil is almost always in the details.  Thus the critical nature of DD, but what is Munger's quote about getting rich with soft hands? People sell for a variety of non-economic reasons, retirements, etc.  Hopefully there is also some fat to cut, like not employing all the family members, etc.

 

 

From the other side: you might as well ask about buying small premium chocolate companies, I hear they are great cash cows. ;)

(not a novel idea, there are companies who already are buying small chocolate companies, see BFCF/BBX filings ...)

Talk about melting. ;)

[Jurgis]

People sell for a variety of non-economic reasons, retirements, etc.

 

We'll keep you in mind when my wife decides to sell her startup....

 

Hopefully there is also some fat to cut, like not employing all the family members, etc.

 

...or maybe not. :P

 

Good luck. Keep us posted how it goes. :)

[oddballstocks]

Two companies have tried to buy my software company on the cheap. Both times I didn't sell. Savvy buyers, one buyers with deep pockets think they can push around smaller companies. But in most cases the smaller companies have decently intelligent founders and employees who aren't willing to dump their baby for peanuts.

 

I wonder about the quality of companies that sell cheap. Wait, actually I don't, I worked for one. When you buy cheap you are buying problems. They are either apparent right away or take a year or two to manifest.

 

If you aren't a software person you are likely the patsy at the table. You will get what you pay for.

 

To do this right you essentially need to re-interview each engineer and rub them through the ringer. Would you hire them? Are they creative? Innovative? Just looking for a job? How well does the company ship products? What type of bugs exist? What's their development process?

 

I get that Constellation probably doesn't care about this. They are buying anything and everything and somehow paying really cheap prices when the industry itself is inflated..hmmm..anyways having industry knowledge is key. I know some people who've tried to get software off the ground for years and it always fails. Likewise those who know the industry and development continually ship product.

 

You are buying customers, a market presence as well as intellectual property. My sense is that buyers always write IP to zero giving it no value. What happens is the people who created the IP walk out the door and the buyer is left holding the bag. I've seen this over and over.

 

Best of luck! It's hard buying in a hot market. Maybe you have a secret source of good deals.