Software Buy and Build Strategy: Lessons from 18 Acquisitions

It’s a pleasure to have you with us today. Maybe if you could start by providing a bit of context to when you joined Access?

Yes. Actually, it’s a long history, but I was a founder of Access, in 1991. I left Access in 1995, for 10 years. I did international business development, with a PLC (Public Limited Company), during which time we did a couple of acquisitions. I left there in 2005 and then I was asked to re-join Access, specifically to look at acquisitions. That was still while we were in private ownership, in terms of shareholders. The founder of Access, the 50% shareholder, decided he wanted to retire and we decided to do a private equity deal, which we did in 2011. They, basically, bought out his 50%, leaving us other shareholders with the other 50%.

My role there, for the next four years, was purely acquisitions. We set out our acquisition strategy, we decided where we wanted to go and how we wanted to get there, with the whole point being to buy and build roll-up business, significantly.

In 2011, we were a £25 million business, making about £5-5.5 million EBITDA. Obviously, we wanted to grow that very quickly, over the following four to five years, which is the private equity period. I can’t remember the exact number of employees, but in 2011, it would have been about 220. By the time we got to 2015, it was more like 500 to 600, so it was a fairly rapid growth.

The private equity players came in and, clearly, they saw room to roll up different software businesses. Was growth slower in the core business? What was the rationale for the buy and build strategy?

One of the drivers, in private equity, is to find what they call a platform business. Access is a classic platform business. We provided core accounting functions, such as payroll, purchase ledger, purchase ordering, procure to pay, general ledger and finance, with some other things that we had already built ourselves, which helped us stay inside of business, once we’d caught them, as a customer. We were a classic platform because, if you think about, an ERP system like that, you can add all kinds of things.

You can go down the employee health and safety route, HR, absence tracking. You can look at where that business has a concentration of customers. For example, we had a concentration of customers in the charity sector, so we then looked to go out and find software that assisted charities, which we could integrate with our own, to make it one offering. That’s why the private equity route was a good route. The easier route would have been a trade sale, but you take the money and you run. With a private equity, you don’t take any money. In fact, you lend them money. Actually, they lend you money, to lend to them. That’s the way it works, but the returns are much higher and the risks are, of course, higher.

The core value in that business, in the early days, was the stickiness with the customers that can allow you to build a platform business?

The things that people look for are the churn rate in the business. We had a less than 4% churn rate, in our customers, which is very strong. That would be one of the things that we would always look for in businesses that we were acquiring. How long do they keep a customer? Another key is how much recurring income they have. Whether that’s subscription based, support based, or something else.

At the time of the acquisition, Access was a renewal-based business, really, and not a subscription business. It was an annual license to run the software, so it counted as renewals, but it wasn’t a pure SaaS business in any way and didn’t provide a SaaS based product, as such. That was all to be done in the strategy, going forward.

Going back to 2011, when the PE owners come in, it’s clearly a buy and build strategy, what framework did you have in place to make acquisitions?

The first thing, which is quite interesting, is that before we met the PE company, we decided that, in order to sell the business at the best possible value, which actually works against the people that are staying, but it’s good for the guy that’s going, was to create a list of companies that we thought were targets. We had quite a long list of about 20 companies and we said to the PE company, if you invest in us, then we’ve got these 20 companies, almost lined up, and these will all be growth opportunities.

Looking back, we didn’t buy any of those companies; not a single one. Once we’d actually done the deal, we then had a much more strategic session about what we wanted to do. If you put the platform at the center, what are all the spokes going out, that you can possibly look at? We started dissecting the customer base. We looked at construction, we looked at charity, we looked at not-for-profit, generally, so a whole range of different possibilities that we could add on to the business. Then we went out to research and find out what companies fitted those criteria that we could possibly buy.

Everyone talks about the first 100 days after acquisition. In the first 100 days, we set out a strategy for, this is what we are going to do. We wanted to buy a payroll bureau, for example, which I thought would be very easy and turned out to be one of the hardest things to buy. It took us about three years to find one and buy one. What you think might be easy, isn’t; what you think isn’t easy, sometimes it is. That’s how we set about it.

Looking back, you mentioned that original list of 20 targets. Was that a mistake there?

Not really a mistake. We didn’t really have the time or resource to properly identify them. Before 2011, we had made a couple of acquisitions within Access. For example, we bought, very successfully, an HR business. We identified companies that we thought we would be attractive, but we weren’t in a position to pursue them because, by the time we had bought the HR company, we had no cash left. We were a very cash-generative business, but we had paid £4 million for the acquisition. We were only a small business, with about £6 million in the bank, spent £4 million of it. We didn’t really want to spend any more. It’s one of the reasons why the founder left. The remaining board of directors wanted to grow the business and the only way to grow it, fast, was to acquisition. The only way you could do that is by borrowing money and the founder did not want to borrow any money. That was his Rule 101. We’re not going to borrow any money.

Whereas going into private equity, they’re going to let you borrow as much money as you like, as long as you’re generating profit. The list wasn’t properly researched and we sold it to them as, these are ideas of companies we could buy, the kind of markets that we could go into. We did get quite a bit of input from the private equity company in the first 100 days, as to what they thought. It was a very collegiate process.

Going back to the decision-making framework, the first one you mentioned was the verticals? What KPIs would you use to double-check if the business was worthwhile your time? Were there certain hurdle rates that you had to meet?

We had a very strong organic growth in the business. We had about 12%, year on year, organic, so that’s what we needed to increase. We needed to get to about 30% growth, year on year, overall, to achieve the target.

Working backwards, first of all, we knew we need to achieve 18% growth, through the acquisitions. You start looking at the ones that are probably going to provide the best bang for your buck. There had to be some rules and one of the rules was that we couldn’t buy a loss-making business. It’s a shame, in a way, because obviously, a loss-making business, you might pick it up for very little money and be able to turn it into something. But because you are bound by some banking rules and all the rest of it, buying a loss-making business is immediately out of the question. So you’ve got to look for profitable businesses.