Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

To start, could you introduce yourself and explain how you came to join ABS Laundry?

Yes, I joined ABS in 2018. I met the owner in Luxembourg while I was working there from 2014 to 2018 for another company. I believe we met in 2014 or 2015. We had a good rapport, and I advised him privately. When I decided to leave Luxembourg in 2018, he immediately invited me to join him at ABS. He was having some operational issues, and we had discussed his business and potential improvements over the years. He asked me to do a ten-day consultancy job to investigate certain aspects of the business and present a restructuring plan to the executive board. I agreed, and in July 2018, I presented my plan, which was based on my professional experience, to the board. We had a lengthy discussion that lasted into the evening. At the end, they asked me to join the board as a contractor, which suited me as I wanted to work independently. They asked me to implement the plan I had presented, and that's how I became a member of the executive board.

That's a great introduction. So, 10 days turned into a few years.

Yes, indeed.

Could you describe what ABS Laundry does, for those who may not be familiar with it?

ABS Laundry is a software supplier that creates its own ERP software. This software is designed for industrial laundries, which are as large as a football field. For instance, Center Parcs sends all their laundry to these industrial laundries where it's sorted, washed, dried, ironed, and then returned in plastic packaging. These laundries can handle up to 50,000 pieces of linen or sheets. Our company, ABS, focuses on this sector worldwide. We provide ERP software that helps these industrial laundries and the rental laundry industry streamline their operations. The software enables machine communication, automated invoicing, and stockroom management. It's quite comprehensive. To clarify, ABS only produces software.

Is it on-premise software or software as a service?

We were in the process of transitioning to a SaaS model. It was partly on-premises, and we had some elements in our own cloud, but it wasn't fully software as a service yet. However, I believe they should be almost there by now.

Can you give us a rough idea of the size of the business when you joined in 2018?

When I started, the annual turnover was approximately €11 to €12 million. By the time I left in 2022, it had increased to approximately €20 million. The number of employees grew from 135 in 2018 to 170. However, in terms of full-time equivalents, it's around 140, which equates to 170 employees. This is a global figure. Is there anything else you'd like to know?

You almost doubled the business in four years.

Yes, the economy was very good. I was brought on board to reorganize the operations. I have a professional background in this area, having worked for ABN Amro, Fortis, MeesPierson, and for the Luxembourg Bank. I knew what needed to be done. My focus was on restructuring departments. I also advised the sales team to concentrate on sales. Before my arrival, the commercial director, who also owned 10% of the company, was responsible for operations. He was stretched too thin and couldn't focus solely on sales. Hiring someone to focus solely on operations, which was me, was a significant advantage.

How did you reorganize the business once you joined? It's clear that the commercial director focused solely on sales afterwards, which is reflected in the numbers. But could you elaborate on how you restructured the business?

I initiated a customer satisfaction survey to independently learn from our customers through an external organization. I wanted to understand what was important to them and what changes we needed to make.

We have several departments, including what I prefer to call the customer center, often referred to as the help desk. In my opinion, the customer center is the most crucial department in the company. I centralized this department, emphasizing that they should know everything about the customer and the sales side, front office. They must be more aligned as a team with the customer center. This was not the case before my arrival.

The company was previously owned by two individuals, one owning 90% of the shares and the other 10%. They had been working in the same way for 30 years, so the changes I implemented were significant.

I believe the customer center is the most important department because they have a lot of contact with the customer. It's crucial to acquire new customers, and we have an advantage because ABS software is well-known, especially in the US and Europe. We are the market leader, five times larger than our competitors like AdvanTex and other software suppliers.

That's impressive. In terms of retention, what percentage of customers would you expect to lose annually in a software company like this?

It's hard to quantify on a yearly basis, but I'd estimate we lose one or two customers per year. During the Corona crisis, for example, we lost a UK customer who went bankrupt as they were focused on the hospitality sector.

We had discussions with customers and offered help where we could, understanding that they were in trouble. We offered delayed invoice payments or discounts. Most of our customers have a diverse business, not solely focused on hospitality.

How many customers do you have in total? If you lose approximately two customers a year, what's the size of the customer base?

That depends on how you view it. For instance, in the US, we have listed laundry companies like UniFirst and Aramark that use our software across 100 plants. Technically, it's one customer, but indirectly it's more than 100.

If you consider licenses, we have between 100 and 200 customers. However, considering all the plants behind it, the number is significantly larger.

How did the selling process come about?

When I was hired in 2018, the owner, who was approximately 59 years old, was already considering selling the company. He was a savvy individual and knew that he needed to make some organizational changes to professionalize the company. That's what I spent the first three years doing. I reorganized and focused on HR and the entire company, except for sales, which was handled by someone else.

In 2021, I transitioned from my role as COO to a more strategic advisory position. I also had other business priorities, so I reduced my working hours from five to three days a week. My role was still on the executive board, but it was more strategic, with the goal of selling the company in mind. By then, the owner was 62 or 63 years old and ready to sell.
We actually started the selling process much earlier, around 2019, when we were approached by numerous private equity firms interested in acquiring ABS. We even signed a Letter of Intent (LoE) with one firm, but ultimately decided not to proceed because we believed our company was worth more. We paid the necessary fees for terminating the negotiations and continued to be approached by private equity firms. We were continuously approached by many private equity firms for takeovers.

Was the owner also the CEO of the company?

Yes, the owner was also the CEO.

Who led the sales process?

I handled all the preparations. We identified potential private equity firms that could be interested in us and had several discussions. I prepared an investment memorandum, a detailed one, and sent the short version to my contacts. We wanted to understand how a private equity firm would view our business. I was also considering the multiple, knowing that we needed volume and some changes in our model.

Vitec was introduced to us through a former colleague who worked for an intermediary. If I'm going too fast, please let me know.

Were you aware of other potential buyers, like TSS in the Netherlands, who also purchase a lot of software companies, apart from just private equity firms?

Yes, I was aware of it, but I'm not a private equity specialist. I'm primarily a private banker. Private equity is a side interest of mine. I wasn't aware of Total Specific Solutions (TSS).

Total Specific Solutions is a Dutch company that also makes acquisitions.

I'm familiar with Visma and Constellation. They operate similarly.

Yes, TSS is part of Constellation.

I see. I was aware of Constellation. I didn't know to approach them. When I did come into contact with Vitec, I found their approach interesting. They believed in not changing our strategy, acknowledging that we are the best in our market. They were also interested in long-term investment, not just for five years. With this information, I went back to the owner and suggested that this could be a good match for us, better than previous private equity companies we had interacted with. He also had a discussion with them, which went well. The owner had a fruitful discussion with Olle Backman, the CEO of Vitec. I wasn't present, but I heard it went well.

You mentioned earlier that you had an idea of the market multiples and what ABS could get. What were your expectations regarding the multiples at that point? The business eventually sold for around ten to twelve times earnings, according to public disclosures. How did you perceive multiples at that stage?

I didn't expect such a high amount. The final sale price was 100 million, with an initial 80 million and an additional 20 million based on meeting certain targets. No other company was offering that much. I thought the sale price would be between 60 and 70 million, so the 100 million was a surprise. I had a discussion with the owner a few weeks ago, and he mentioned that Olle Backman had said they wouldn't buy the company at that price anymore because the interest was very low at that time. That worked to our advantage. We were very fortunate in that regard.

It seems like it was the right place, right time, and right buyer.

Absolutely.

Going back to when the idea of selling the business became more serious, did you engage advisors or brokers?

We handled most of the process ourselves because we had substantial knowledge about how an external company would view ours, as well as what we and the owner wanted. The owner was very clear about his expectations. The price was crucial, as he is an entrepreneur, always mindful of costs. He was aware of the value he could get and was adept at selling. He would always redirect questions about the company's worth back to the inquirer, setting high targets. We were quite knowledgeable and only hired a tax lawyer in Luxemburg as an advisor. We never engaged an intermediary to sell our business.

You mentioned a former colleague or friend who worked as an intermediary and had heard of Vitec Software. Is that how you came into contact with them?

Yes, my former colleague contacted me on LinkedIn after several years of no contact. He said he had a client interested in ABS Laundry and asked for a call. That's how the process started.

Vitec Software engaged this intermediary, who happened to know you?

Yes, they happened to know me. I believe they work with several intermediaries. I've never asked how they found us, but I suspect it was through one of these advisors.

Did you or the owner meet with Olle from Vitec Software during this process?

Yes, I met with Olle and Gert Gustafsson, the operations manager. I also met someone from either Oaklins or PwC, but I don't remember their name. It was a financial business discussion.

Oaklins, the corporate finance firm?

Yes, I believe I met them once in person.

When was that?

I think it was in either February 2022 or January. I was approached by my former colleague in December 2021, and things started moving in January. The entire transaction was completed in about five months, which was surprisingly quick. We had to fill a data room, which required substantial work. Vitec Software acted quickly and professionally, with a large team supporting their decisions and preparations.

During that five-month span, were you also in discussions with other potential bidders, or was it exclusively with Vitec?

No, it was exclusively with Vitec.

From the moment you met Vitec and they started asking questions about the business, what was your impression of their primary focus? What seemed most important to them?

They were primarily interested in our revenues. They were intrigued by our business model and how we became number one in our market. They wanted to understand why and how we maintain that position. I was a bit surprised because they were interested in our software, but they didn't delve deeper into it. They wanted to know what was going well with our software and if we were ready for the future. We gave several presentations, and the management team members had to sign an NDA. They didn't really probe further into the software. They trusted us, which was very positive.

So, they didn't necessarily ask deep questions about the code base specifically, but more about the features and how it fits with the market?

Exactly, they were not interested in the code. We presented something about the code, but there were not many technical questions, not as many as I would have expected.

Did they indicate during the process that they wanted to change anything about the business?

No, they said from the beginning that they were not going to change our business because we made it what it is. However, I did advise them to make some changes, especially in HR, which was not well-organized at our company. The owner always said HR and other staff disciplines cost money. We didn't do marketing. I changed the website, for example, and organized a team with someone from Romania. But we did all this in addition to our regular jobs because we didn’t want to waste any money. We didn't even have an intranet site, despite being an international organization.

I was more curious if there were any plans to centralize functions like HR and finance.

The first change we made was in finance. Vitec is listed, and our finance department was small, consisting of one CFO and two assistants. We had to expand this because of our listing status and the need to comply with certain regulations. This was a significant change in our organization, and perhaps the most important one.

If you're asking what changed after that, the answer is not much, except for our focus on recurring revenues. When compared to other companies they acquired, like ABS, we found that only 40% of our revenues were recurrent. They set a target of 80% for us. We had to change our business model to increase our recurring revenues to 80%.

I'm surprised that a business with a SaaS product only had 40% of its revenue as recurring. Could you describe what the rest of the revenue is made up of? Is it professional services?

Yes, that's correct. Our model was such that customers paid an initial amount for a large license, followed by a 20% license fee every year based on the initial amount. This was for new customers. We also had legacy customers who paid a lower maintenance or recurring fee but utilized a lot of our consultancy services.

We offered more than just software and licensing. We organized a technical platform and updated the software annually, which could be quite significant. This required us to set up a technical environment, which added to the costs. We also had customers who paid a low maintenance fee but had service levels.

I introduced service levels and categorized our customers into three types. The professional customers, such as the listed laundry companies, could change the code through a center or support desk. They could also directly discuss with the developer. We didn't want to change everything, so we had a person overseeing this process. He decided whether we should change the software for a particular company or not.

Most of the professional companies had tailor-made software. If they wanted to change something in the code, they were charged by the hour. This was not a recurring fee, but a one-off charge. These were quite significant as about 50% of all our revenues come from the US.

The 40% is essentially the annual license or maintenance fee that customers pay to access updates. The remaining 60% is a mix of professional services and, I believe, the initial license fee, which is non-recurring.

I'm not certain about that, I apologize. I do know that the maintenance fee covers support. If customers have queries or encounter issues, they can contact our support desk. However, we do have different service levels. Smaller customers are entitled to a few hours of support. If they exceed this or fail to update their software, they are charged by the hour. We have quite a few customers on this plan.

There's also custom pricing for the largest customers requiring customization.

Yes.

That's fascinating. You came into with Vitec in December 2021 and primarily interacted with them during that period. How do you think they arrived at the 100 million valuation? What was your perception, given that you were expecting 60 to 70 million?

The final negotiations were conducted by the owner, not me. I would have been satisfied with 70 million, even 80 million. But 100 million was truly surprising. I believe our thorough preparation played a part. Everything was in order, from completing the data room to organizing HR. We had no debts, which you see for IT companies. Our EBITDA margin was nearly 30%, perhaps even 31%. We've been growing by 15% to 20% annually, at least in recent years. They recognized that we have a compelling proposition in an attractive market. The market conditions were favorable, interest was low, we had a promising pipeline, and there was still a vast market available to us. For instance, ABS is well-established in Europe and the US, but there are opportunities in the rest of the world. We have an office in Japan, where we've been for over ten years. We hired a Dutch employee who is fluent in Japanese to work there. That's a significant market for us. South America and China also offer potential. We're just starting in those markets. From that perspective, 100 million seems reasonable, if you're looking at the long term.

You mentioned 15% to 20% growth. Do you believe that's sustainable?

No, I don't believe it's sustainable.

What would be a more realistic expectation?

To be honest, I don't think 20% is sustainable. But considering the company's history and the transition to a software as a service model, which can significantly reduce costs, I believe a growth rate of at least 15% is still achievable. I'm quite optimistic about ABS.

That's encouraging.

There will inevitably be some hiccups in the coming period due to the CEO's departure from the company. The current commercial director, who is now the CEO and is also around 61 or 62 years old, knows the market well. However, they will eventually be replaced. It's crucial to have a succession plan in place to fill the gap. In my opinion, this is an area they still need to work on.

This is a common occurrence, isn't it? Especially when a business with a 60-year-old founder is sold. The founder usually stays on to ensure a smooth handover. I imagine this was part of the discussion with Vitec at that point, about his plans post-acquisition and the commercial director who won't be taking over. Were there potential successors discussed?

We presented it as if we have a management team that can operate independently. In our business model, the executive board isn't necessarily required. The CFO is needed to ensure everyone is paying their bills, but the business can continue even without the executive board. That's how we presented it. I didn't always agree with this, but that's the approach we took. In my opinion, you always need someone to set the direction at a high level and make decisions in case of conflicts. This will be a challenge for ABS in the future, figuring out the succession plan.

Now that Vitec has acquired the business, they'll have to consider succession. The first thing they did was integrate finance and set a recurring revenue target. Was that the only target they set, or were there others?

The most important KPI was indeed the recurring revenue target. They wanted to see plans on how we could achieve 80%. That was quite a challenge. I left in July, three months after the acquisition was finalized. As a contractor, they decided to end my role to cut costs, which is understandable, especially as we transitioned to a SaaS model. Other than that, we had the freedom to do what we wanted without needing approval from Sweden.
I advised Gert Gustafsson to centralize functions like HR, marketing, and finance. We have other Vitec companies in the Netherlands, and they plan to acquire more in the Benelux region. In my opinion, Sweden is quite far away and we've always had issues with HR. Centralizing these functions would save costs. The same applies to marketing. They could be more visible in the market, in the press, and so on.

How do you envision them increasing their recurring revenue from 40% to 80%?

I'm not sure if they'll reach 80%, but in my opinion, it will require a significant effort. For new contracts, it's relatively straightforward. You can establish service levels and set an annual fee for the customer, which includes consultancy services and software updates.
My approach was to make these service levels more concrete. There are several service levels for each contract, and I believe that you can significantly increase recurring revenues this way. However, for existing customers, it's more challenging. You need to provide them with a benefit to justify increasing the recurring revenues. This could be in the form of consultancy services or improvements to their IT architecture.

If you look at the laundry business, it's an old-fashioned business model. I estimate that 60% of the industrial rental business in the laundry sector is run by small family-owned operations, or as they say, mom and pop shops.

This is particularly true in Japan. If you want to change this model and professionalize it, there's a lot of work to be done to reach that 80% target, which is quite high.

Did they assign anyone from the headquarters to oversee the business or assist you, like a VP of operations or even Gert himself?

Yes, Gert himself was involved. He attended the operational meetings every week because ABS is the largest company.
Gert also visits the Netherlands several times a year to visit the company and for new acquisitions. He's mainly responsible for operations. From what I understand, they are hiring people based in the Netherlands to oversee operations in the Netherlands and Belgium for more delegated management.

I noticed that all the people at headquarters who have that role are based in the Nordics.

Yes, that's correct. I think they should change that. ABS is quite international, and we derive only about 10% to 15% of our revenues from the Netherlands and Belgium, but the management is still Dutch.

I advised them to hire someone from France. We have an office in France, near Rouen, which is a very important business for us. However, the owner was concerned about the cost implications of promoting someone to a director title in France, which would legally require a higher salary. He was always very cost-conscious, which is quite normal.

Indeed, one of the reasons he was able to sell the business at a good price is because it was highly profitable.

Absolutely.

As we conclude, what is your overall assessment of Vitec as a buyer?

In my opinion, they are professional. They understand us and we understand them because we share the same values and culture. This was an advantage.

They trusted us. They had good advisors and even hired our tax lawyer. This was the first time I spoke with that tax lawyer in Luxembourg. It was interesting to have one lawyer for both the seller and the buyer.

What I appreciated about Vitec was their efficiency. We had a data room filled with financial matrices, historical performance, current financial projections, balance sheets, and more. We had to explain our sales pipeline, our legal structure, and the location of our IP rights in Luxembourg.

They trusted us a lot. They didn't visit our operations in Romania, where we have 100 full-time employees. Personally, I would have liked to see more of the operations if I were taking over a company.

How do you assess them as an owner?

I'm sorry?

What is your assessment of them as an owner of the business in terms of values and focus? Essentially, do you think they are a good owner?

Yes, I believe they are capable, as they can continue to follow the strategy as planned. However, I think they could improve by listening to their employees through satisfaction surveys. When I look at private equity firms, they seem to focus too much on financial metrics and not enough on non-financial ones. Vitec does the same. I would suggest they focus more on HR, which in my opinion, is a very important and valuable asset.
They are a good owner from what I've seen in my three months with them. They don't change the strategy much and leave it to the current management. However, I believe that management can sometimes be changed and they could put more effort into that, as well as focusing on HR.

I hope that the new management they hired in the Netherlands and Belgium will increase employability. For instance, at ABS Laundry, many employees in the Netherlands have been with the company for 25 to 30 years. They are well-paid and have a lot of freedom, but it's a long time to be with one company. I question whether it's beneficial for someone to work for the same company for over 20 years.

That was very helpful.