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.

It's good to meet you. I'm looking forward to this. To give you some context, I've been studying Vitec and Constellation Software, or as some call it, VMS acquirers, for a considerable amount of time, around six to eight years. I'm fascinated by these businesses. They are high-performing and have been around for years, especially Vitec, Visma and Constellation. I'm curious to learn more about their operations and your experience there.

I assume you've read both the quarterly and annual reports and have been following the changes in their management team, especially at the headquarters level.

Yes, I met Olle and Patrik two weeks ago.

One thing that surprised me was that I always saw Patrik as the successor of Lars.

Why didn't that happen?

I have no idea. I believe Lars saw it that way too. Patrik is from Umeå, a family man from that part of Sweden.

That's right, it's up north of Sweden.

Yes, it's way up north. The northern people are known to be a bit slower than those from Stockholm and the Malmö area. It took me about a year to understand that when they said, "Let's sleep on it," they meant we don't have to make a decision today. I would say, we can't continue to go straight, we need to choose left or right. So, what do you think? Give me a direction here.

Did you have to adapt to their style of working?

Yes, we often met at the Lindhagen office in Stockholm.

Are Lars and Olle also from up north?

Indeed, Patrik had a diverse career in various sectors, including finance, and worked for large corporations in Stockholm. When he returned, he became part of the business community there. He was recruited and quickly ascended to upper management under Lars and Olle. I had anticipated his success, but perhaps he didn't want to work around the clock. But it surprised me.

One of your questions, was about Lars. Lars is excellent with people, he knows how to motivate them. He's meticulous in ensuring that the upper management, particularly the decision-makers, share the same mindset and understand how the business should be run, according to his vision. Are you aware that Lars's favorite book is "From Good to Great"?

How does he apply that?

He keeps a stack of those books in his office. Whenever you have a meeting with him, he makes sure you have a copy. I received mine at a management team meeting last year.

Why is he so fond of that book?

I believe it provides him with a framework. He's very structured and likes to stick to a plan. While he constantly evaluates the business and makes minor adjustments, his long-term vision has always been clear. For at least the past 15 years, he's had a clear goal of becoming what they are today.

How did he communicate that?

As a serial buyer of companies, specifically dominant software companies and smaller ERP suppliers for specific industries. For instance, if you have 80% of the Swedish real estate agents using a tailor-made ERP system, there's no room for organic growth. The system is based on Swedish real estate law, and you can't do much else with it.

I'd like to discuss that product later because it's quite intriguing. But back to the history, can you tell me more about Lars and Olle? Were they originally from Umeå?

Both Lars and Olle are from Umeå. I believe they met either at university or shortly after. Without checking, I think one of the first companies they acquired was Vitec Energy. 

He initially rolled part of his equity in the first transaction.

Yes, exactly.

And now, as you mentioned, Patrik has moved up.

Yes, I believe he moved up about 15 years ago. He was quickly absorbed into upper management and decision-making roles, assuming a very important role as the COO at that time. However, I think someone else now holds that position.

In response to your other question about management, let's take the ones that are easy to answer. Payment for services and overhead services are based on a simple commission of your turnover.

So when Patrik came in, for instance, comes in as COO. Given that these companies are all decentralized and standard, what was his actual role?

At that time, he was overseeing the companies. The CEOs of each company they owned would report to Patrik.

And Patrik would report to Lars?


Who else would report to Lars?

The HR manager and the head of finance. At that time, there was a small group at the headquarters. The head of finance at Vitec headquarters, for instance, all the CFOs in the companies would report to her.

But wouldn't all the CFOs also report to their CEOs?

Yes, they would, as well.

To send up the accounts and numbers every month?

Exactly. They were given directions on how to report. Consequently, all the companies switched to this way of reporting to their CEO in their organizations.

But how does that work? It seems tricky to have two bosses when you're probably used to having just one. How does that work?

If you're delivering according to the set plan for the year, you're pretty much left alone. The budgeting happens in October and November.

How does that work?

I can't recall the exact system. It's a large finance system, one of the big ones where you can build multiple company structures that feed up to a headquarters financial reporting system. Both reporting and budgeting are included. You're measured on your monthly budget as you report every month. If you deliver according to plan, it's fine; usually 10% to 12% net profit. They're usually not that interested in growth, as long as you deliver and meet the target for turnover and net profit.

You mentioned that you budget in October and November. How does that work? For instance, if I'm a subsidiary company and you're the headquarters of Lars and Patrik, how would we decide on a budget?

The process begins with a set of rules. You are expected to defend your turnover according to these guidelines. They are not particularly interested in whether you achieve your profit through cost savings or other means, as long as it's not out of line.

Is there a requirement for a certain percentage of growth in turnover or profit?

Most companies don't have a growth percentage. They're not primarily interested in organic growth. If you have an ERP system where between, let's say, 65% to 90% of the users are in a certain market, there's not much you can do to increase growth.

But you could charge them more.

Yes, exactly.

You could also add new features.


You mentioned they don't focus on organic growth. However, I feel like Vitec, more than say, Constellation Software, claims to be more operationally focused. They focus on growth and reinvest in their companies. So why don't they measure that? You say they don't focus on organic growth, but they do.

That's true, they do now. I think there are a couple of reasons for that. Shareholders probably expect them to look at both the cost side and how to grow the profit. They have also taken a more active role in developing the companies. The main reason for this is that the companies they're buying started developing their systems between, let's say, 15 and 25 years ago. A lot has happened in software development over the past five years, and for a small company, keeping up with these changes is a significant investment.

You're saying that, historically, they didn't focus as much on reinvesting in the companies or on organic growth as they do today.


Is this mainly because of the move to cloud or the need for more infrastructure investment?


What was the message in the early days? If we go back to the budget, let's say I'm a subsidiary, you buy my company, I'm making 10 million, and one million in profit. Then I come back next year and I say I'm going to do 11 million and 1.5 million in profit, and I explain how I'm going to do that. What would be your response at the headquarters?

That would be absolutely fantastic.

So, you would just approve it?

Yes, definitely.

And if I don't meet the target?

If you continue to deliver month by month, we would definitely leave you alone.

You would likely continue as the former owner and CEO. However, you would need to earn some cash and plan for a possible exit, either when you find a successor who can deliver the same results or when you retire.

What percentage of the founders continue to work after their earn-out period?

A significant number of them stay on for a surprisingly long time. This was something I initially struggled to understand when I transitioned to Vitec from the gambling industry, where growth was measured on a daily, monthly, and quarterly basis.

One of the things I had trouble understanding was the lack of a strong drive for growth. However, I later realized that in most of these industries, there is a plan for increasing the price to follow the indexes and to deliver new services.

Another surprising aspect was on the M&A side. In most cases, the ownership of the shares simply switched hands, and then we moved on.

Why did they choose to stay on?

I believe it's because many of these companies, which they started from scratch, were like families to them. For instance, one company they acquired in Kalmar, a small city, had a very familial atmosphere.

Let's say I sell my business to you for a turnover of 10 million and I'm earning 1.5 million. I get an earn-out consideration after hitting certain targets in one or two years. How are these selling founders then compensated? Do they receive a lower cash salary?

They receive a fair cash salary in most cases. Additionally, they are often paid with newly issued shares in Vitec, making many of them significant shareholders in the company.

If I sold my business to Vitec in the early days, I would be paid partly in cash and partly in Vitec stock. I would then accept a smaller cash salary to continue working, but I would still own Vitec shares. You mentioned that you were surprised by how many of these individuals chose to stay on?

Yes, I was.

Why is that?

Because I wouldn't have done the same. I would have started a new business with that cash.

But why do you think they chose to stay? Apart from what you've already mentioned, is there anything else?

Many of these founders see their companies as their babies, something they've built from the ground up. In many cases, they've run these companies for 25 years before selling. They might not know how to do anything else.

Could you tell me what percentage of companies Vitec owns are located in Stockholm versus those in the north or other smaller towns and cities in Sweden?

Very few.

So, they're primarily in the north and countryside?

Yes, they're in the countryside. This is not exclusive to Sweden. It's the same when they acquire companies in Denmark and Finland.

So, they don't prefer companies in cities?

I don't think they specifically look for that. However, the companies they have sought out are not typically located in metropolitan areas.

Why not? One would think they would be in places like Stockholm.

Yes, you'd think so, but they're not. One of the reasons is the price tag of these companies. They often buy companies with a turnover of 10 million and a profit of one or 1.5 million, for 35 to 40 million. These companies are valued quite low because there's no competition from large VC firms. For instance, if they look at an ERP system supplier for Swedish real estate agents, there's no way to significantly increase the turnover. If we already have 6,000 out of the 7,000 Swedish real estate agents as customers, we might only be able to increase turnover to 12 million in five years.

Returning to this point, I'd like to discuss the real estate aspect later. But for now, let's say it's 2015 or 2016 and I come to you with my budget of 10 to 11 million, with a 1.5 million target. How would Vitec and Lars communicate to me, as an owner, what I should focus on? Should I concentrate on revenue, net profit, or operating profit before tax? What did Lars emphasize?

Recurring revenue was really important at that time. In the early days of ERP systems, you had a platform and then you added applications or services on top of that. The way you sold it was by providing access to the platform and a few attached applications. That's not how we sell software or ERP systems today. Now, we charge 100 krone per user per month for access to everything. After about 10 years, the invoice would be three pages long, listing the 35 modules we developed, each with a different price. Some cost 40 cents, some 62 cents, and others $2. This was because the development costs were high for us.

This was the old on-premise software model?


So that was the structure.

The decision to focus on recurring revenue was significant for our headquarters. We, like a few other companies, restructured our entire package. We provided access to all modules, raised the price per user, and performed a basic calculation. There were certain modules in these systems that were designed for super users and were highly sought after. For instance, there was a module for commercial real estate, which is a bit more complex as it involves legal transactions between companies. If a real estate agent encounters such a deal, they need this module, which is 10 times more expensive than the regular ones. By granting everyone access to this module and illustrating the potential savings, we were able to increase the price per user by 22% in 2020, just by switching the model.

Did you have to change the entire architecture from on-premise to cloud infrastructure?

Not really. We simply opened up and then began the transition to the cloud. For instance, in the real estate sector and for estate owners, like rental management, tenant management, and so on, they have completely transitioned to a cloud-based, web-based system.

I find it interesting that Vitec seems to have data centers and shared IT services.


When and how did that start?

It started around 10 to 12 years ago.

Why did they start?

It was just before companies stopped having their own data centers. No companies have their own data centers now, but they still do.

Why? Surely AWS is more efficient than this.

Absolutely, and it's a tenth of the price to manage your own. However, they wanted to have their own because they're not that modern. The companies they acquired were not that modern either. They're not like metropolitan app developers or Spotify companies.

But why don't they move these companies to AWS when they acquire them, even if they're on old infrastructure? Wouldn't they save money by moving to AWS rather than their own? What's Lars' rationale for this?

I actually spoke with one of the technicians who are now part of a division assisting companies with the technical transition from old to new infrastructure. This allows them to practically move to AWS. However, due to the foundation of how the system is built, it's not possible to simply move everything to AWS. A little rebuilding is necessary beforehand, and they're assisting with that.

I'm curious about their claim of being decentralized, yet they have these centralized IT services that they utilize across the groups. How do you perceive the value of these IT services for these companies?

Are you asking about the value of the IT services provided to the subsidiaries?

Yes, why not let the subsidiary handle it? Why not let the engineers at the subsidiary take care of it?

I don't believe they have the capability. In the companies I've examined, the developers or architects are the same ones who built the first version of the infrastructure. There have been significant advancements in infrastructure and server technology, and it's a big leap for them to take. They're interested, but they can't see how to make it happen.

Do the subsidiaries appreciate this service, or are they reluctant?

Initially, they are a bit reluctant because this has been a topic of internal discussion. However, I think there's a sense of relief because it's also a budgeting issue. Prior to joining Vitec, it was challenging to justify the cost internally. In some cases, it's a costly project with no immediate benefits.

Especially if you already have all the customers.


If you tell me I have to move off my system that's working perfectly fine, that's exactly what I would say.

That's why they are a bit reluctant.

But what does Lars say? In the long term, say the next 20 years, they might need a new architecture.

That's his point. We have to modernize, or else we will become outdated.

And you risk losing customers in the long run.

Exactly. They don't want to leave a gap for a competitor.

Who foots the bill for this? Let's say I'm initially reluctant. My system works well, and my developers, who are my old friends, only know the old system. You guys come in and want to change my back end. How much do I have to pay the central element? How does it work? How much do I have to pay these technicians or the Vitec subsidiary?

You can often offset the cost by making adjustments on the cost side. We had to do that with both the real estate and real estate agents systems. They said, instead of 10% next year, we expect you to deliver a new architecture within a certain timeframe, and in return, we can give you a rebate on the cost.

So, you're referring to a 10% growth? A 10% profit? Okay, let's assume I'm generating 10 million in revenue and one million in profit. Typically, I would aim for a 10.5% growth. But you're suggesting that if I make a significant shift in architecture, I might only achieve a 0.5% growth in one year. However, after the shift to the new architecture, I could potentially see a significant increase. So, it's like a discount on the cost?

Precisely. But it's not a complete cover. It's also a tactful way of communicating to the subsidiaries that there's room for reorganization. If a company has been around for 25 years with the same team from the start, there are likely people who, despite being good employees, aren't contributing significantly. We wouldn't suffer if we let go of a couple of them.

Does Vitec make cost cuts post-acquisition? Do they reduce labor and HR?

They never do, but they cleverly set requirements on the turnover and profit side. This forces you to realize that capturing the last 20% of the market is more expensive than the initial entry phase.

Going back to Lars' focus, is he emphasizing net income, profit growth, operating profit growth, or revenue growth? What is his primary concern?

The priority is to maintain sales at the same level, not to lose turnover. If they can achieve a 12% net profit on that, it's considered successful.

So, a 12% net income was the target?


For all companies?

Yes, indeed.

So, all companies had a 12% net income target.

That's what I last heard. However, it's been a while, and the targets might vary for different companies.

But there was a 5% growth every year, right? Or was it a 10% growth? What was the growth rate?

There's no company-wide growth rate set for all the subsidiaries. When Patrik was the COO, he would meet with the management team of real estate agents and discuss growth strategies and reasonable levels. He would have a notion before the meeting, and then there would be a discussion.

But you have to agree on a profit growth rate. You can't just agree on the numbers. Patrik might say, "I think you can grow a bit more," and you might respond, "Okay, we're going to aim for an increase in profit of 5%."

Yes, that's correct.

And that would be the budget.

Yes, that's correct.

You can achieve that profit either by growing sales or by maintaining sales and increasing prices. The choice of how to achieve that profit is yours.



I've noticed that some CEOs reach out more than others. There is a group of COOs, each leading different companies. Some of these subsidiary CEOs reach out more often and have monthly meetings with the COOs. This is something we observe in our market. It's important to understand that each of these CEOs sees their own situation as unique.

You need to understand, I've heard it many times in these meetings where you meet the leaders of all the subsidiaries. They meet in Umeå once or maybe twice a year now. All of them say that, you have to understand that the real estate business is unique.

They're all the same. They're unique in their own way.

Exactly. They are customers and whether it's an ERP system or a business system, none of them will call you to say, "Thank you, this is way too cheap."

Could you tell me how and when you joined Vitec and what your role was?

Actually, Fredrik Rubin, the CEO of the real estate ERP system, brought me in. They had acquired a Stockholm-based company. So, Vitec bought two companies that focused on real estate owners, handling tenants and annual budgets for maintenance tasks like painting and elevator replacements. All the maintenance staff used their system.

And this is the Mäklarsystem?

It's called Vitec Fastighet, Vitec Real Estate.

Because Mäklarsystem is for real estate agents.

That's correct.

So, how related are these? For instance, the real estate and real estate agents, are they in one group or are they completely separate?

They are two completely separate systems with separate teams.

So, what was your role? Were you working in one of these operating companies?

I was in the real estate agent sector, handling both marketing and sales.

If I understand the organizational structure correctly, you've got all the executives in Umeå , like Lars, Patrik, Olle, and others. And you were working in one of the groups. Which group was it?

I was brought in as a project manager to handle the integration of two real estate ERP systems that Vitec had acquired. One was based in Stockholm and the other in Kalmar, in the south of Sweden. The goal was to merge these two systems.

We developed an integration plan for the upcoming three months. The first step was to provide everyone with a new email address for the new company. We then worked on shared calendars and other small things that facilitate integration.

Vitec learned early on that the fear of integration is often exaggerated by buyers. If you've been working in the same place for 20 years, a change like a new owner can actually be quite exciting. Especially when the new owner is a big company that can open up new opportunities.

In these types of organizations, people are generally welcoming. If you were to merge Amazon and Google, there would be a huge fight from both sides, and great fear. The benefits of being purchased by a larger company include better structure and improved finances in the long term. There's a steadiness and robustness that smaller companies often lack.

So you merged these two companies together?

Yes, we merged the two companies. At the end of this project, Fredrik decided we couldn't have a sales and marketing manager on both sides. I thought he would choose one of them, but instead, he appointed me as their manager.

These were two separate companies, one providing a system for real estate agents and the other for real estate owners?

Yes, one was a system for real estate agents, and the other was for real estate owners.

And you merged them together?

No, there were two separate companies that Vitec bought, both of which catered to real estate owners.

What were these companies called? I know the Mäklarsystem, which is for real estate agents in Sweden, was bought in 2010, but that's not what you're referring to.

The company in Kalmar was called Capitex, and the one in Stockholm was, I think, 3L.

Let me share my screen to show you what I have.

This is from their 2016 report. This business area, real estate. What does that mean? Which companies are included in this?

That includes two companies from the start of 2016.

These are the companies they had in 2020. Yes, Mäklarsystem is here.

Yes, that's the one. And that's the one where I helped integrate two companies into Vitec Mäklarsystem. One of these companies was a company from Stockholm, named 3L. The other one was Capitex.

So, you merged these two companies into Mäklarsystem?


What's included in this business area real estate then? Is there a CEO of business area real estate, or is this just them grouping together all the individual companies?

Now, what you're pointing at here, it seems like a group of companies who are in different countries. They have one in Finland, for example.

Yes. Because they've got one here, which is like real estate in Norway.


But these are not the same software system, right?

No. And the Vitec Megler there is real estate agents.

So, is this in Vitec Mäklarsystem real estate agents?


Where's the owner business, then? That's in Mäklarsystem?

No, the Fastighet. That's the one I was referring to.

That's a really big one. That's the biggest one. That's probably the oldest one.

Yes, exactly.

So, you merged two separate smaller companies that they acquired into Fastighet?

Yes, exactly.

That's how you came into the business. Once you've done that, you became sales and marketing manager for Vitec Fastighet?

The company they bought in Kalmar had two separate divisions. So, they had one for Fastighet, which is for real estate owners, and they had one for real estate agents.

But did they put this at Mäklarsystem or not?

So, they divided it.

It's still part of Fastighet. but you're suggesting that Fastighet encompasses two businesses?

There might indeed be a few more companies now included in Fastighet.

So, what is the relationship between Fastighet and Mäklarsystem for real estate, given that they both serve the same industry?

There's not much of a relationship because they operate quite separately. The real estate agents have nothing really to do with the maintenance of commercial estates. Vitec Fastighet's property portfolio is largely owned by the state and regional entities, like cities and communes. They are also major buyers of commercial estates. Those are the customers on that side.

Is there a CEO or leader for this real estate business area?

There is a CEO for that division.

There's a separate individual who oversees Fastighet and Mäklarsystem?

Yes, those are two separate CEOs.

Let's say there are three businesses, for example, Mäklarsystem, Megler for Norway, and Fastighet. Each of these three operating companies has a CEO. Then you're suggesting that they have a business area manager, which is a separate CEO, or do all these three CEOs report to someone like Patrik?

Exactly. There's probably a COO position to whom they report. That person is part of the senior management at Vitec headquarters. Previously, there was only one person, Patrik. But as the number of companies grew, it became too much for him to handle, so they probably divided it into divisions. Even if the owners of real estate and the real estate agents don't have anything to do with each other, they probably have them in the same division for supervision from Vitec headquarters.

Who did you report to?

I reported to the CEO for both of these companies for a while. Then we divided them, and I primarily worked on the real estate side.

Who was the CEO you reported to?

I reported to the CEO of Mäklarsystem, the real estate side, and the CEO of Fastighet, the system for estate owners. At that time, it was quite practical because Fredrik was the CEO of both. But when he left the company, they hired a separate CEO for each. Then I took on the role of Head of Marketing and Sales, but only for the real estate side.

Could you explain how common your type of role was? It doesn't seem to fit neatly into a decentralized structure, which is often messier than theory suggests. Could you elaborate on their organizational structure? What aspects were centralized and what were decentralized? What principles did they use?

At that time, they owned maybe five or six companies, so very little was centralized. They had a very small head office with Lars, Olof, the CFO, Patrik, and two HR personnel.

So, they only started acquiring companies recently?

Yes. They've started serious acquisitions recently.

Why didn't they start this process earlier?

I believe it was due to cash flow reasons. They have a history of using their cash as security for loans when buying companies. They almost always loan the whole portion of the cash payment and then issue shares for the rest.

If they didn't need cash, why didn't they start buying companies earlier, like in 2010?

I think it was due to practical reasons. There were too few people, only Lars and Olof part-time, and one full-time person who managed the shortlist of companies to buy. Now, they have an entire team for this purpose.

For doing the lead generation, like finding companies to buy?

Exactly. Lead generation is easier now because everyone in Sweden knows about Vitec and sees it as a possible exit.

Why didn't they use brokers, though?

I'm not sure. But Lars found it difficult to explain the model, even to people internally.

He was looking for a certain mindset. He wanted to meet the founder of the company he was going to buy and really get to know that person. He was very thorough in that respect. A VC company would have a set of terms and if you meet 80% of these, they would talk to you.

But he started in 1985, right? And there are a couple of businesses here, the Fastighet one you mentioned was in 1985, they acquired it, I guess he almost started that. Then there's one in 1998, which I guess was the first one they bought.

Yes, that's correct.

When did he start speaking about this vision of being a serial buyer? It must not have been from the start.

Indeed, it's quite amusing because he merely mentioned in passing that we are continuously looking for companies to buy. He didn't share a broader vision about becoming a serial buyer. He spent more time discussing the culture of these companies and the notion of us being a family. He focused more on the group rather than on acquiring more companies. As employees in the subsidiaries, we didn't really receive any information. There's nothing on the intranet about it. It's just a simple press release when they purchase a company. There's no real strategy around mergers or acquisitions that he spoke about.

Was he aware of Constellation Software at this point or when did he become aware of them, if at all?

Not really. I think they are still looking for companies with a very targeted, narrow customer base. He doesn't want competition when buying a company. They don't want competition from large corporations or venture capitalists.

It's very beneficial for Vitec if there isn't a huge upside, even in 10 years from now, because then you get serious competition from other buyers.

I understand.

If it's a steady 10 million a year, one million in profit a year, it's perfect. We can always do things with those companies.

This has been great. I'll let you go. Thank you very much for your time.