July 18, 2022
Gustaf: Hey Paul and Chris, it is a pleasure to dig into Dura Software with you! A few years back, you sat with your chairman Michael Girdley at a café in Texas to discuss Dura’s founding. What did you decide? Have any assumptions been rethought?
Paul Salisbury: Continued technological advances make starting a software business easier every day, however, operating a sub-scale software business with predictable growth and profitability is still really hard.
There is also a “capital gap” at a revenue stage that we view as $2m to $10m in ARR. Companies this size may have a smaller TAM or are not growing fast enough to attract venture capital, and growth equity does not quite dip down that low.
But… that does not mean that these are not great companies whose customers and employees would be extremely impacted if they were to shut down! Dura seeks to find, acquire, and operate these companies profitably for the long term.
We find and acquire hyper-niche (horizontal and/or vertical), B2B, mission-critical software businesses with good products and loyal customers and turn them into great businesses.
Our initial assumptions are still valid. However, we have modified our acquisition strategy over time. We initially focused on distressed or what we liked to call “unloved” companies that needed significant restructuring, product modernization, and operational improvement.
Most of the time, these companies were mis-capitalized and mis-managed. We can fix the capital structure with a simple purchase process, and Dura does seek to deploy our own management teams. We always buy 100% of our businesses. We can acquire these businesses at low revenue multiples, allowing us to preserve capital.
But we also found that there were typically deeper issues in play requiring more resources and much time to reach our target performance objectives. As a result, we have shifted to acquiring healthier companies with positive EBITDA and better near-term growth potential at higher (but not much higher) revenue multiples.
Our post-acquisition efforts now consist of a much lighter and faster “optimize” motion to get our companies to steady state “Rule of 40” performance.
Gustaf: Your acquisitions include international ones and carve-outs. What are your acquisition criteria? Do you see Dura becoming even more acquisitive?
Chris Burney: We have acquired ten firms to date. Three international acquisitions, two carve-outs, and one technology “bolt-on.”
We have a very disciplined quantitative and qualitative set of criteria to assess all acquisitions, with the most fundamental being - Can this company consistently deliver ‘rule of 40’ returns over a long period?
Our acquisitions will typically operate with lower growth (10-20%) and higher EBITDA margins (20-40%). We usually optimize for a growth strategy in the near-term, but always know that our companies will eventually shift to a slow-growth, higher profit strategy over time.
We always evaluate several growth/cash flow tradeoff models during our acquisition underwriting. When our investment committee believe that we can deliver these types of operational results above a minimum IRR hurdle rate of 30% across multiple scenario outcomes, then we move forward.
The great news today, is that current macroeconomic market conditions have created an ideal acquisition environment for us. We currently have more than 3x the pipeline size from mid-last year that meets or exceeds our investment criteria! We intend to capitalize on this current situation and acquire much more aggressively over the next 18-24 months.
Gustaf: How does it work when you move HQs to Texas? And how do you source CEOs?
Paul: When we acquire a new company, we relocate the headquarters to San Antonio. Over time we will consider moving additional resources to San Antonio if there is a need or desire by our employees, but most of our workforce today works remotely.
We place new CEOs at our acquired companies. We are always sourcing for future CEOs, and over time we have created a pipeline of “next up” leaders that have the potential to lead future acquisitions. During due diligence, we evaluate our existing talent pool and externally source in parallel to ensure we put the best leader in place with the highest likelihood for success.
Post-acquisition, we leverage our shared services model to centralize non-strategic functions (finance, accounting, HR, IT, security/compliance). For strategic functions and core competencies that are truly differentiating, such as sales and marketing, customer experience, product design, and development, we use a decentralized approach and enable a significant amount of independence to the company.
Our companies operate with a large degree of autonomy, but we also do standardize on a core set of enterprise systems, reporting, goal-setting methodology, and performance objectives to allow us to operate efficiently as we scale.
Gustaf: How do you incent managers?
Paul: Managers receive a fixed salary and variable bonus tied to the success of their business. Bonus targets are tied to company profitability and growth, oriented around the “rule of 40.” In addition, each leader has the potential to receive equity in Dura based on their level of impact within their organization(s) and the performance results.
Gustaf: You prefer proven operational playbooks. But now that some years have passed, have you made any significant Dura tweaks to them?
Paul: Our playbook is a living and breathing documented set of tools, templates, best practices, and frameworks that will constantly evolve and expand over time. That said, our core methodology and systematic approach to sourcing, acquiring, transitioning, and optimizing business remains the same.
We have acquired ten companies over a four-year period, and we learn something every time. We will never stop learning and adapting. Today, Dura is poised to accelerate our pace and acquisition efficiencies.
The biggest change in our strategic approach is the shift from acquiring significantly distressed companies in need of major turnaround efforts, to acquiring healthier companies that we can improve/optimize much more quickly.
Gustaf: How do you finance acquisitions?
Chris: We have raised just over $20m in external equity capital from, among others, our board members Alex Rozek who is Co-CEO of Boston Omaha and Matt Morris through his investment firm Hampton River. We have a credit facility that can expand as we grow, and we also use seller financing and performance earnouts. But as we grow, cash from operations will become the largest source of acquisition capital.
Gustaf: What are your favorite business books?
Paul: Favorite books include:
Also, the Netflix Drive to Survive F1 series sucked me in (along with many other Americans); now I follow every detail of the sport… to me, there is no better example of sporting competition mixed with business leadership and technology.
Gustaf: And how can people get in contact with you and Dura?
Chris: Let’s just see if this backfires… [firstname]@dura.software
Seriously – please do hit us up via our website. Our Corp Dev / Acquisitions team is always interested in building relationships with potential sellers who want to see their business thrive for the long term.
Disclaimer: This is not investment advice. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice. Any reference to or omission of any reference to any company should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. The author may hold positions in securities discussed. Any forward looking-statement is subject to risks and uncertainties. Read further disclosure in the Terms of Service.