Five key insights from Volaris Group CEO Mike Dufton
Volaris Group CEO Mike Dufton discussed our nuanced approach to software acquisition in an April 2024 episode of the In the Trenches podcast.
The podcast series is hosted by Steve Divitkos, the founder of Mineola Search Partners and an investor in search funds. During the 78-minute episode, Divitkos centers his attention on the Constellation Software and Volaris playbooks for acquiring and growing software companies.
The podcast isn’t interesting only for M&A professionals. It’s also insightful for business owners who are looking to learn more about what Volaris looks for when investing in and strengthening software companies. Dufton touches on themes including why we believe in vertical market software, and why the best way to operate a business is to provide high-value service to customers.
Here are five takeaways for business owners considering a sale.
1. Technical Debt Isn’t a Dealbreaker, But It’s Part of the M&A Conversation
Many mature software companies accumulate technical debt over time, especially if they maintain legacy products. Technical debt is what results when software development teams prioritize the delivery of a piece of functionality or a project, which they will later need to manage. In other words, it happens when a business expedites quick over perfect coding.
As an experienced acquirer of 200+ software companies, Volaris understands that technical debt can be inevitable. In a continually evolving technology landscape, most owners of software products can expect to undergo shifts in preferences around programming languages and underlying data structures.
However, technical debt can present challenges for R&D teams if not managed over time. During an M&A process, business owners may be asked to describe the impacts of technical debt on their software product. An acquirer from Volaris might ask questions such as:
- How hard-wired is the application?
- How flexible is it for the future?
- Can it adapt to a changing market that sees new entrants joining it frequently?
During an M&A process at Volaris, we would typically bring in product experts to review the applications the business is currently selling. Sellers can also expect to help a potential acquirer understand how much technical debt could affect customer acquisition rates.
Technical debt is something that’s addressed over years, not months. So as a long-term investor, you presume that there’s always going to be technical debt, and that’s part of the solution that needs to be solved for.
2. Evaluating Companies for Acquisition Can Mean Looking Beyond Profitability
It might be surprising for a seller of a business to learn that profitability isn’t the top metric Volaris considers when acquiring companies. Three key metrics that can rank higher in importance are:
- Level of attrition
- Level of growth inside the enterprise, and understanding the growth drivers
- Size of the enterprise by revenue
Understanding these metrics can help us map out how to drive profitability in the enterprise over the long term. Looking at long-term growth is important to Volaris because we commit forever to the businesses we acquire, and never sell our acquired companies.
[As an investor that holds companies forever], we’re going to be asking ourselves, ‘Do we see a path to sustainable growth in the business?’
“If the profitability isn’t at the level that it needs to be, you can certainly get it there over a period of time,” Dufton elaborates. “It is a manageable variable over the long-term of a business.”
3. We Value Predictable Growth in Any Business Investment Environment
The conversation delves into how business growth has changed in an environment of higher interest rates and costlier borrowing for businesses.
“In many enterprises for quite a few years, we’ve seen debt at incredibly low levels,” says Dufton. “Many enterprises wouldn’t have thought twice about putting meaningful debt into a business.”
As a result, the current environment has changed how both venture capital and private equity firms make investment decisions. With more limited supply of capital, a business that is growing at a steady pace, but not at a stratospheric level may seem unremarkable to some venture capital or private equity backers. However, Volaris does not have the same perspective as these types of acquirers.
We find that we’re often a great home for types of businesses that haven’t fully met the expectation of a venture capital firm or private equity firm, for many reasons.
“Predictable growth is something that we value highly,” Dufton adds. “If the business was on a rapid trajectory of growth at one point, and now it’s not growing at that speed anymore, I would say that we often do quite well in those situations, because we’re more patient and we’re not looking for an exit.”
4. Consider How to Transition Knowledge When Selling a Company
Sellers of businesses can play a role in helping acquirers manage leadership transitions or other transitions related to key personnel. Since Volaris is a frequent acquirer of businesses, we are well-equipped to develop strategies in partnership with business owners for both transitioning knowledge and leadership.
If a business owner is highly involved in day-to-day operations but decides not to stay with the enterprise in the long term, an acquirer will typically want to understand how to manage any transition of knowledge needed to preserve the value and legacy of the business.
“Transition of knowledge is a very manageable task,” says Dufton. “We can teach other smart, capable individuals in the enterprise how to run this business over a period of time.”
Volaris often partners with existing management to create succession plans and identify the next generation of leaders within businesses. Dufton further elaborates that leaders who typically excel within Volaris are those who are curious and open to learning.
People who are successful in our world are data-driven, want to learn, and believe that they need to surround themselves with talented individuals, and who are not trying to be the person that has all the answers.
5. Customer Centricity is Key After an Acquisition
After a business is acquired by Volaris, a key area of focus is figuring out how to add additional long-term value for existing customers.
“It comes down to understanding where the pain is in the existing customer relationships, and then figuring out what the solution is,” says Dufton. This can mean looking closer at how to create great experiences for every customer, which can mean investing more in customer care, account management, or software development testing – or whatever clients value most.
Another common area of improvement is in product management strategy. This can mean being disciplined by building solutions that are reflective of the majority of your customers, instead of only the ones who demand the most attention or who may be the nicest to work with.
“Being disciplined in your product management area is hard work, and it takes time,” he adds. “It’s going to come back to: Do you understand where your customers are coming from? And are you talking to a representative base of your customers?”
To learn more, listen to the full podcast.