Constellation bought 134 software companies last year.
The secret is in their M&A machine.
8 surprising tactics they use:
EBITDA over Growth
Post-acquisition they stop innovation that isn't driven by customers and what they are willing to pay more for.
Core ratio (EBITDA / revenue) is their most important metric with 30%+ being the goal.
The M&A machine requires cash flow.
Service Agreement Profits
In many verticals service agreements, not software, are where profits are made.
One customer pays $1.6m/year for customer support & back office work. Basically an insurance policy.
They provide 24/7 service with 99.999% uptime with overseas labor.
Mandatory Price Increases
Upon acquisition Constellation typically asks companies to raise prices. It is up to business unit leaders to decide what the market will bear.
Annually they have mandatory price increases of 6% yearly.
Keep Founders Around
Instead of firing founders and replacing the team, Constellation generally keeps everyone.
Founders take care of their companies.
If they run it successfully for a few years, then they get asked if they want to run a portfolio.
Monster CRM
Constellation keeps track of 50,000+ companies in a big Salesforce instance.
Every vertical software company seems to be in there.
It's surprising when one is missing.
Eat What You Kill
If an opportunity goes stale (for three months) with no outreach and no one updating the record then it comes up for grabs.
Another portfolio manager or M&A associate can steal it.
Decentralization to the Extreme
Managers are empowered to build their own small portfolios. Many are buying companies in similar verticals.
Acquisitions are based on who touched it last.
They just aren't allowed to compete directly on deals.
"It's a free for all."
Benchmark Everything
Constellation forces structure within companies so KPIs can be compared.
Every department has its own P&L.
2:1 revenue to cost in professional services is the benchmark. Bill 2x cost.
4:1 revenue to cost in support