Startup Acquisition Stories w/ Conor Chamness – Corporate Development | M&A at Dura Software

This is a mini-series within SaaS Acquisitions Stories where we profile the top Private Equity firms and firms acquiring online businesses at scale.

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Transcription:

Andrew Gazdecki:

All right. I’m here with Conor Chamness from Dura software. Thank you so much for joining me on this podcast.

Conor Chamness:

Glad to be here. Thanks for having me.

Andrew Gazdecki:

Well, hey, big fan of what you guys are doing over at Dura. And more than anything, just wanted to learn more about your firm and help other people looking to sell their business learn about you guys. So, with the first question, could you provide just a little bit of background on Dura, your track record? Just any information that you think buyers or sellers should know?

Conor Chamness:

Totally. Yeah, happy to. And apologies in advance, I have a scratchy throat and I’ve been drinking out of a measuring cup all day because you can’t convince me there’s a better vessel to drink out of. But I’m not a crazy person, I promise, if that pops in and out of frame. But yeah, so Dura Software Holding Company, exist in the universe of, kind of, software consolidators who are buying lots of smaller businesses into, sort of, into one larger package. But, really we see ourselves as a software company that just happens to be growing through acquisition. So, we kind of view everything through the lens of, how do we build a big, exciting company out of smaller ones. And that means a couple of different things, just in terms of, for a seller it means we’re permanent capital, we’re not going to sell your business. And so, we’re taking a long view on it.

Conor Chamness:

And so, we’re going to be likely to take care of your employees, your customers, all that kind of stuff, your legacy, that stuff really matters. And it’s really important to sustaining a business over a long period of time. The other thing that I think we’ve really found is what matters to people over the years, is giving us a smaller, kind of, we buy sub $10 million software businesses, but the sweet spot is kind of 2-5 and usually we’re buying a niche, a business that has some sort of relatively narrow focus or niche. And those markets can be hard to grow in, capital intensive to develop a product, all that sort of stuff. And what we’ve started to really focus on is how do we help those kind of smaller-scale businesses act like big ones?

Conor Chamness:

And so, we focus on giving the companies that we buy the opportunity to focus on winning, making their customers happy, selling more of their product. And then we help on the back end with, there’s kind of the strategic stuff where we’ll have input on sales and marketing, and et cetera, et cetera, playbooks for that. We’re very serious and methodical in how we deliver that information to you, but it’s up to our businesses because they know their customers best, to go do that. But then on the non-strategic stuff, software tools, buying power on licenses, back office function, recruiting, et cetera. We help take care of that. So, kind of, if you had to boil it down, it’s enable our companies to focus on winning.

Andrew Gazdecki:

Nice. How many acquisitions has Dura software made to date?

Conor Chamness:

We’ve done 9 acquisitions so far, hoping to do 10 and 11 here in relatively short order, and those have really run the gamut. We say on our website, we buy hyper-niche and we mean it in more ways than one. We purchased maritime email software. We love the fax industry, virtual events, IDD software. Some of these companies predate the internet. Some of them are relatively new, so, yeah.

Andrew Gazdecki:

I got a question for you. Describe like the perfect acquisition target. So, if this came across your desk, you’d be like, “Oh my gosh, we got to buy this, like what would it…” You’re literally drinking out of a measuring cup, I love it. What would be Conor’s dream acquisition target, you could make it up.

Conor Chamness:

Totally. Yeah. So, dream business for Dura has a couple of key ingredients. There is, kind of, the financial profile, which is high retention, moderate to low growth, could be slightly underpacing inflation to 15%, maybe a little bit profitable, breakeven. But the big thing is that the customers really like it and the owner of the business wants to go do something else. I think I maybe skipped over a big part of our model at the top, but that’s one of the biggest ones for us is, we oftentimes are buying from founders who are just looking for a good home for their business. Somebody that, whether it’s they want to retire, or they started a business and that’s what they’re good at, but they don’t want to grow it or keep working day in, day out.

Conor Chamness:

They move on, and so we want kind of good bones to the business, financially. We want a very clear and defensible niche, or moat, and then some unexplored opportunity. It could be just that they’ve never put much emphasis or focus on sales and marketing. It could be that they never picked up the phone and called their customers because they didn’t feel like it. But something on the operational side of the business has not been invested in because the founder either couldn’t due to time constraints, and energy constraints. Or just didn’t want to because it wasn’t their core competency. And so, that’s really what we’re seeking to do is buy, kind of, smaller businesses that are itching to go to that next level from a founder who wants to see it go there, but not necessarily take it there themselves.

Andrew Gazdecki:

Gotcha. Well, let’s go a little deeper in that. Think of an industry company-size business model. I’m throwing you a curveball here.

Conor Chamness:

No, that’s-

Andrew Gazdecki:

That’s like DevOps tool, that’s been around for five years. If you just had to make up like an imaginary-

Conor Chamness:

Gosh. Okay, if you want me to. All right, we’ll start with what the company does. I would like an ERP for-

Andrew Gazdecki:

Fax machines?

Conor Chamness:

Trophy engraving companies.

Andrew Gazdecki:

Okay. So, when you say niche, you mean it?

Conor Chamness:

Yeah, niche.

Andrew Gazdecki:

You’re literally, you’re nudging on the trophies.

Conor Chamness:

Absolutely. We’ll take trophy engravers and whatever they use to run their shop, manage their orders, et cetera. Something that’s really mission critical. And they can’t do their day to day without, something that impacts the bottom line. I would love it if it was four and a half million in revenue, my preference would be that it’s SAS, or multi-tenant, or in the cloud. However, say they started back in the 90s back when, in the glory days of trophy making. And you know, they had an on-prem solution, that’s totally fine. As long as there is predictable maintenance revenue because buyers like us, we need to buy predictability. So, north of 70% recurring is ideal. We would love it, again, if the founder was ready to move on, let’s say I think average age of our deals, I might just be making this up, but probably 15 years old. Could be older, founder owned and operated.

Andrew Gazdecki:

And what about growth opportunity? Would it be like a B2B sales opportunity? Would it be like a marketing opportunity?

Conor Chamness:

So, generally speaking, we like businesses that where we can build a list of customers and go find them. So, we like a direct sales model, or a channel sales model, to a really marketing-heavy, or marketing-intensive business. We’ll certainly do a more self-servicey business, but we really thrive, honestly, in complex selling environments, which is part of cost of doing business when you buy a niche product, generally speaking. Yeah, I can give you an example on that. We got a company called Lane, which is a faxing solution. And it’s really hard because the faxing component is a tiny, sort of, it’s a bell on an overall architecture for a hospital, for example, they have all these, sort of, document manage, record management tools, usually related to something like an Epic or a Cerner, or something like that. The faxing solution is really necessary, but it’s a small piece of that. And so, generally, a business like that really benefits from a channel strategy, which takes a different set of skills than a marketing-heavy business.

Andrew Gazdecki:

Nice, I like that. If I come across a business that engraves trophies, I’ll refer them your way.

Conor Chamness:

Please do.

Andrew Gazdecki:

So, there’s a lot of founders looking to sell their business. A lot of the times, it’s the first time. I’d say probably most of the time, it’s the first time. What’s maybe like two tips you give to founders looking to sell their business this year, or the upcoming year?

Conor Chamness:

Yeah.

Andrew Gazdecki:

Maybe they come to Dura software. They’d say, “Hey Conor, I got this trophy engraving business. What’s like two things they can do to maybe make your life easier, or make the decision on whether this is a good opportunity?”

Conor Chamness:

Yeah. So yeah, I can answer that in two ways. One is from the Dura perspective and then one is just, maybe, from a buyer perspective, or I mean a seller perspective. So, on the buyer side, a buyer like Dura really has to make sound financial decisions. And so, we are very careful in our financial study of the business. We try not to ask for too much and be overly cumbersome, but in a small business, every single customer, especially if it’s an enterprise software business, every single customer has a huge impact on the top line of your business, and even your gross margins. And so, providing a level of access and granularity to that customer base is really big. And along with that, especially a lot of times these sort of founder-led businesses can have cash-based accounting or something like that. Be willing to share your invoicing data so that we can look at the financials properly and get a feel for what recurring revenue is, or what is the driver of your growth?

Conor Chamness:

Was it you sold a whole bunch of new licenses and that made up for you losing a bunch of customers? Or if your churn was bad last year, is that because you have a product problem or because one really important customer left, and you knew that they were going to leave for the last five years. So, allow the buyers to dig in deep enough that they can get answers to the questions they need to know, and sooner rather than later. Because that’s the big thing that I run into a lot is, especially in a competitive market, there are going to be buyers that don’t want to do the work. And then they’ll throw out a crazy number and the seller will go ahead with them. And then those buyers will start asking for the information that they could have had access to earlier.

Conor Chamness:

And then they’ll re-trade on you, which generally leaves nobody happy. So, I think access to data and granular data is big. Maybe one more point on that, when you’re negotiating with the buyer, especially a financial buyer, make the negotiation about your specific business, not your market. There are a lot of things you can point to external to your company that are going crazy in technology. But at the end of the day, your growth is your growth, your churn is your churn, it’s not somebody else’s. I try to caution people from looking to public markets or even crazy private equity transactions with strategics. Every deal is different and it’s best when you’re defending your business to stick to your business, because that’s what you know best.

Andrew Gazdecki:

Nice. I like that. Yeah, no, I run into that a lot like “Oh, but our competitor sold for a hundred times revenue.” So, that’s great advice. Favorite acquisition that you guys have done? Do you have one? I know that’s kind of like what’s your favorite kid but…

Conor Chamness:

Yeah, I’m going to make people cranky. I’ll give you two answers again. One is, because it was just an absolute whirlwind, crazy thing. We have a virtual events business called 6Connex, which we purchased in 2019. And so, we rode the pandemic wave in an insane way. That business experienced growth, like few people ever see.

Andrew Gazdecki:

Oh, you bought that before the pandemic.

Conor Chamness:

Oh yeah.

Andrew Gazdecki:

Oh wow. Timing.

Conor Chamness:

They’re calling me Nostradamus in some circles.

Andrew Gazdecki:

Wow. There’s a really good Ted Talk you should check out about market-timing being one of the biggest indicators of a start-up success. So, obviously different in this circumstances since you bought it. But…

Conor Chamness:

I mean there is an important point, part of what I’m doing here is selling us. And there’s an important point with what we did on 6Connex. Which is, when we purchased it, it was a very good business, but it would not have been able to achieve even close to the scale that it did or be able to capitalize on that market opportunity without the Dura integration. And I think that is really a prime example of what we’re trying to do here. We were able to get infrastructure in place so that the business could scale. Well, I don’t want to throw out their financial numbers, but pretty absurdly over a short period of time and keep up with that market demand. So…

Andrew Gazdecki:

Nice. I like that.

Conor Chamness:

Yeah. My real favorite though, and the most surprising, is the fax company that we bought. I won’t talk too much about that, but fax is not dead folks. And they’re great businesses. So…

Andrew Gazdecki:

I’m going to look into that company just because I’m curious, but I’m sorry to inform you, I won’t be a customer.

Conor Chamness:

It’ll be as well, that’s all right. That’s all right.

Andrew Gazdecki:

That’s past my generation. So, in the last two years, MA activity has been crazy. Do you have any sort of, just industry takes, predictions, for 2022?

Conor Chamness:

Yeah. So I think in terms of takes, I’ll probably say some similar things to what I’m sure other buyers tell you. There’s been an amazing confluence of factors over the last year. Really frothy public markets, a bunch of dry powder and PE, and then insanely low interest rates. There are private equity firms out there that can buy companies with none of their own money. And so, there is just a frenzy to deploy capital. I don’t see all of those things continuing forever, for better, for worse. I think, selfishly, that creates opportunity for a buyer like Dura that is more focused on the fundamentals. But also I think it will yield better kind of long-term outcome for founders, especially ones that sign up for structured deals and things like that is, right now, I think that sellers are getting a lot of promises that aren’t going to be delivered on because they’re just not realistic.

Conor Chamness:

I hope one of the things that maybe changes is, or honestly, just as there’s been a proliferation of buyers, sellers will start to study who’s on the other side of the table from them a little bit more and get to know their intentions a little bit better, or even what the structure of the deal means. There’s an anecdote that I think pretty well sums this up. I was talking to somebody that sold his business for some absurd multiple, and it was after a bunch of buyers, kind of, backed out and he said, “Yeah, I mean, of course I’m going to take this deal. What they just told me is that they’re going to be able to grow my business a hundred percent better than me for the next decade and then exit it in order to make any sort of reasonable underwriting standard,” which is fine in some ways.

Conor Chamness:

Especially if you’re the seller and you’re getting a big paycheck, but it also makes you think about who’s on the other side of the table. Is the seller doing the work, I mean, sorry, the buyer doing the work to understand what it takes to grow your business, or if that’s reasonable. If they have a particular hurdle rate or cashflow requirement, that they need to see in X number of years. If they pay you a crazy amount of money, then they’re going to have to make some pretty dramatic changes, for better or worse, in order to see that. So, you get into financial engineering territory and I think we as buyers, we Dura, really try hard to not base our financial outcomes on anything other than running a good, solid, predictable business and kind of growing it long-term.

Andrew Gazdecki:

Cool. Yeah. I agree with you. I mean, 100% for 10 years, like year over year. Absolutely.

Conor Chamness:

It doesn’t make any sense. Yeah.

Andrew Gazdecki:

Hmm, I’d make a bet on that in Vegas if it was available, but, okay. I got three more questions for you, these are just random ones. Favorite book?

Conor Chamness:

Favorite book, should I give you a business answer or just my actual favorite?

Andrew Gazdecki:

I want to know both.

Conor Chamness:

Gosh. Okay. I think my favorite business book, it’s just the best one I’ve ever read, was Never Split the Difference. I think primarily, because it helped me be a better question-asker and to better put myself in the shoes of buyer, or sellers. I think when you buy somebody’s software company, there is a certain level of humility that is often lacking, especially for somebody that’s in my seat that is doing very little of the doing, post-acquisition. And so, that book gave me the tools to better articulate, kind of, where I’m coming from, but also better understand where they’re coming from. So, that’s a really good book. And then on a personal level, or on a fun streak, I really like The First Law Trilogy. It’s a fantasy series, by Joe Abercrombie. It’s a good read.

Andrew Gazdecki:

I haven’t heard of that one, but I’ll check it out.

Conor Chamness:

Yeah, you should check it out.

Andrew Gazdecki:

Second question. Who’s your favorite entrepreneur, if you had to pick one?

Conor Chamness:

This is probably a lame answer because he’s the guy that hired me and brought me into the fold. Michael Girdley, who has amassed quite the Twitter following. He’s kind of the guy behind Dura but I say him, maybe it’s a little bit of a cop-out, but I think there are very few people that, in business, treat people as well, and as fairly. I really admire, in entrepreneurship there’s, kind of, a go-getter mentality that’s great, like hustle, hustle, hustle. And he certainly works incredibly hard, but I think more important than that, he’s just incredibly thoughtful about the people around him. And to me, that’s kind of the ethos behind Dura and the teams we bring into the fold, and it’s been impactful for me in my personal life. And I think goes hand-in-hand with that Never Split the Difference thing, of making sure that you are a student of the people around you first.

Andrew Gazdecki:

Nice. Yeah. I’m a fan of Girdley too, but I haven’t heard of compliments that strong. So, maybe he’ll give you raise or something like that after this.

Conor Chamness:

Unfortunately, he’s not that involved at Dura anymore, we’ll see.

Andrew Gazdecki:

Well, hey Conor, I really appreciate your time on this podcast and people, if a founder’s listening to this, and they think Dura might be a good fit for just a conversation. Where should they reach out?

Conor Chamness:

Just shoot me an email, conor@dura.software. You can check out our website, dura.software. You can follow Michael Girdley on Twitter. But yeah, if you want to talk to me, just give me a call or shoot me an email, my phone number- Do I give that here? No.

Andrew Gazdecki:

It’s 911, and they’ll route it straight to you.

Conor Chamness:

Perfect. Yep, I got ties everywhere.

Andrew Gazdecki:

All right Conor. Appreciate your time, man.

Conor Chamness:

All right, man. Likewise.

Andrew Gazdecki:

Cheers.