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How to squeeze cash from VMS, Constellation style
Bonus: anonymous rants from CSI executives
Constellation Software (CSI) is a savvy buyer of VMS companies. Unlike Visma, which is not averse to paying eye-watering multiples for the right assets, CSI is a dye-in-the-wool value buyer. That said, CSI is equally good at maximising value after the acquisition. We have spoken to dozens of former and existing CSI executives to piece together its operating playbook, which we share with you in this article.
Investors, if you want to understand CSI, don’t waste time and money on expensive expert networks like GLG. Read our guide instead!
Constellation teaches its tricks during in-person events
Below, we cover topics such as:
Which metrics CSI executives get rated on
CSI’s 4 levers for value increase
Why the CSI model is not without its detractors
Let’s jump in!
Which metrics do CSI executives get rated on?
Here’s a non-exhaustive list:
Sum of Organic Growth and EBITA margin = 35% or higher
Absolute Working Capital: decrease by 10% on a trailing 12 month basis
Attrition: 5% or less
Business Unit revenue growth (including through M&A): 20% or higher
Core Ratio - how much maintenance revenues falls to bottom line: 50% or higher
IRR on all existing acquisitions: 25% or higher
Lever #1: Inflate maintenance prices
Your typical VMS business has 5 key revenue drivers:
Perpetual Licence
Maintenance and Support
SaaS and Hosting (becoming increasingly relevant)
Professional Services
Hardware and Other
For a deep-dive on on-premise software economics, check out this article. To see how VMS P&L works in practice, request the ABC Software P&L here.
Maintenance revenue is tied to sale of perpetual licences, which allow clients to use a particular software version. Thereafter software is “free” to use, however, ongoing updates and support are not. These revenue streams represent 50-90% of total.
A real pricing sheet from AssetWorks LLC, a CSI subsidiary
And guess what? If you are locked into a particular software, you have no choice but to absorb those maintenance prices increases, helping CSI achieve two key objectives:
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