The Rollup of Tomorrow Vol 6. NED Holdings: Distressed SaaS investing without a big fat fund behind you

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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After selling a software business to a PE-backed strategic, most entrepreneurs would shut down their offshore operations and move on. Not Stephen Whyte. He kept his shared service center - complete with the engineers, finance, and admin teams - and had a lightbulb moment. Why not go after failing businesses?

Next, Stephen launched NED Holdings hunts for gems among the UK's pre-pack administration process, then brings them back to life using his offshore centre and hard-earned operational know-how.

I sat down with Stephen to pick his brain on this fascinating approach. 

He walked me through:

1. How he landed on this investment thesis; 

2. What his ideal targets look like;

3. Week 1 business revival playbook;

4. Lessons learnt along the way; 

5. Stephen’s capital allocation philosophy - and the importance of having a dedicated offshore team

6. Bonus content: Why do software companies end up in distress? 

The Rollup of Tomorrow series is sponsored by Sourcescrub: the No.1 deal sourcing tool for serial acquirers.

If you'd rather listen to the audio version of the interview, check out our Rollup Stories podcast on Spotify!

OK, let’s go!

Pavel:  Welcome to the next episode of the Rollup of Tomorrow series. Stephen, tell me about yourself, what is NED Holdings, and why are you doing it?

Stephen: I was a bootstrapped founder of a B2B SaaS business called Qadex (supply chain mapping), which I founded in 2007 and exited in 2023 to an Hg Capital-backed platform, Ideagen. As part of the exit of Qadex, I had an offshore shared service center where all our engineers, as well as finance and admin functions, were based. So I held on to that as part of the sale, because the platform that was buying Qadex didn't need those.

NED Holdings is a family office that I use to invest in B2B software turnaround situations in which I can leverage my offshore engineering, finance and admin functions.

Pavel: How many companies do you have? What do they do? 

Stephen Whyte: We have 5 companies. There's a cluster emerging around healthcare.

We've done three transactions in the past two years in this space and we're building a platform called Silicon Practice. We're hoping to add another business to that platform over the next few weeks. 

In the UK, selling to the National Health Service is challenging. But once you're established as an approved supplier, it's a very, very strong moat. 

1. Choosing a sector for a new family office

Pavel: Got it. Why did you choose turnaround as opposed to going into a broader software market?

Stephen: Following the exit from Qadex in January 2023, I spent quite a bit of time looking at angel investments. I looked at probably 400 or 500 angel opportunities, and considered the option of building a venture studio myself, etc. I felt that in all of these spaces there were many people doing it. It was a crowded space and it was hard to find deals that were both a quality business with a quality team and sensible valuations. 

For better or for worse, as a bootstrapper and as quite a frugal person, I like to acquire at a good entry point. So the idea of looking at distressed businesses and turnarounds came out of the need to try and find something that was both cost-effective to acquire, but also leveraged our ability to fix it in a patient, slow way. 

Because these businesses take several years to stabilise and fix, it's not a time scale that is suitable for PE or VC investors. It's suitable for us because we can take a 5, 10, 15 year horizon when we're looking at a business. I said, right, we know B2B software and we'd stick with that. 

And anytime we've steered or moved away from B2B software, that's gone into our blooper reel of mistakes and learnings. 

Pavel: At NED Holdings?

Stephen: Yes. At NED Holdings, we've done eight deals so far. Of those eight deals, five have been very successful. Three have been complete failures. And of those three failures, two were non-software businesses. So we've got a 100% failure rate on non-software acquisitions.

2. What does a typical target look like?

Pavel: You have got to stick to your ICP, right? What does a typical target company look like in terms of size? Whether it's the revenue, the employees, is there a particular stage? What's the sweet spot for you?

Stephen: We're looking at a minimum £1M ARR. Smaller than that - they're just too messy. We can look at smaller deals if they're a bolt-on, but ideally we're looking at a £1M+, up to £3M of revenue because we find that's a sweet spot - too small for most people but big enough for us to fix and add value.

Pavel: I can imagine that this is quite a niche pond to fish. How do you identify such situations and how do you get to know sellers? 

Stephen: We've done quite a bit of outreach to the various insolvency practitioners in the UK. Most of the major ones know us, and know that we focus on B2B software.

If they have a B2B software business, they have a responsibility to market that business as extensively as possible to demonstrate that they've made all reasonable attempts to find a buyer for the business. These insolvency practitioners are motivated to contact us and say, we have this business that we are looking to put through a pre-pack administration or looking to refinance, etc. Would you be interested in engaging?

But in this space, there's a lot of time wasters as well. Hence we move very quickly and we say “yes” or “no” the same day. And then we move again very quickly within 48 hours to say, “yes, we are serious” or “we're not”. And then if we make an offer it's a simple offer and we always complete.

3. The anatomy of a distressed deal

Pavel: That’s a very very quick turnaround! What is your thought process for deciding that something is a fit? Do you have a checklist? 

Stephen: Assuming the opportunity meets our pre-qualification criteria around turnover etc.,  we quickly analyse the tech stack. If the tech stack is an open-source tech stack (as opposed to Microsoft), big tick. If there is a diversified customer base, 30, 40, 50 customers minimum, big tick. If there's a sensible head count, another tick.

We find sometimes that VC-backed businesses may have very small revenue, but a massive headcount with a chief executive, a CFO, CTO, CCO, CRO, CMO, you name it, all on big packages. In turn, these people have big teams around them. 

If there’s a sensible team that is adding value, and the bits we can remove quickly, then we will take a serious look at it.

Pavel: So you have spotted an opportunity, you did a quick check, how do you go about placing an offer? Do you have a valuation methodology?

Stephen: I'm almost embarrassed to say this, but it is what it is. All of our deals are in the public record, on Companies House. Generally, the businesses are worthless but we don't buy them for nothing. We still have to pay enough money to pay the administrators and the insolvency practitioners. We're typically looking at a percentage of revenue not a multiple of revenue. As low as 10% of revenue up to 20% of revenue.

That said, we would usually spend a multiple of revenue fixing that business. There will be a lot of cash burn that has to be funded post transaction. There's technical debt that needs to be fixed. Hence, there's a lot of investment we put into these businesses at the other side of a transaction.

How do we qualitatively value that? It's about how clean it is, how easy we see it to fix that business. If the overhead is manageable we’ll pay more. If there is extensive confidence in product/market fit, i.e. long-standing customers, where the solution is a business must-have, a critical solution, where we know if the business failed and ceased to operate, the customers would stick with it. Because a pre-pack administration is a very stressful process for everyone, if your product is a nice-to-have, the customer churn could be massive.

Pavel: So you put an offer, and then you've got 3-4 weeks to close the deal? 

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