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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Welcome to Episode 9 of our interview series.

The Montreal based Valsoft Corp. has quietly built one of the largest vertical market software HoldCos in the world. With over 130 acquisitions since 2015 (including 25 in 2024 alone), Valsoft has created a decentralized empire that spans several continents. Mo Firouzabadian joined Valsoft as Executive Vice President in 2024, after a successful career in tech, including 3 years at Constellation Software.

I sat down with Mo to learn about Valsoft's approach to acquiring, operating, and scaling VMS businesses.

We talked about:

1. Valsoft's operating model and decentralized structure

2. What makes an acquisition target a "screaming buy" in vertical market software

3. Deal structuring and valuation approach

4. Due diligence focus areas and common red flags

5. Post-acquisition playbook and AI integration

6. Portfolio success stories

7. Advice for emerging VMS acquirers

If you need a primer on Valsoft, check out Sam Youssef’s recent interview with Luke Sophinos from the Linear Newsletter. 

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

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Pavel: Welcome Mo! Tell me about yourself and what brought you to Valsoft.

Mo: I've been working in software for 22 years. I joined Valsoft about 18 months ago. I was attracted by the investment model of compounding - acquiring great businesses, helping them grow, and building platforms around them.

Prior to Valsoft, I was at Constellation Software for three years, so I'm very familiar with the VMS compounding model. Before that, I was leading businesses in publicly owned and private equity ventures across various vertical markets.

1. Valsoft's operating model

Pavel: Can you walk me through your operating model? 

Mo: Valsoft is part of Valsef Group, an investment vehicle. At the core, we're a software roll-up operation with over 130 software companies to date.

Valsoft operates in a decentralized manner. There are 7 operating groups. Each one is led by an investment partner with the mandate to deploy capital in different strategies. For example, one operating group focuses on travel and leisure. Others focus on a geographic basis. 

Valsef’s other businesses include Valnet, Valstone and Valsef Capital. Valnet is a digital media and online publishing company - you may have heard of ScreenRant or HotCars. Valsef Capital is the public market investing vehicle. And we have a newer division called Valstone that focuses on industrial software providers.

2. What makes an acquisition target a "screaming buy"

Pavel: When a new opportunity lands on your desk, what makes it a “screaming buy”? 

Mo: We want businesses with high recurring revenue and low churn, where the software is mission critical. We look for signs of customers reinvesting - purchasing additional modules or making regular configuration changes.

We look at market position. Is it the leader? Can it become the leader in its core geographies or niche? Is it famous within its niche?

We also look at underdogs. It may be a company with smaller market share that's done a lot with a very small team. Maybe they've bootstrapped the business, reached $5M in revenue with no salesforce - just the MD going out and selling. That could be an amazing opportunity because with a professional sales and marketing operation, that business could scale much further.

We really want to understand the upside. Where would Valsoft's playbooks and assets enable us to scale that business? Of course, we care about profitability and cash flow too.

In terms of size, most of our acquisitions have been between $2M to $20M in revenue. The sweet spot is between $5M and $10M. Vertical market software businesses tend not to be much bigger than $20M-$30M because they operate in niches. Some are bigger though. We recently announced our first take-private of a publicly traded company called Quorum Information Technologies, an automotive dealership software provider, for around $60M.

Pavel: You described different types of companies - big companies, small companies, market leaders, underdogs. The competitive environment is getting stronger. What's your edge? 

Mo: 3 things. Firstly, in VMS, we work to provide certainty of close. We pride ourselves in being thorough but fast in our due diligence process. 

The other advantage is that we are permanent capital. If you're a founder who's been working for 20 or 30 years to build your business, you've invested in your team and customer relationships - you want to protect your legacy. About half the time, those founders stay with us. They have the moment of exit as monetization of their investment, but then they go on to grow and thrive within Valsoft. 

A third edge is payment processing. Within the Valsoft umbrella, we have ValPay, our payment facilitator. Thanks to ValPay, we can provide great customer experience with an integrated payment solution tuned to the processes for that VMS company - whether online, point of sale, subscription, or similar. 

Ultimately, we want to build long-term relationships with founders and investors. From a fund perspective, those funds look to Valsoft for selling additional assets they want to liquidate, and we can provide that liquidity multiple times.  

3. Deal structuring and valuation

Pavel: How do you typically value a business, and how do you structure transactions?

Mo: Because we intend to hold forever, we look at two things. One, the growth trajectory of the company - the rule of 40. Two, the return on invested capital (ROIC). By valuing businesses as perpetual annuities with growth, we are aligned with Warren Buffett’s approach. What’s the intrinsic value? Does the company genuinely add value to the customer base? Or is it providing something that's a commodity? What’s the moat? 

Because of the type of transactions we find ourselves with - a founder seeking retirement or a liquidity event - cash offers prevail. That said, if the founder believes in the business and wants to stay, we may structure a cash offer with an earnout over three years based on the founder's business plan. 

4. Due diligence and red flags

Pavel: On the diligence side, what are the big things you focus on, to de-risk an investment? 

Mo: One, we want to make sure the financials are aligned with what we've been presented. Two, we focus on the key legal frameworks - customer contracts, employee contracts, contracts with main suppliers.

Three, the technology. Does the target own all of its technology? Is the IP protected? 

Pavel: Why do deals fall apart? 

Mo: Usually when things are presented differently than reality. For example, a seller has presented revenue as recurring which is actually non-recurring. Or instances where recurring revenue is underpinned by a gentleman's agreement with no contract in place. 

One piece of advice I would give any seller: it can be dangerous to put too much window dressing on a business. Obviously put your best foot forward… but change the reality too much, and you’ll end up with a wasted process.

Pavel: Looking at the other extreme, where in your experience have you paid the highest prices? What levers can sellers pull 3, 4, 5 years before sale to maximize value?

Mo: Quality of revenue. Have a very low churn rate. Be a customer-centric organisation. Have a growth engine and strong growth over 2-3 years. There are companies that will have an amazing year and then it all drops off. You need a growth engine that is repetitive, proven, and where customer expectations are met post go-live. We look for businesses with high NPS and good growth. 

Remember: we don't need 30-40% growth. We are looking for 15-20% growth over multiple years that's sustained without buying the revenue. 

5. Post-acquisition playbook and AI integration

Pavel: Once you've completed the acquisition, what are the first steps you take to de-risk or accelerate value creation?

Mo: Our first rule is “do no harm”: avoid any disruption for customers and employees.

Day one is all about communication and stability. We sit down with employees and reassure them that nothing drastic is going to happen. We're here to support their growth. We also reach out to customers and let them know the product and team are not going anywhere. If anything, these will improve with Valsoft's backing. 

Next, we sit down with the leadership team and review the low-hanging fruit opportunities. We help them figure out the best way to make that change. We put them in touch with experts within our ecosystem. Maybe we have playbooks in that area they can leverage.

A great example is AI. So many companies still don't know how to benefit from AI. Whereas we've been working for a long time leveraging AI tools across our portfolio.

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