Why legacy SaaS are the new hot acquisition target with Shane Cheek @Continua Software

saas.unbound is a podcast for and about founders who are working on scaling inspiring products that people love, brought to you by https://saas.group/, a serial acquirer of B2B SaaS companies.

Episode #32 is the special episode where Tim Schumacher takes over the hosting of the podcast to welcome Shane Cheek from Continua Software, an Australian-owned software holding company that acquires, operates, and grows B2B software businesses.

Shane Cheek’s career spans over two decades, marked by a unique intersection of technology, business, and capital markets. Beginning as an entrepreneur, he founded a software company in Adelaide, which he expanded into the U.S. market. Following this venture, Shane transitioned into corporate advisory, primarily working with technology firms. His journey continued through venture capital and private equity, leading to the creation of a funds management business called Auman.

Shane’s pivot towards growth equity investing stemmed from his preference for working with businesses that had achieved product-market fit and were ready to scale. This experience laid the groundwork for his eventual focus on acquiring legacy software companies that still held potential for growth.

The formation of Continua Software

In 2019, Shane founded Continua Software, fueled by a desire to focus exclusively on acquiring and modernizing legacy software businesses. Partnering with a family office in Adelaide, Shane sought to replicate the success of serial acquirers in the U.S. and Canada. The goal was clear: to identify and acquire legacy software companies with untapped growth potential.

Constellation’s influence and market positioning

Constellation Software has established a formidable presence in the SaaS acquisition landscape, and their success serves as a model for Shane and Continua Software. While Constellation has built an extensive portfolio, Shane identified a gap in the market for acquiring legacy software businesses that still showed growth potential. He recognized the opportunity to operate in the space between traditional private equity and the aggressive acquisition strategies of larger firms like Constellation.

Acquisition strategy and target metrics

Continua Software targets companies with annual recurring revenues between $2 million to $10 million, focusing on the stability of earnings rather than rapid growth. The firm typically seeks businesses with strong historical earnings profiles, primarily in vertical software sectors such as utilities, insurance tech, and fintech.

Shane emphasizes the importance of assessing the operational independence of potential acquisitions. He believes that successful acquisitions depend on maintaining the unique identity and operations of the acquired company, rather than forcing integration into a larger corporate structure.

Transitioning legacy software to SaaS

One of the most significant trends in the SaaS market is the transition of legacy software to a SaaS model. Shane notes that many companies are being driven by customer demand to make this shift. Customers are increasingly seeking modern solutions, and younger decision-makers are less familiar with traditional on-premise software models.

This transition requires careful management of cash flows, as companies may experience volatility during the switch from a perpetual licensing model to a subscription-based model. Shane shares that Continua Software prefers to maintain annual contracts while transitioning to cloud deployment, allowing for better control of infrastructure costs.

Balancing growth and profitability

Achieving a balance between growth and profitability is a constant challenge for companies in the SaaS space. Shane highlights the importance of maintaining discipline when investing in new opportunities, particularly in a market that often prioritizes rapid growth over sustainable profitability.

Continua Software focuses on generating free cash flow from its portfolio to fund future acquisitions. Shane advises that companies should be cautious of spending on projects that do not yield a solid return on investment, as this can lead to cash flow issues.

Market dynamics and valuation challenges

The valuation landscape for software companies can be complex, especially for legacy businesses transitioning to SaaS. Shane notes that while Australia may have lower multiples compared to the U.S. market, this can create opportunities for strategic buyers. He emphasizes the need for sellers to have realistic expectations about their company’s value and to understand the intrinsic worth of their business.

Operational independence and management approach

Continua Software adopts a unique management approach, prioritizing operational independence for its acquisitions. Shane believes that integration efforts can often destroy value, particularly for smaller businesses. By allowing acquired companies to operate independently, Shane fosters an environment where each company can thrive while benefiting from the resources and guidance of Continua.

Hiring and retaining talent in SaaS

Attracting and retaining talent is crucial in the competitive SaaS landscape. Shane emphasizes the importance of creating a positive work culture that values employee contributions. By maintaining a lean operational structure, Continua Software can provide opportunities for growth and development without overwhelming employees.

Shane also acknowledges the impact of remote work on talent management. The shift to remote work during the COVID-19 pandemic has persisted, and many employees appreciate the flexibility it provides. By focusing on employee well-being and offering growth opportunities, Continua Software aims to retain its talent pool.

Advice for founders seeking an exit

For founders considering an exit strategy, Shane offers valuable advice. He stresses the importance of selecting the right advisors who understand the market. Founders should have clarity regarding the type of exit they desire, whether it’s a complete sale or retaining some equity. Proper documentation and preparation are essential to streamline the exit process.

Shane recommends that founders take the time to gather their data and ensure they are well-prepared for the selling process. This preparation can significantly reduce the headaches associated with selling a business.