Same SaaS, New Acquisition Model: Q&A With Dura’s Paul Salisbury
San Antonio—Dura Holdings is trying to put a different spin on the model of acquiring and improving a business that has either underperformed or may have room to grow.
San Antonio-based Dura buys software-as-a-service (SaaS) companies with recurring revenue and seeks to cut operating costs or improve simple things like marketing and sales processes, in order to boost profitability. Venture capital and private equity groups have been targeting investments toward similar SaaS businesses—including other San Antonio-based firms Active Capital and Scaleworks—though the end goal of Dura is a bit different. A traditional investor might buy a stake in a company, or buy the whole thing outright, with the intent to improve the business and sell it (or exit otherwise) later on.
Dura Holdings, however, plans to maintain ownership of the companies it acquires—indefinitely, says CEO Paul Salisbury. Plus, Dura is a holding company that operates each business, not an investment firm, he says. The Dura Holdings model is to get each business it buys to the point of profitability that increasing cash flows eventually provide a return to Dura (and any investors, if the company ever takes funding).
Salisbury founded the business in November with Michael Girdley, who has started numerous San Antonio companies and investment firms, including coding school Codeup and Geekdom Fund. Salisbury most recently worked at Rackspace, and has also held roles at Dell, Ernst & Young, and Procter & Gamble.
The pair announced this month that they acquired one business, Salt Lake-based Moki Mobility, and plan to buy as many as two to three annually. Dura funded that first acquisition internally and hasn’t yet determined whether it will take on outside investors, or how those investments and returns (if they happen) might be structured.
Salisbury spoke with Xconomy about Dura Holdings’ first acquisition, developing the Dura business model, and the company’s goals. (This conversation has been lightly edited for clarity.)
Xconomy: How did you meet Michael Girdley, and what made you leave Rackspace?
Paul Salisbury: In the latter part of the spring, early summer of last year, I decided I wanted to do something else more entrepreneurial. I reached out to folks in my network and Graham Weston [an early investor and co-founder of Rackspace] introduced me to Michael Girdley. Michael has been extremely influential in investing in startup businesses in San Antonio for the last five to six years. He had already been working on the concept of Dura, and had already developed most of the sourcing engine to begin identifying companies.
X: How did you finish developing the concept?
PS: Our overall expectation is that there will be opportunity to optimize and improve any company we acquire. We think it’ll be unique for every company, and for some companies there will be growth opportunities because the product hasn’t been effectively marketed or sold. There will be opportunities with other companies to be just more operationally efficient—where we’ll be able to reduce cost of goods and operate in a way that will allow the company to be profitable without necessarily making any changes or requiring any additional growth.
X: How are you picking the companies you buy?
PS: We’re looking for software and SaaS businesses. We like recurring revenue. That’s a model that makes sense for us. Those companies come with high gross profit margins. We’re looking for owners and founders, who, for whatever reason, are looking to take cash out of the business because we want to put our own leadership team in place and run it the way we think makes sense.
X: That’s the same thing that a lot of venture capital investors and private equity buyers want.
PS: We are a holding company, not a fund. We are different, not only in the way we are structured, but in the way we want to keep, operate, and run these companies for the long term. We don’t have visions, or plans, to, once these companies become successful, sell the companies off. We’re more excited about the long-term profitability and the cash these companies can produce.
X: Wouldn’t you make more money faster by selling off a business you made profitable, like a PE firm?
PS: Our bet is that, if you look at the value of future cash flow, we can be just as financially interesting as those [PE] companies, but just in a different way. Instead of it being a one-time cash sale and get out, we think that we should be able to improve and operate more efficiently, and produce cash for the foreseeable future at a rate that we think is going to very a interesting internal rate of return. We think we can be very profitable and generate higher rates of return, just in a different way.
X: Would you still sell if you got the right offer?
PS: We will, obviously, in the interest of ourselves and any of those that invest with us, look at any opportunities that come our way. But that is not our design point and it’s not the way we’ll model our companies.
X: With more PE firms and VCs interested in these very same lower middle market businesses, are there enough good companies to go around? (Dura says it is looking for businesses with $1.5 million to $5 million in annual recurring revenue.)
PS: This is definitely an area of interest. The high gross-profit margins are very attractive. Clearly there’s not an infinite supply. My sense is, based on our outbound marketing approach, and the opportunity deal flow we see, I think we’ve got a ways to go based on the criteria we’re looking for. I really feel like we’re just scratching the surface right now.
X: How many have you found that meet your criteria?
PS: Over the past six months, we probably assessed 1,000 or so companies. We didn’t get down into deep diligence and have conversations with all of those. We probably had conversations at a high level with a couple of hundred. We only got to diligence with a subset of those. We have a couple of term sheets out that we’re still waiting to hear about—three to four, right now. If we can come to terms, we’ll move forward.
X: Where are you looking?
PS: Throughout the U.S. Most of the companies we talk to also have operations in Europe and other areas across the world. Some have been based outside the U.S., whether it be Latin America or Asia. We haven’t limited our focus.
X: You’ve said you plan to relocate most of the businesses and employees to San Antonio. Why?
PS: One of our parameters is that we plan to own and operate these companies out of San Antonio, so that’ll impact how we assess and value and select the opportunities. We will relocate most of the team from Moki: sales, exec team, operations, customer success. That’s the intent of future acquisitions: to move as much of the company to San Antonio that makes sense. We think there are synergies to be had as we grow and acquire multiple businesses. There are transferrable skills from one business to the other.
X: What were the terms for your deal with Moki and what do you plan to do with it? (Moki develops software used to administer mobile devices and tablets intended for a single use, such as a point-of-sale system or a customer satisfaction survey at an office.)
PS: I can’t share financial details. We think we can absolutely operate more efficiently. We think we can grow the company. We think we can do things to reduce our cost of goods. All those things together we think will allow us to make the types of profits that we’ve modeled, and ultimately that rate of return is something that’s very interesting to us.
X: Are you using debt in your acquisitions and will you continue to?
PS: At this point, there is some debt financing, and we’ve put in some of our own funds. For the first couple of companies, we will prove the model, we will validate the assumptions that we’ve made, and then we’ll figure out the best capitalization structure and what the plan is to raise the equity we need. We will likely continue to use debt in deals we do in the future. How we get the money and what that structure looks like is to be determined.
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