with Sapphire · Sapphire
LenderHawk analysis. Not affiliated with or endorsed by Acquisitions Anonymous.
The attraction is not current profitability but a prebuilt asset with recognizable enterprise logos, live technology, and the possibility of turning it into a cash-generating niche software business through sales, marketing, and operational cleanup.
Subscale software businesses can be too small to run as real platforms and too large to justify as a casual side project.
Carve-outs should be priced from the value of the standalone asset and the seller’s need to exit, not from the parent company’s sunk development cost.
Government software can be a moat when renewal rates are high, because buyers often keep incumbent systems for years even if the UI is dated.
A business with $2 million to $2.5 million of recurring revenue is much easier to staff and improve than one around $1 million to $1.5 million.
Technical searchers and product-minded operators are the best fit for legacy software that needs modernization, not a pure finance buyer.
If a software business has multiple product lines and separate code bases, operating complexity rises fast even when revenue looks modest.
Carve-outs often hide cost allocations, so the buyer has to rebuild HR, finance, office, and software infrastructure after closing.
A good acquisition thesis for niche software is often to buy a foothold, improve the product, and tuck in smaller adjacencies until the platform reaches a saleable scale.
Steve’s shorthand for buying a subscale software business and growing recurring revenue to about $5 million before selling to private equity. The idea is to use sales, pricing, and add-on products to create a platform large enough to exit cleanly.
When to use: Use it when evaluating small software assets that are too small to optimize forever but have enough bones to scale.
Bill’s rule of thumb that software below roughly $2 million in recurring revenue often forces the buyer into an under-resourced operator role, while larger businesses can support specialist hires and real scaling.
When to use: Use it to decide whether a small software deal is worth pursuing as a platform or only as a lifestyle asset.
Sapphire had about $1.3 million of annual recurring revenue forecast for 2021.
The first listing was an IoT asset visibility software carve-out.
The parent company had put roughly $25 million into the software business.
The hosts used this sunk cost to illustrate how detached parent-company expectations can be from market value.
Losses were more than $7 million in 2019 and were expected to decline to about $3.5 million in 2020.
The first deal’s financial profile showed heavy spending and limited commercial traction.
Sapphire had fewer than 10 SaaS deployments and only five full-time employees, plus contractors.
The listing suggested very small operating scale despite the size of the parent investment.
Bill said software below about $2 million to $2.5 million in recurring revenue is hard to staff as a real business.
The panel used this as a rule of thumb for when software becomes operationally viable.
Steve said a good government software business can have over 100% net retention and sometimes 120% to 130%.
He used retention to explain why legacy government software can still be attractive.
The second company was founded in 1995 and bought by the current owners in 2006.
The government software listing was old, sticky, and slow-growing.
The second deal had about $3 million in revenue and EBITDA that bounced between $500,000 and $1 million.
The hosts debated whether the business was large enough to justify the technical complexity.
Price carve-outs as if you are solving a corporate problem, not as if the parent can recover sunk R&D.
Why: The seller’s historical spend usually has little relation to what a standalone buyer can pay.
Assume hidden overhead will reappear after closing and underwrite extra costs for HR, finance, office support, and software licenses.
Why: The parent company’s shared services will not come with the asset.
Target technical or product-oriented searchers for legacy software assets that need modernization.
Why: These businesses often require product judgment, not just general operating skill.
Use sales and pricing improvements first before trying to rebuild the whole product on a small software platform.
Why: The quickest path to scale is usually to improve monetization of the existing base.
Look for government software niches where incumbents are sticky and customers renew for years.
Why: High retention can compensate for dated technology and slower sales motion.
Prefer states or niches that competitors ignore when selling into government.
Why: Less crowded segments can produce a durable niche moat.
If a deal has multiple code bases and multiple customer bases, underwrite a heavier support burden.
Why: Operational complexity rises quickly when the product is fragmented.
Steve pointed to a spinoff from Cisco as one of the best investments he had seen. The attraction was that the underlying business had a real product, meaningful revenue, and a manager who understood the operational gaps from the inside.
Lesson: Carve-outs can create strong returns when the buyer has inside knowledge and the asset already has a viable product and customer base.
Michael described a divestiture that did not come down to price so much as making sure a family member in the division still had a job after the sale. The transaction logic was political and human, not purely financial.
Lesson: In corporate carve-outs, the real deal terms may be dictated by internal politics and employee transition concerns rather than valuation alone.