The private equity fund buying Montreal's 20-20 Technologies must keep an eye on two key areas if it's going to create value: costs and dwindling North American sales.
Despite relatively stable revenues, 20-20's profits have slumped, prompting the company to launch a strategic review earlier this year.
Yet analyst Richard Tse of Cormark Securities noted a month ago that 20-20's performance shouldn't get people too down because its recurring revenues are promising, and he is enthusiastic about the company's technology.
The problem is the company's cost base, which means the buyer, San Francisco-based Vector Capital Corp. must keep an eye on expenditures.
But it must do that without neglecting sales--another area of the company that could be improved.
Europe, the Middle East and Africa are doing well, but North and South American sales have struggled because they are more dependent on small, independent dealers who are in much worse shape than larger clients like Home Depot and Ikea.
That puts this business under a spotlight for Vector, which has a history working with firms like Corel Corp. and WinZip.
At first, it was difficult to tell what kind of buyer would best be abe to capture extra value from 20-20.
When the strategic review was first announced, BMO Nesbitt Burns analyst Thanos Moschopoulos noted that the common strategies used by private equity firms to boost growth in struggling businesses might be difficult to apply to 20-20 Technologies because of the way it differs from other software companies.
For instance, it has limited maintenance renewal rates, and the nature of its clients is unique. Only time will tell if those will prove to be problem pockets.
Vector, which manages more than $2-billion in equity capital, agreed to pay $4.00 per share in cash for 20-20, valuing the deal at $77-million.
For that, Vector will add a company to its portfolio that has become a leader in the specialized function of creating 3D space-planning presentations for interior design firms and furniture companies.
The 25-year-old company also produces other design, business and manufacturing software that aims to help make processes more efficient or easier to understand.