
“Think of the small as large, accomplish the great task by a series of small acts.” Lao-tzu, 4th century BC
Making the impossible happen
These things shouldn’t go together:
A small initial size: $23 million in EBITDA
Modest organic growth in revenues: 2% per year
A stock price return of 190x in 18 years
Yet that is exactly what Constellation Software has done since its IPO in 2006.
The company’s market value now stands at $68 billion, up from $350 million 18 years ago.
That increase in value was not fueled by inventing a world changing technology like the iPhone or generative AI, and it did not involve billions of dollars in invested capital.
Extraordinary business success is not supposed to be this simple.
The business
Constellation Software buys and operates vertical market software companies. These are small businesses that provide mission-critical software to companies in traditional sectors like healthcare, utilities, hospitality, real estate and education.
What it looks for in an acquisition, according to its website, is:
A mid to large-sized vertical market software company with a minimum of $1 million in earnings before interest and tax.
Consistent earnings and growth.
Experienced and committed management.
An offering price that has been determined.
Since its founding in 1995, Constellation has acquired more than 500 businesses that match this criteria. This acquisition activity was the main driver behind the company’s revenue growth, which in the last 2 decades expanded from $100 million to more than $8 billion.

The principles behind the success
The company’s CEO and founder, Mark Leonard, is a former professional investor that has shaped the culture of this company in a very unique way. His most important contribution, in my view, is providing a set of principles that have guided organizational design, strategy and execution.
Those principles can be summarized into 5 categories.
Holding company structure: Leonard used to be a venture capitalist before starting Constellation. He decided to use a holding company structure for Constellation instead of the limited-life funds that venture capital and private equity rely on. This critical decision allows the company to think and act long term. Constellation can avoid paying high prices in hot markets in a way that venture capitalists cannot.
Operating capabilities: Constellation is not just a financial play on small software companies. They have taken the time to understand the sectors they invest in and build effective teams in each. This operating capability makes it a better investor, as it is less likely to be surprised after making an acquisition, and it also allows it to add value after buying a new business.
Decentralization: The company seems to have found the recipe to avoid bureaucracy. It has 50,000 employees but it doesn’t behave like it. Decision-making has been pushed down, closer to reality than in other companies of similar size. This has allowed it to expand rapidly while maintaining decent operating performance.
Investment discipline: Constellation has consistently paid low multiples in its acquisitions. By my estimates, it pays less than 2x revenues and 5x EBITDA for its typical small acquisitions. That is fair but far from generous. It is hard to explain how hard it is to maintain this discipline for decades while the scale of the business grows into the billions. There is genius here.
Financial strength: The company made no use of financial debt until recently. And even now the overall debt level is modest. They decided to take financial risk off the table. As an acquirer of businesses this is a huge competitive advantage because it allows them to be present in the market during difficult times when other investors are playing defense.
The combination of these principles applied consistently over a long period has resulted in something extraordinary.
Can it be replicated?
When I sit down to write, I normally think of someone specific that I’m writing to and that person is always an entrepreneur. So when I ask if this can be replicated, I’m asking with that person -you- in mind.
The answer is yes, this can be replicated.
What you as entrepreneur and business owner bring to the table is the operating expertise and the holding company structure that make up principles 1 and 2 above. Both of those are hard to replicate, making them a strong starting point.
The decentralization question will only matter if you turn this into a big company. At the start all you need is a natural disdain for bureaucracy, which you probably have.
Points 4 and 5 are what you need to get if you don’t have them. Financial and investment strategy can turn this type of company into a multi billion dollar business or a quick failure.
The good news is that it is easy to understand how and why this model fails. In almost all cases the mistakes originate from a lack of patience, or put differently, from a desire to get rich quickly. That impatience leads to paying high prices for acquisitions, financing them with poorly structured debt, and several other mistakes that are easy to avoid with the right mindset.
If a simple and patient approach to business and life suits you, then perhaps the Constellation model can work for you.
At its core it is a system to achieve extraordinary results from ordinary actions.
This is in direct opposition to the mainstream narrative in business, which says that to achieve extraordinary results you must do something special and sacrifice a lot in the process. That is simply not true. There’s another way to do it and Constellation Software proves it.
How can you test if this is the right model for you? Go buy a smaller competitor and see how you feel about it.