Software Circle’s Acquisition Strategy Targets Dull, Sticky Niche Software

Software Circle’s acquisition strategy is built on a simple premise: buy mature, unglamorous software businesses with loyal customers, recurring revenues and founders looking for an exit. Listed on AIM under the ticker SFT, the company carries a market capitalisation of £65.046m at a share price of £16.675, according to the Software Circle investor relations page. For most institutional investors, that puts it firmly below the radar. That is, arguably, the point.

Why Boring Vertical Software Makes Sense

The businesses Software Circle pursues serve narrow industries: care homes, education providers, insurance brokers. The software they sell is rarely exciting, but switching costs are high and the products typically represent a small fraction of the customer’s total costs. Providers carry real pricing power as a result, and churn is low. Annual price increases pass through without much friction.

The company’s origins are instructive. It began as a printing business burdened by manufacturing costs and operational complexity. Management identified a profitable software platform, Nettl Systems, buried inside the group, sold the manufacturing operations, used the proceeds to clean up the balance sheet, and redirected capital into software acquisitions. The transformation was completed by the time the company formally renamed itself Software Circle.

The FY2024 Annual Report captures the progress. Revenue grew from £12.5m to £16.2m, operating cash generation from activities reached £2.6m (up from £0.3m in 2023), and the group ended the year with £15.4m in cash and net cash of £6.9m, against net debt of £16.7m a year earlier. Recurring revenues had risen from 35% to 57% of total sales by the period end. The group also raised £23.1m net of issue costs through a share issuance, providing the firepower for further deals. As at July 2024, Software Circle was home to seven vertical market software companies, including Arc Technology Limited, acquired during the year.

Software Circle’s Acquisition Strategy: Price Discipline and Scale

Management maintains an internal database of more than 4,000 potential targets across the UK and Ireland. The discipline on price is the feature that sets this apart from many buy-and-build stories: the firm generally refuses to pay more than seven times adjusted earnings, and the average multiple paid across acquisitions to date has been closer to six times. Overpaying is the most common way serial acquirers destroy value, so that constraint matters.

The latest interim results showed revenue up 15% to £10.2m, with subscription income accounting for roughly three-quarters of group sales. The education software segment delivered organic growth of 17%. The statutory accounts show an operating loss, but that largely reflects acquisition-related accounting charges rather than underlying trading weakness. The cash flow picture is more informative.

The FY2024-25 Annual Report, summarised by MarketScreener, shows total capital deployed under the acquisition programme has reached £24.7m (up from £15.5m), generating an operating return on capital deployed of 24%. The snippet references a figure of roughly 25% return on invested capital; the slight difference in framing reflects two distinct metrics, but both point to the same underlying picture. Deal activity has continued into the current year: Software Circle announced the acquisition of Broker Information Services Limited on 13 October 2025, and agreed to acquire Artificial Intelligence Finance in August 2025, described in the announcement as fitting the strategy given its ‘high recurring revenue, sticky vertical software, and a leadership team that shares our values.’

Financing, Alignment and What Could Go Wrong

Software Circle’s acquisition strategy now has a larger war chest behind it. The company disclosed a £25m committed revolving credit facility with Santander in May 2026, according to filings aggregated by financialreports.eu. The facility reduces reliance on equity issuance and, if the capital allocation holds, brings the self-funding compounding model within reach.

Shareholder alignment is tighter than the size of the company might suggest. The executive team is lean, operating from a modest Manchester office, with long-term incentives tied to shareholder returns. Chapters Group AG, a European software acquirer, held 9.81% of issued share capital as at 16 October 2025, according to an RNS filing. Around 10% is held by Sun Mountain, the vehicle associated with investor Will Thorndike, whose investment horizon is measured in decades rather than quarters. The trailing earnings position, with EPS at -0.71p, is a reminder that the statutory numbers still reflect a business in investment mode, not a mature income generator.

The risks are not subtle. This is an illiquid AIM stock. Integration can go wrong. Debt adds fragility. And if management drifts on price discipline, the economics unravel quickly. The shares will suit neither income seekers nor those with a short time horizon.

The next test is whether the Santander facility allows the deal pace to accelerate without diluting returns on capital. If the oROCD holds above 20% as the capital base grows, the Investors Chronicle announcements page will become worth watching rather closely.