The Nordic Compounder Playbook: How Lagercrantz Bought 90+ Companies and Never Sold One

Background and Career Path

I grew up in a small rural community in the midst of Sweden, then studied at Stockholm School of Economics. I spent about five years as an analyst doing a lot of valuation work on different companies, then joined McKinsey for a couple of years before being recruited into this world by Anders Bergman, who was behind the Bergman and Beving group. He was CEO of that company for over ten years, and I joined in 1998. We worked together for about three years, then decided to do the spin-out. A number of companies came out of that group, five or six different listed companies, all doing different types of compounding over the years.

I left the group in 2001 to do my own thing. I had done some pricing work before and was interested in pricing and revenue management, so I co-founded a company called Price Gain. I worked there for a few years, but then was recruited back into Lagercrantz in 2006 and have been CEO for just over 20 years now.

Return to Lagercrantz

I have always been fond of this model and how it works. I really wanted to get going with building it myself and be fully part of it. When the chance came to return as CEO, I had already founded my own company, so it was a difficult decision, to run something totally independent, or come back and really do the compounding, really get going with Lagercrantz.

Lagercrantz had faced some challenges after 2001. As a separate listed company, we were struggling with low margins and not very strong performance. So there was a turnaround ahead of us, which I found professionally challenging and quite interesting.

Business Transformation

We really needed to go back to the foundation, the roots of where we came from. We did a lot of decentralization, working with management by objectives and those types of frameworks within the group. We decentralized the whole thing, made sure the companies were independent and working in an autonomous way, and changed the direction of our capital allocation. We moved away from businesses that felt like electronics with short product life cycles and things changing all the time, toward something more stable, businesses with consistently good cash flows over a long period of time.

We actually changed the content of Lagercrantz dramatically from 2005 up until about 2015. From then onward, we have consistently built through more proprietary product-type companies, as opposed to value-adding distribution and other types of businesses that we felt did not have the same opportunities for growth and profitability.

The Acquire and Hold Model

It's a beautiful business model. We are looking for really good companies with a great long-term perspective. We want them to work independently, under their own brand name, in their dedicated market, with a dedicated local management team running things. We can be supportive, we help them with certain aspects of the business, push them to become more international if they've been very domestic in their approach, or find other ways to grow, but fundamentally these companies run autonomously within a local framework.

We are good at following up on the companies we own and challenging them in terms of setting targets and getting the right people on board. The ambition is to grow profits every year by 15%, which means we double profits in the group roughly every five years. That growth comes from a combination of organic and inorganic growth, about one third should come organically and two thirds from acquisitions. That means we need to acquire the equivalent of about 10% of ourselves every year to grow at that pace.

Acquisition Criteria

We always talk about niches. Parts of the market where you have a strong player. We want B2B companies, either industrial or tech. Everything we do is within hardware. We have not gone deep into software or MedTech. We have broadened ourselves a little along the way, but the core foundation is industrial companies with strong market leadership in their niche.

A strong market position in a niche, held consistently year after year, usually translates into very good financials. We are looking for companies with an EBIT margin of 15 to 20% or better. That typically translates into strong cash flows. We take that cash out of the businesses we already own and put it into new businesses, acquiring at four to eight times EBITDA. That model generally delivers a return on capital employed of around 20%.

Niche Market Example

We found a company a couple of years back that is really strong in building security and safety solutions for helicopter decks offshore. Think about a vessel, an oil platform, or a wind turbine situation where you need to land a helicopter. Those are very rough environments. A lot of ice, a lot of wind, a lot of bad weather, and you need a safe environment to make that landing possible. That means the circle and H lights around the landing area, the nets covering the platform, and the perimeter nets around those. This company is the market leader in building those solutions for offshore helicopter decks, globally. That is what a niche looks like.

Seller Profile and Succession Planning

Many of the companies we look at are very established, brick-and-mortar type businesses. They are usually in some form of succession planning when they come to market. They might have been run by three generations of the same family, but eventually the family becomes so spread out, so many siblings, that it gets too complicated to find a successor for the next phase. The sons and daughters are often not interested in running the business. They are doing other things in life.

We come in and work with them locally over time. We build trust. Most sellers want the company to be kept as it is. They do not want to see the brand taken down, the company moved, or everyone laid off and merged into something else. They want the company to continue doing what it has been doing for decades. That is the most common situation.

We often work with the family before acquiring the company, sometimes for three months, sometimes for three years, sometimes for ten years. Eventually we get through. Then we work with a transition period that includes earnouts and other arrangements, meaning both sellers and buyers are working together with the company for about three to four years before we take over fully. Even if we own 100% during that time, the previous owners are still incentivized through the earnout structure.

What Lagercrantz Adds Post-Acquisition

We are not looking for synergies in the traditional sense. We do some add-on acquisitions where we talk about synergies, but that is not what we are after. What we add when we acquire a company is two things: energy and structure.

These companies have often been owned by the same family for generations. They know everything about the business, but they may not have modern follow-up systems in place. We usually find a few key dimensions we can improve; Inventory control, pricing, or other specific aspects. We put together a reporting system and follow up closely on order intake every week, a simplified P&L and balance sheet every month, and a full P&L and balance sheet every quarter. We track cash flow more tightly than most of these companies have before. That creates an early warning system so we can adjust resources quickly, whether the company is growing or facing a slowdown in the market.

The energy piece is about ambition. Many of these companies have been addressing a domestic market, drawing a good dividend, and not been overly ambitious about growing. We set them up to go after a new market or a new geography, or to address a new segment. Electrification, the green transition, defense, we are investing in all of those areas. We might add AI to a company that has never had it. We add ambition and drive, while keeping what is very good about the company: the management team, the former owner on the local board, the brand.

Centralized Functions

It is very light touch and very decentralized. We centralize essentially three things: banking, insurance, and auditing. That is it. HR is not centralized. Most functions are not centralized. We try to share ideas and experiences across companies, but it is not structured. It is more like running a team of individuals who want to run their own things but find improvement opportunities by talking to one another. If a company is looking for a new ERP system, they will talk to colleagues in other Lagercrantz companies to find out what they are running and what worked or did not work.

The most important thing we do to facilitate that sharing is gather all the MDs and CEOs once a year at an MD conference. People are usually with us for many years, so you might feel like a newcomer the first time, but after two or three conferences you have friends there and can pick up the phone any time to discuss whatever you are dealing with.

Deal Sourcing and Relationship Building

We build an internal database of all the companies we find interesting. In markets where we have been for a long time; the Nordics, broader Northern Europe. We become known over time because we go out, talk to people, and that is outbound. We search for companies, find companies, meet with companies. We drink a lot of coffee. We are out there having a coffee here and there and meeting with people.

Most times when we approach a company, they are not for sale. They might imagine selling in ten years or five years, but they are not in a sales phase at all. Eventually they reach a point where they want to understand the market value of their company and where they should go. The first thing they do is contact an advisor or broker. And the first thing that broker does is make a list of potential buyers, and they will usually highlight that we have had good discussions with Lagercrantz for many years, that we could be a potential buyer. But they still want some competitive element in the process.

About 70% of the companies we meet have some type of advisor on their side. But it is not a pure auction all the way through — especially for smaller companies, where a full auction process is too time-consuming and expensive for everyone involved. What we prefer is to get exclusive much earlier. We like each other, we are discussing price, so let us spend six weeks or two months together to see if we can find our way through a process. If we cannot, they can go out to other buyers at a later stage.

Pricing Discipline Against Private Equity

In the market where we operate, prices have been fairly stable over a long period of time. I know people might think it is wrong to be transparent about what we offer, but I actually think it is a good thing. For this model to work, you need to be disciplined. If price gets carried away, it makes the whole thing much more difficult. It has been very important to us that we can finance the flywheel ourselves and that we generate our own cash to buy businesses.

We have not done any capital raisings over the years. The whole thing has been funded with internally generated money. You buy businesses that make money, and then you use a portion of that money to keep buying businesses. When you look at newer companies trying to build this model, most need to build up a capital base first and then turn the flywheel. That is a difficult transition. All the way through my tenure, we have been funding our own acquisitions.

Selling the Model to Owners

If it is a high-growth, early-stage venture-type company, we are usually not the buyer. Those companies have price tags much higher than their current performance, so it is not for us. But for the other type of company, the established, profitable business, we have a very clear value proposition: your life's work will be in good hands.

If you sell to a trade buyer, you might get a good price, but you do not know where your life's work ends up. We offer to keep the brand name. We want to meet the seller at the local grocery store fifteen years later and have the company still be around. So we can look each other in the eye and say this was a good thing for the company, a good thing for them, and a good thing for us.

Yes, you might get a couple of turns more from private equity. But you have no idea where your life's work will end up. You may have inherited this company from your grandfather, and putting it in someone's hands who might make everyone redundant, move operations to a low-cost country, or fundamentally change what it is, and people do not want that. There is a price attached to that uncertainty. And if you already have a hundred million or two hundred million before the deal, the extra difference may not change your life.

Legacy as a Competitive Advantage

A lot of it comes down to reputation built over time. People get to know us. So much of M&A that gets underestimated. Especially by those new to the industry. A lot of M&A is relationships. That is why we are having all the coffee. We are just checking in with people over time.

Some of our best deals have taken ten years of relationship-building before becoming actionable. Most come in at around two to three years on average. We collect annual reports. A big advantage in the Nordics is that financials are quite transparent, so you can find financial figures on most companies. When a company posts their most recent numbers, that becomes a natural reason to reach out. A great year? We call and say, you had a really strong year. What is happening now? Can we come around for another coffee? It is constantly working with those types of touchpoints.

Nordic Financial Transparency

Sweden and Finland have the most transparency. Norway to some extent as well. Denmark is a little less transparent. Then it varies quite a lot across the rest of Europe. In Germany, for example, transparency generally comes with size. Really small companies do not need to be as transparent, while larger companies have more reporting requirements. But in the Nordics, being able to see how a business is performing publicly gives us meaningful indicators and a natural cadence for staying in touch.

Timing Deals and Reading Sellers

A lot of it comes from external factors. If a war starts in the world, maybe it is a good moment to sell before things get really uncertain. Or they might think they are in a low period and want to wait a few more years before selling. Timing is often driven by what is happening with the family. Are the key people healthy and up and running, or are they running into problems? Are they getting along within the family? When we are close to that situation, we can maybe encourage them and say, this might be a good time. We can nudge the timing a little, but not to a great extent. They need to be ready.

Depending on the relationship, they might tell us things they would not tell their wider community, like we are going to reach one hundred million in revenue before we sell. They have all kinds of reasons and triggers. Usually it comes back to succession. If the senior people are approaching their seventies and their sons and daughters are all over the world doing other things, they start thinking about the next phase. Then it becomes time.

Deal Structure and Valuation Philosophy

We think of ourselves as industrialists, not purely financial operators. Most of our people have not come from finance. One of our core values within the group is simplicity, and that carries through to how we do valuations. When you get into future cash flows, discounting, net present value, IRR, you lose the industrialists in that process. We need to keep it simple.

We think in multiples. The metrics we use - return on profitable working capital, 15% growth targets, were established in the 1980s and have been with us ever since. We establish an EBITDA level that we believe is sustainable for the business, apply a four to eight times multiple, and that gives us our price. The earnout kicks in when the company performs above that sustainable earnings threshold. We split the profits above the threshold between seller and buyer for the coming three years.

We do not like adjusted numbers. We work with hard numbers. There are obviously discussions around what is extraordinary and what adjustments need to be made. Quality of earnings is an important part of the analysis we do before any deal. But if a seller provides skewed numbers and we have to adjust later, we end up in a difficult conversation after signing the LOI. If they have been transparent and given us accurate numbers, we do not adjust the price.

The Operating Team Behind 85 Companies

We have organized our roughly 85 to 90 business units into five divisions. Each division used to run on one or two people; we are now up to three people per division, so about 15 people managing five divisions. Their most important role is to sit on the boards of the subsidiary companies. They are also responsible for running M&A within their sector. Identifying and pursuing acquisition opportunities in their area.

Most of them are senior operators. Some have an M&A or financial background, some are former analysts or management consultants. We try to bring together a group of people who collectively cover all of those profiles, because you will not find them all in one person. These are the force multipliers, the people having the M&A conversations, doing the business development, sitting on the boards of existing companies, going to industry fairs and conferences, staying present and well known in their respective markets.

My deputy heads up M&A overall and acts as a dispatcher for the process, following up across all the divisions. Given our size, we need to do around eight to twelve deals per year, roughly one a month. Broken down across five divisions, that is one to three deals per division per year. Each division team has around 18 to 20 companies and carries that deal responsibility.

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