Thinking
of taking your information technology company to the next level with a
major capital investment or hiring additional sales resources? These are
decisions that can impact your company's future. It might be time to
consider the alternative of selling your business.
We
are often approached by information technology company owners at a
crossroads of taking the company to the next level. The decision in most
cases is whether they should bring on the one or two hot shot sales
people or channel development people necessary to bring the company
sales to a level that will allow the company to reach critical mass. For
a smaller company with sales below $5 million this can be a critical
decision.
For frame of reference, prior to embarking
on my merger and acquisition advisor career, I spent my prior 20 years
in various sales capacities in primarily information technology and
computer industry related companies from bag carrying salesman to
district, regional, to national sales manager and finally Chief
Marketing Officer. So when I look at a company, it is from the sales and
marketing perspective first and foremost. I am sure that if I had a
public accounting background, I would look at my clients through those
lenses.
So with that backdrop, let's look at what might
be a typical situation. The company is doing $3.5 million in sales, has
a good group of loyal customers, produces a nice income for its owner
or owners, and has a lot more potential for sales growth in the opinion
of the owner. Some light bulb has been lit that suggests that they need
to step this up to the next level after relying on word of mouth and the
passion and energy of the owner to get to this stage.
I
have either spoken with more than 30, primarily information technology
based companies over the years that have faced this exact situation and
can count on one hand the ones that had a successful outcome. The
natural inclination is to bite the bullet and bring on that expensive
resource and hope your staff can keep up with the big influx of orders.
The reality is that in most cases the execution was a very expensive
failure. Below are several factors that you should consider when you are
at this crossroads:
1. The 80 20 rule of salesmen.
You know this one. 80% of sales are produced by 20% of the salespeople.
If you are only hiring one or two, the likelihood is that you will not
get a top performer.
2. The founder of the company
is a technology guy and has no sales background, so the odds of him
making the right hiring decision are greatly diminished. He will not
understand how to properly set milestones, judge progress, evaluate
performance objectively, or coach the new hire.
3.
To hire a good salesman that can handle a complex sale requires a base
salary and a draw for at least 6 months that puts him in a better
economic condition than he was in on his last job. So you are probably
looking at $150,000 annual run rate for a decent candidate.
4.
If you have not had a formalized sales effort before, you are probably
lacking the sales infrastructure that your new hire is used to. Proper
contact management systems, customer and prospect databases, developed
collateral materials and sales presentations, sales cycle timeframes and
critical milestones and developed competition feature benefit matrixes
will need to be developed.
5. Current customers are
most likely the early adapters, risk takers, pioneers, etc. and are not
afraid of making the buying decision with a small more risky company.
These early adaptors, however, are not viewed as good references for the
more conservative majority that needs the security of a big company
backing their product selection decision.
6. Your
new hire is most likely someone that came from a bigger company like IBM
or Oracle and may be comfortable performing in an established sales
department. It is the rare salesman that can transform from that
environment to a new role of developing the sales infrastructure while
trying to meet a sales quota.
7. Throw on top of
that the objection that he has never had to deal with before, the small
company risk factor, and the odds of success diminish. When he was hired
he assured you that he would bring his very productive address book and
deliver all of these customers from his Blue Chip prior employer. He
and you soon discover that he may not have been totally responsible for
his sales success. Having IBM or Oracle on his business card may have
been the predominant success factor.
8. Finally,
this transformation from a core group of early adapters to now selling
to the conservative majority elongates the sales cycle by 25% to as much
as twice his prior experience. If you don't fire him first, he will
probably quit when his draw runs out.
With all this
going against the business owner, most of them go ahead and make the
hire and then I hear something like this, "Yes, we brought on a sales
guy two years ago who said he had all the industry contacts and in nine
months after he hadn't sold a thing and cost us a lot of money, we fired
him. That really hurt the company and we have just now recovered. We
won't do that again."
What are the alternatives?
Certainly strategic alliances, channel partnerships, value added
resellers are options, but again the success rate for these arrangements
are suspect without the sales background in the executive suite. A
lower risk approach is to outsource your VP of Sales or Chief Marketing
Officer function. There are a number of highly experienced and talented
free lancers that you can hire on a consulting basis that can help you
establish a sales and marketing infrastructure and guide you through the
staffing process. That may be the best way to go.
An
option that one of our clients chose when faced with the eight points to
consider from above was to sell his company. This is a very difficult
decision for an entrepreneur who by nature is very optimistic about the
future and feels like he can clear any hurdle. This client had no sales
background but was a very smart subject matter expert with an
outstanding background as a former consultant with a Big 5 accounting
firm.
He did not make the hiring mistake, but instead
went the outsourcing of VP of Sales function as step 1. When their firm
wanted to make the transition from the early adapters to the
conservative majority, the sales cycle slowed to a crawl. Meanwhile
their technology advantage was being eroded by a well funded venture
backed competitor that had struck an alliance with a big vendor.
We
were able to find him the right buyer. His effective sales force has
been increased from one (himself) to 27 reps. His install base has been
increased from 14 to 800. Every one of the buyers current customers is a
candidate for this product. The small company risk has been removed
going from a little known start-up with $1 million in revenues to a well
known industry player, publicly traded stock with a market cap of $2.5
billion.
A portion of his transaction value was based on post acquisition sales performance, and things worked out very well.
He
avoided the big cash drain that a bad sales person hiring decision
would have created and he sold his company before a competitor dominated
the market and made his technology irrelevant and of minimal value.
My
professional contacts sometimes tease me and suggest that I think every
company should be sold. That may be a slight exaggeration, but in many
instances, a company sale is the best route. When a business owner is
faced with that crossroads decision of bringing on a significant sales
resource that will be faced with a complex sale and the executive suite
does not have the sales background, a company sale may be the best
outcome.
Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital
No comments:
Post a Comment