Thinking
of taking your information technology company to the next level with a major
marketing campaign or by 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 software company or information technology business
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 software 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 spoken with more than 30, primarily 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:
- 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.
- The president of the
company and decision maker 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.
- 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.
- 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.
- 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.
- Your new hire is most
likely someone that came from a bigger information technology company and
may be comfortable performing in an established sales department. It is
the rare salesman that can transform from that environment to developing
the environment while trying to meet a sales quota. 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. 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
double 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 six 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.
They engaged our firm to find them a buyer, but then
we encountered the valuation gap. Our business seller thought his company was
worth a great deal and that he should be paid with cash at close for all the
future potential his product could deliver. The buyer, on the other hand,
wanted to pay based on a trailing twelve months historical perspective and if
anything was paid for potential, that would be in the form of an earn out based
on post acquisition sales performance.
With a well structured earn out agreement and the
right buyer, our client will reach his transaction value goals. His earn out is
based on future sales, but 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 buyer's current customers is a candidate for this product. The
small company risk has been removed going from a little known start-up with
$500 K in revenues to a well known industry player, publicly traded stock with
a market cap of $2.5 billion.
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
information technology 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
