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 $7.5 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 50, 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 $3.5 million 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.
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