Is It Time to Sell Your Hardware or Software Company?

This is the point that most, if not all, technology entrepreneurs aspire to reach. They dream of selling their company and laying on a beach somewhere, a colorful drink with the requisite umbrella, cooling in their hand.

There are a few of you out there that would never sell your company (it's your identity, after all), preferring to work forever lest you slow down and quickly deteriorate. But that's another story; we'll save your psychoanalysis for another day…

Some of you that want to sell your company have the most grandiose plan of all in mind: An initial public offering (IPO) through a brand name investment banker, bringing not only unimaginable riches, but fame along with that fortune. But that rarely happens--we'll also table that discussion for another column…

So let's get back to the great majority of you out there, who set out to some day cash in all of your hard work, by selling your company directly to another company. How do you know when the time is right?

WHAT MAKES PEOPLE WANT TO SELL

There are many triggers that set off serious reflection about whether or not to pursue a sale of a software or tech company. Let's examine a few of the more common:

1) A potential acquirer approaches the company with an offer
2) A strategic partnership grows closer, and it seems to make sense to grow closer still
3) Business is bad, and the principals begin to worry about losing everything
4) Negative cash flow is starving the business, forcing a sale to ward off bankruptcy
5) The owners need cash for another reason; be it investing in another business, or personal reasons
6) The owner/operators are burnt out, and no longer enjoy the business
7) Business has been robust, and the owners astutely consider whether now is the time to maximize their return, and minimize their risk by selling now
8) It becomes clear that there is a viable business, but is better suited/more valuable within a larger company
9) It's time for the owners to retire (it seems that very few high tech entrepreneurs make it that far!)

These are the most common reasons that come to mind--it is certainly not a complete list. Although we are talking about companies, the decision to sell ultimately comes down to a personal decision by one or a few individuals. So the reasons that these decisions happen are as varied as the population overall.

Given this list of common rationale for considering a sale, what are the RIGHT and WRONG reasons to consider a sale--if you want to maximize your return within your particular circumstances?

WRONG REASONS TO SELL

On an impulse--you've been running your business, not even think about selling your company. An offer comes along, and you get caught up in it--without having planned for it. Or things have been going poorly, and you are at an emotional low. Acting in these circumstances is similar to married, divorced or starting a new business--don't do it without thinking it through, or planning it properly.
Fear--don't sell just because you are scared; that's probably the best way to leave money on the table. There are ups and downs to every technology business. In my experience, things usually aren't as bad as they look at a specific "down" point in time--or as good as it looks at an "up" time. It's important to look at the prospects of a business over a period of time, considering both how things have gone and the forward-looking forecast.
Sales are in decline--this is the worst time to sell. If you do this, all leverage goes to the buyer. Of course, panic sets in, as you see your valuation melting away, and human instinct is to "get what you can" before it degrades further. But first consider the situation--is it reasonable that you can turn it around and reignite growth? Is the decline all specific to your business, or is it a cyclical market, or a bad economy overall--which might turn around in some reasonable time period? Sometimes selling under these circumstances is the right thing to do, and is unavoidable. But with proper planning, you may be able to sell your company BEFORE this happens, or turn it around first.

RIGHT REASONS TO SELL

You believe you've reached the peak of valuation--this seems obvious, but it is difficult to do. Finding the right time to sell is tricky; you don't want to exit too early and leave money on the table. So the inclination, given that tech businesses are value as a multiple of revenue or EEBITDA, is to hold on until growth stalls. But if you wait until you built up your sales so much that little "natural" growth" is left in your product/market cycle, the business may not look as attractive going forward, for potential buyers. Most strategic buyers, at least, would like to see growth prospects in a potential acquisition. So it might be best to "leave a little growth on the table"; it might lead to a higher multiple from the buyer.
You haven't been enjoying running the business for a very long time--I believe strongly this is a time to get out. If you have someone else whom you feel comfortable leaving in charge, that's fine. But otherwise, either you'll run it in to the ground from burnout, or you'll walk away and let someone else destroy it, because you just don't care anymore. Passion is important in our business; when it's gone, it's usually a good time to sell.
A fundamental shift in the market or your business--This could mean many things: you have lost a number of key people, the economics of your market changes, or a major investment will be required to keep the company on a growth path. The specifics here could be quite varied; the common thread is that with the change in fundamentals, there are real clouds on the horizon. This lead you to a thoughtful belief that continuing to operate the business as a standalone entity isn't optimal.

SUMMARY

An exit, or sale of your company, is a very important "life changing event" for the owners, founders and managers of a software or hardware company. I've seen sales come together very quickly, and completely unplanned. I view unplanned company sales as the business equivalent to a quicky divorce that comes out of an emotional event, without careful consideration, or an objective study of the alternatives and consequences. It is a once in a lifetime event for many, and should be given the careful consideration that those types of events deserve. That's my view--post a comment with your own Exit tales or opinions.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Organizational Structures in Software & High Tech Companies

So you've put together a hardware or software startup company. Chances are you didn't give a lot of thought to what the next step should be in organization development--you just wanted to bring in some revenue and find a way to keep the doors open. Or, maybe you gave it a great deal of thought, even before you bound your initial business plan--there are quite a few anal-retentive planning types out there--you know who you are!

I don't mean to make light of this issue; it's actually quite a serious one. Let's look at a few of the questions to consider when deciding how to organize your company, as well as a few options.

IMPORTANT QUESTIONS TO PONDER

What are the strengths, weaknesses, and operating styles of the principals? I believe that this is a critical question to ponder, if one wants to organize the company successfully. One of my great examples is HP. Bill Hewlett and Dave Packard instituted a decentralized structure almost from the very beginning of Hewlett-Packard. They were careful to keep the units small, by breaking them up as they grew. In my opinion, this was one of the great drivers of HP's success, and worked well because it suited their personalities, as well as the folks that they hired. They believed in "Management by Walking Around", but also believed in motivating high performance by allowing their employees to use all of their talents, without unnecessary constraints. It seems simple, butit is often hard for managers (especially hands-on, entrepreneurial types) to give their employees enough rope and space to excel. I believe that this hands-off, decentralized approach only worked well because this style fit with Bill and Dave's personalities.

What are the key personality traits of your employees and target hires? Similar to the question about the principal's above, the organizational style needs to fit with the "personality" of your company, the culture. If you have a lot of type "A", self-motivated people with strong leadership skills, a decentralized org chart may fit better than a hierarchical, centralized approach.

Are there disparate technologies within the company? This is a big driver in deciding how to organize. If you have several different technologies, how do they fit together technically--if at all? Do they fit together from a market perspective? If there is a lot of synergy or need to coordinate between technologies/products, a centralized, hierarchical approach may work best. The less "fit" that there is between your core technologies or products, the more inclination I would have to organize using a decentralized, business unit approach. This assumes that the resources are available for a decentralized organization. But if resources are so scarce that you can't decentralize properly, does it make sense to try to be successful with multiple disparate products/technologies anyway?

Now let's take a look at some common ways to organize.

ORGANIZATIONAL OPTIONS

Hierarchical/Functional/Centralized - the classic organizational style of traditional businesses. The strength of this type of organization is that it is easier to optimize each function, as there are more resources available within each function in a centralized approach. This can enable a more sophisticated approach to best practices. On the downside, my first job was with a Big 3 Automotive manufacturer, which was VERY hierarchical and centralized. The company was SO hierarchical that it paralyzed the organization to a huge degree; trying to get even the simplest, small thing done had to go many levels up. It was like trying to turn a battleship on a dime, and really painful. I'm not a big fan of this style for larger organizations, but for smaller, single-market or single product companies, it generally is optimal.

Decentralized/Business Units - This is the polar opposite of the traditional hierarchical organization. It's my preference for growing companies who are starting to "spreading their wings" beyond their initial market or technology focus, as well as for larger companies. It's strength lies in the ability to keep lines of communications short, keeping personnel close to the marketplace, and motivate self-starters by providing more positions of broad responsibility. For medium-sized companies, the danger lies in decentralizing before there is really critical mass to run separate business units, which comes with some added costs due to duplication of functions. One good way to mitigate this is to centralize and share as many of the non-product specific functions as possible, such as finance, HR, quality control, etc. The key functions that absolutely need to reside in the business units are usually marketing, product development, possibly manufacturing (for hardware companies) and occasionally sales.

Product-Centric or Market-Centric- This is a variation that can be combined with either of the two major organizational structures above. For example, within your marketing department, there could be people assigned as product managers, or as market managers. Sometimes a hybrid approach is used, where there are product managers for unreleased products, and market managers for currently-marketed products.

Matrix - This organization style is "overlaid" on top of a more typical organizational structure, such as the types discussed above. The main idea is to set up "dotted line" teams, responsibilities and reporting structures that are desirable, but fall outside of the normal way a team is constituted within the main structure in use. For example, in a hierarchical organization, you might set up a matrixed, cross-functional team to put focus on the launch of an important new business initiative. This may give the new initiative more emphasis than it normally would get, given its modest contribution to the overall business at that point. If used properly, matrix management techniques can be a great way to dampen the negatives that are inevitable in any rigid organizational structure. It must be used with caution, however. If used too frequently, or without endowing the "head" of the matrix with real power to accomplish the desired goals, matrix organizations can quickly become ineffective and politically driven entities--and the butt of jokes around the water cooler.

This is just a quick take on a very complex topic. There are many different ways to organize a software or technology company for success--too many to discuss here. And we just touched on a few of the issues to consider. Hopefully this short article will stimulate some thinking on this topic, to avoid organizational structure which often form haphazardly as companies are started and grown. Post a comment if you have a take of your own.

Phil Morettini

PJM Consulting

www.pjmconsult.com