It is hard if not impossible to get a “Fair” price for your business if you are pitching the business to people who do not understand the (1) business or (2) industry in which the business operates.  Just as the title to the post states why would you try to sell your cow in a pig market?  Why would you try to sell you business in a market that does not understand what your business does.  You may be able to sell it but not for a “Fair” price.

Two examples:

1. Was listening to a pitch the other day for a Health Care company.  After the pitch the room was dead.  No excitement. No questions. No discussion.  What was wrong?  Was it the company or the presentation.  I don’t believe so – it was that the people in the room were not Health Care people.  I myself simply did not listen to the pitch because I know nothing of health care and since I do not trust myself on the industry, I do not invest.  It was not that the idea was bad necessarily it was just the wrong venue.

2. Met with some great guys the other day.  Brilliant company concept, smart implementation.  They are totally on track.  They are having trouble raising funding.  They are starting to question themselves and their company.  Their problem is that their company is pre-revenue.  My message to them, “Don’t doubt yourself just recognize that your company is at a stage where most people you have pitched to will not invest.  It is outside their risk profile in “THIS” market.

In both cases the companies were selling cows in a pig market.  It is still possible, don’t doubt yourself,  but recognize that you will have to lower your price.

Fast food managers know the cross training principle.  From the moment they walk in a store they are trained to cross train their crew.  I have seen a well cross trained crew handle 30% more volume with half the staff.  My belief is that team members who are cross trained in several functions like customer service, and training, or client marketing and brand marketing, or sales and marketing etc.  are exceptionally more valuable than single purpose workers.  They can handle more issues, work more efficiently, and can squeeze much needed leverage from the system.

If you are cross trained then the company can afford to pay you more or can afford to pay you in the first place.  As a manager you should seek out employees who can do more than one thing.  As a leader you must cross train your team to develop this type of leverage.  If you are a leader of a startup this is a fact of survival.

Sometimes moms can be too protective.  My wife once spent 20 minutes dressing my son for outdoor play in the winter.  It took 20 minutes to put on all the clothing, get a second pair of socks, get a hat, a winter coat, a set of gloves, good boots and then finally he was ready to go out.  Open went the door and in 15 minutes he was ready to come in and play with toys inside.  Sometimes lawyers can be too protective as well.

In some companies they call legal, “The business prevention team.”  Too much power is given to a team or person who gets paid to avoid all risks.  At some point it is not worth the effort to play.  This is a terrible problem in that business is about risk and taking risk.  Risks are minimized based on experience, and consideration of the people involved.

So what is the “1 risk” lawyers do not warn you about?  The risk of not trying.  See if you give them too much power over you, like your mom, they will protect you.  You will never skin a knee or worse break an arm.  But I would argue you will never live.  Like life business is about taking risk.  Remember no risk – no reward.

Some risk is ok.  Go ahead jump in.

Go through the revenue being generated and find the opportunities to increase sales by just 1% – heck find more if you can but look for 1%.  Don’t do what the airlines did and impose a baggage fee or look for ways to gouge your clients for more.  No way!

Look for a way to sell 1% more or increase value for your client or find just one more client or increase traffic to your site by just 1% more.

Its challenging but I bet that if you turn the subject to finding 1% more in revenue to your leadership team the mentality will begin to shift from cost cutting to growth.  Growth is what we all need now.

• Is the new idea currently within the scope of what your company does?  An example – if you are an accounting firm, should you also provide car washes – answer is easy: No! but what if the new service is tax preparation?  If you have no tax experts in your shop and your specialty is book keeping services the answer may be no as well.
• What if you have one person that knows taxes but that person is currently your best skilled bookkeeper managing a great and growing client?  The answer may still be no.
• What if that one person is serving your best client and you can see that bookkeeping services are being off shored to India?  Then the answer may be yes.
• What if your firm does bookkeeping and you are growing at 35% a quarter and there are clients who want your services but you just can’t serve?  The answer should be to focus on growing your current business instead of adding a new one.

The scenarios are many – there are a few key questions:

1. Is your current business growing at an acceptable pace? If yes, then stay the course.
2. Is there some systemic threat to your current business that requires you to look for profits somewhere else?  If no, why divide your attention?
3. Do you have the resources to adequately serve the new initiative?  Can you get them?  If no, then don’t stretch.
4. If you try and fail at the new services, do risk your current clients and business?  How great is that risk?  If yes, and the risk is great don’t do it.
5. Is the adjacency or new initiative within the perceived scope of your current business?  If it is outside do not tie the business together.

In all most of the time you should not move too far afield.  A start-up should focus and give the original model time to grow.  You should be worried if you are spending too much time thinking about expanded services and not growing the core.

I think you might guess where this is going.  Why is every pitch a boring PowerPoint?  Show your product if you can.  Do something different – it is similar to American Idol – where Simon states how disappointed he is as he was hoping the contestant would be memorable but isn’t – do something memorable. Please! 

If you are like everyone else and your company is like every other company – why do I want to invest?  Here is some advise:

1. Don’t have a presentation – give a speech – tell a story
2. Show your product – even a mock up is better than nothing – wire frames of a website are ok.
3. Answer the key questions (http://hueyequity.com/blogg/2008/05/19/the-1-thing-a-web-company-should-provide-to-potential-investors/)
4. If you need to show a slide show it while you are talking about it and then advance to a blank screen as you stop discussing that one point.  By doing this you keep the attention on you as a speaker and not the slide.
5. Hand out the slides or have a leave behind that you distribute after your talk.

Don’t use PowerPoint as a crutch.  Focus the attention on you and your business.

• Never Give Up!
• Have confidence in yourself!
• Work for yourself because you will never get rich working for someone else (a favorite saying)
• Be generous
• Work Hard
• Family comes first – even when they do not deserve it – be loyal to your family.

He is gone but his spirit will always guide me.

I love you dad!

• Messy Capitalization Tables – by messy I mean a wide variety of equity issues – warrants, options, common, preferred, convertibles, and more. Often you would find from reviewing the company’s legal agreements that there would be a vendor who could lay claim to having warrants or other equity of some type. I actually found on several occasions where a provider of broadband bandwidth would have warrants as part of their standard agreement and ding dong business types would always miss that they were giving equity away. Now that was expensive! In another instance the founder’s ex-husband held a portion of the company and the divorce decree was not specific to the equity and the matter was complicated because he was the patent holder to the company’s great technology. Very messy.
• Messy Contracts – The thing that can sink a deal the fastest is screwed up contracts. Contracts that give most favored nation pricing. Contracts that give licensing of technology to or from other companies. Contracts that have no assignment rights. Contracts that have “change of control” provisions. I had a deal blow up (Billion dollar deal for that matter) due to a contract that gave an unrestricted license of not only the company’s technology on a change of control but also the acquiring company’s technology.
• Everyone gets rich on the deal – It is expected that people should get rewarded for their efforts – that is why entrepreneurs set out on the dangerous road of a startup. The problem happens when all the key people – needed to extract the value from the company make so much money from the deal that they have little or no incentive to continue after the transaction. I had one deal actually go through where each of the key management team members were paid well and no one was left standing after the deal was completed. The CEO went missing in action. The kid was 23 years old and my acquiring company handed him $23 million. What did we think was going to happen! We had to fire him, once we found him on a rented yacht in the Caribbean. If there is no one left to man the ship the ship does not have much value.
• Messy rights to invention – In technology I have experienced companies where you have a difficult time substantiating the company’s claim that they actually own the technology that is the key to the value. This usually comes about because the company does not ask its engineers to sign what is called a “right to invention” agreement. These agreements establish that what the employee creates while employed by the company is owned by the company. I had one deal where a former employee claimed ownership rights to the company’s flagship product and the deal did not go through until the current owners reached an agreement with the employee, signed a large escrow agreement, and warranted to more than the deal value that they owned the technology.

Four main areas to think about if you are trying to sell your company.  Keep the capitalization table as clean as possible.  Watch your contracts and keep in mind that you can actually damage your company’s value by agreeing to whacky terms.  Develop a transition plan and make sure you own your key assets.  Do all of these and you should protect the value you worked so hard to create.

Personally I like investing in and building businesses not building technologies.  I like the idea of having a breakthrough technology that enables a business.  I like businesses that use proven technologies in game changing ways even better.  I find that most investors like to bet on teams and businesses more than technologies.

The net is this: A great technology is just that a technology.  It does not mean it isn’t a good investment but it is not a business.  Great technologies get values lower than great businesses.  Entrepreneurs need to recognize this and determine what they want to do and how they want to do it.  Usually someone that invents a great technology does not have the skills necessary to build a great technology into a great business.  They should either sell their technology or work hard to attract the people necessary to take it and build a business out of it.  I used to think that there were plenty of business people and a shortage of technologists.  Today I am not too sure.  What do you think?

·         Have rock solid set of conservative financial statements

·         Assemble a complete electronic data room – all contracts, financials, human resource records, etc.

·         Clean up your contracts (can you assign them to the buyer?)

·         Understand why the acquirer is interested in your company so you can feature those attributes during the diligence process.  An example: The acquirer is interested in your penetration of specific geographic markets.  Create the reports necessary to show geographic market penetration and potentially the growth rate of those markets.

·         Build a solid team (no one is going to assume that you the founder will stay for any length of time but they will look to your top captains – I call this a leave behind team)

·         Foster a can do attitude – paint the picture of how the two companies will fit together – help the acquirer prepare an integration plan

The goal in taking the above steps is to lower the buyer’s perceived transaction risk.  I have been in both situations where the records were a mess, there was low level talent, and I have seen the other side where the records were immaculate.  I was willing to pay a little more for the latter as the organization of the company’s records and diligence binders gave me confidence that I was not going to run in to any whammies after the close.

One more note on the contracts – the one thing that I have seen blow deals the most is poor contracts.  Non assignable contracts or contracts that gave the parties outs or special rights in a change of control situation will damage the value of your company or KILL IT altogether.  Manage your contracts carefully.