Situation: A company has a technology that was developed by but not of interest to a major corporation. The company continues to have significant business ties with the corporation, but the corporation wants to be assured that they are never connected to the technology in question. How do you create a Chinese wall around a product?
Advice from the CEOs:
The challenge facing the company is this: representatives of the large corporation don’t and can’t sell the services offered by the company, however exclusive clients of the corporation represent 25% of the available market for the services provided by the company. To date the large corporation has been unwilling either to reward the company for selling to these clients or to assist them in the sales process.
A solution: show the large corporation that the company provides a higher value or potential value to them than they receive on their existing products.
Show them the potential financial value to them of a symbiotic relationship.
Does the company develop the capabilities and value of the technology on their own, or do they partner with client companies in the market?
Many the potential clients in the market appreciate the technology and want to work with the company in some form so a partnership is possible.
The issue is that an open partnership might offend the large corporation who may then perceive the company as taking advantage of their clients.
How does the company establish a Chinese wall so that neither the large corporation nor the clients who purchase the company’s product are concerned about any activity that the company undertakes in the market?
Set up a separate entity and license the technology to this entity. The company would be an investor and would do some of the work but through a client/service relationship with the separate entity.
Get independent M&A advice on how to structure this entity.
Investigate other companies that have set up similar structures. Determine how they have addressed concerns such as conflict of interest, and what structures they have set up to avoid this.
Situation: A company offers a product combined with a service. Small companies can’t afford the combined price, but don’t need the full functionality of the combined product plus service. An option is to create an offering on a per-seat basis. In this option, how do you price seat utilization? How do you price a product and service?
Advice from the CEOs:
Pricing needs to follow value. For large companies, functionality and seamless operation are key. Small companies have different challenges – they have less money and don’t need all the features required by large companies. Configure a limited product for this market.
Don’t de-feature the product – create a different use / pricing model. Consider a model that prices based on the user company’s revenue, with periodic review of their revenue and fees paid. As they grow and increase utilization, they increase their ability to pay for, and their need for full utilization.
Use a cloud model and create a “pay per amount of use” option. Limit this offering to X number of users or X number of projects to create a different product from the full license option. While this will require monitoring, it will differentiate the partial license option from the full license option.
Develop an alternative to what is offered by the chief competitor and create an offering that this competitor can’t compete with.
Before making a final decision, institute a formal process for collecting ongoing feedback from customers. This will help to clarify alternatives going forward.
Situation: A small company has a parts supplier for product that they sell to their most important customer. That customer’s specs are “copy exact” on components for existing products; also, their new products are usually based on existing components. The supplier significantly raised prices on the parts supplied to the company. How you respond to a price increase from a supplier?
Advice from the CEOs:
This is an extremely sensitive situation. One solution is to not to rock the boat. The reality is that the company needs the parts, and it will take a lot of effort to replace them with parts from an alternate vendor. Just continue the relationship. Quit worrying about it and milk it for as long as it lasts.
Find out what caused the supplier to raise prices. The supplier needs to understand that to preserve the company’s margins they may have to raise prices to the final customer. This may threaten both the company’s and the supplier’s business with the customer.
Make sure that the supplier understands the company’s costs: office, salaries, equipment, maintenance, and local regulations that are unfriendly to business and difficult to deal with. Ask them to reconsider or reduce the price increase.
Assure that the supplier understands the value that the company provides and the importance of this collaboration to the business and profits and bottom lines of both companies. Leverage this value to get the price that the company needs.
Renegotiate the relationship to assure that supplier can’t go around go around the company and sell directly to the final customer.
Start building relationships with alternate suppliers.
Situation: A CEO’s company has built an admirable suite of products. The next step in company growth is to create a more structured marketing pipeline. They have experienced salespeople, but these people have come to the end of their rolodexes. A new approach is needed. How do you boost your sales and marketing?
Advice from the CEOs:
Create a profile of the ideal customer. This is the customer who can create the greatest leverage using the company’s suite of product. Aim for the top management of this customer.
Incentivize the sales reps to target high value accounts. To create targeting incentives, graduate the commission base.
Set initial commission based on the size of the customer.
Differentiate commission by product – pay the highest commission for highest gross profit products or the company’s highest priority products.
Salespeople need to be able to close sales by themselves.
Currently, salespeople are acting as lead generators and are counting on the CEO to close the sale.
Create a different set of expectations, including thresholds to limit the CEO’s direct involvement in the sales process – for example, limit CEO involvement to accounts with a revenue value over $500K.
Train the salespeople to communicate the value proposition for initial conversations as they qualify a new client. Create a set of resources to assist them along the way.
Is it a good idea to pay ongoing commissions forever?
Another CEO used to do this but has moved to X% for the first period/project and X/2% on follow-on-periods/projects. This keeps them hungry for new customers who will pay the higher commissions.
Don’t create a perpetual annuity – the way insurance brokers are paid. Reduce commissions on existing accounts so that they decline over time – keep salespeople focused on bringing in new accounts to maintain their income levels.
Decide on an acceptable level of total compensation for salespeople. Plan the commission structure to allow them to reach this level, but they have to keep selling to maintain this level. Keep them hungry.
Situation: A CEO has an option to purchase another company with whom they have a long and good relationship. A smooth transition will be important. The owner’s relationship with their customers is central to their success, as is his employees’ knowledge of their key accounts. How does the CEO assure that these relationships are retained? How do you construct a business acquisition?
Advice from the CEOs:
Based on the CEO’s responses to the Forum’s questions, the owner of the other company needs this deal more than the acquiring company needs him. This creates a strong bargaining position.
The owner of the business is the business and the key to a smooth transition post acquisition. Retaining his ongoing involvement – at least for a reasonable period – is essential to gaining maximum value from this acquisition.
The value of this business is its people: the owner’s relationships, and both the owner’s and his employees’ knowledge of their key accounts. His employees know the inner workings of their customers’ businesses. These are the relationships and the knowledge needed to assure that the acquisition is profitable post-close. Retention clauses and penalties must be part of the agreement.
If the owner wants 50% of the net income generated from his piece of the surviving company during a transition period, this is fair. However, the financial and operational details of the transition and his share of the income must be spelled out in the agreement and the agreement must assure that there is proper follow-through to qualify for the payments.
The income from the owner’s accounts must support his salary. However, even with this the owner will still cost the acquirer time and energy. Plan for this and budget for it in the agreement.
Situation: A CEO has been approached about a potential acquisition of his company. The offer was a surprise, and the team within the company is split on whether they are interested in a sale. They are currently very happy with what they do. How do you prepare for a potential acquisition?
Advice from the CEOs:
How does a company best position itself in advance of discussions?
Rebrand the company to boost the value proposition. Make what the company does best the focus of its value proposition. Position the company as the “experts” in this area.
Look at a series of possible scenarios that could develop and determine who on the team can best contribute each scenario. This will help to evaluate the implications of each scenario and to rank them in terms of favorability on the company’s terms. It will also help to quickly exclude certain scenarios if they come up during discussions with acquirers.
What research should the company conduct on the acquirer?
Do a deep dive into the potential acquirer. Research is simplified if the acquirer is public. Go online and look at their SEC and public filings. Look at their revenue trend as well as their profitability or losses.
What is the acquirer’s history of acquisitions? Interview people from companies that they have purchased.
Don’t pitch anything to the acquirer until you understand what they want to buy – this is critical so that the company positions itself well.
What is the best approach to take once the conversation starts?
Quick first step – send the company’s financials to the acquirer with a 3-year projection. Ask them, based on this, for a price range that they would consider for the company. If the range is outside of expectations, the conversation is over.
Determine whether this looks like a strategic vs. a financial buy. A strategic buy yields a higher price.
Cut a deal structure with a bonus tied to success post acquisition. This means a reasonable upfront payment with big payments for future success. This creates golden handcuffs to motivate the company’s staff to stay post-acquisition.
There should be multiple options on table – addressing both financial considerations and the future of team.
Situation: A CEO is evaluating an acquisition which could significantly contribute to his company’s financial position. Patented technology may add value to the deal. The founders of the acquisition target are willing to work part-time to facilitate the transition of their technology to the acquirer. How do you evaluate an acquisition?
Advice from the CEOs:
Set a timetable to close the deal or walk.
Two key factors in the due diligence process will be strength of the intellectual property and cost of the acquisition long term.
Another key factor to evaluation will be how this opportunity fits into the company’s larger financing plan. Currently the company is undertaking a financing round. How much will this acquisition contribute to or distract from the financing round?
If this is a primarily a value-add opportunity, will it add to the larger financing round?
Can the larger financing round be completed on time while pursuing this opportunity?
An option is to negotiate a white label agreement – an agreement that will keep the company in the game while completing the larger round.
If the founders are not amenable to a delay, what is the cost in terms of funds and effort versus the larger round.
The technology appears interesting, but the timing is bad given your need for the larger financing round. Here’s an option.
Go to the founders and start the discussion. Secure a license or hire their programmer. Let the technology go dark until the financing round is completed.
There is value here – but do this as a side focus if it’s not too expensive. Assure that the deal includes both rights and the underlying algorithms.
Delegate this to someone else in the organization. The CEO’s focus is the larger financing round.
An early stage venture which focuses on a humanitarian mission needs funding.
The founder is more interested in providing a peer-driven platform and service
than in producing profits. She envisions most of the funding coming from
donations rather than investors, at least near term. How do you fund an early stage venture?
from the CEOs:
that the venture is focused on building a peer-driven software platform, it is
possible that it may be of significant value if the venture was to be sold for
its technology or audience. Facebook and similar platforms could have a
distinct interest as the venture attracts a significant audience. Is this a
potential conflict with the original vision? The answer to this question will
impact funding choices going forward.
are several resources available to assist in fund raising:
for local groups that assist with fund raising.
Foundation Center (www.foundationcenter.org)
specializes in helping organizations to secure funding for non-profit ventures from
foundations. They have online facilities as well as locations in New York,
Boston, San Francisco and other major cities. They also provide training in
raising funds from foundations.
the founder’s network to find people with an interest and contacts in
with local churches and synagogues which also excel in fund raising. The
congregations may be smaller than the mega-churches, but the members are often
very connected. Because of the humanitarian nature of the new venture, churches
and synagogues may be natural partners.
A young company that focuses on personalized solutions needs to generate near-term
revenue to meet expenses. There are also options for debt or equity financing,
but the terms for each will equally depend on near-term revenue potential. How
do you generate near-term revenue?
from the CEOs:
in terms of the referenceability of early customers. As a new company, the first five customers
define the company to future customers.
core values of the company will help clarify how to make early choices.
just go for the easiest closes.
a chart of potential customer prospects:
potential prospects into groups.
is the deal model and key value proposition for each group?
a video and communications package to demonstrate the company’s benefit to each
are trade-offs between the different deals that the company will pursue:
fast deals are most likely to meet immediate cash flow needs.
biggest deals may involve the creation of LLCs. These will involve both more
time and additional legal fees.
sure that early deals align with the company’s core brand.
outsourcing to speed the provision of services to early clients. Build this
cost into your billings. Assure that the funds from early deals flow to or
through the company. This will improve the financial story to additional
serving special interest groups. Their potential value is that they work for
their passion more than for money. If the company chooses to work with one or
more of these groups, assure that customer selection aligns with company values.
current focus for near-term monetization is on merchandizing. As an alternative,
consider charging a separate fee for the use of company IP. This may give clients
additional incentive to utilize company technology to monetize their
Situation: A company wants to up its game by focusing on service. They are evaluating different options to provide customized services to gain a sustainable differentiating advantage over their competition. How do you enhance your customer service model?
from the CEOs:
the gaming industry one CEO sees an effective model focusing on higher level customer
service. The top games have allowed user customization using generic
customization tools. This allows the provider of the tool kit to serve a larger
number of users using a single tool kit to provide a wide variety of gaming
example from the gaming industry focuses on middleware developers. These
developers create an interactive knowledge base for customer self-service. The
knowledge base is monitored by the host company, and misleading or potentially
harmful input is excluded. The benefit is that this enlists clients to provide
their input on customer service as well as product development.
CEO sees this as a useful way to drive down customer service costs by providing
more tools and fewer bodies to perform the customer service task. The model’s
objective is for the customer not to need personalized service, but to be able
to develop solutions on their own using a flexible took kit. The host company
gains additional advantage because their user agreement allows them to take the
best models used by clients to spark their own product development.
fourth CEO sees lasting value in developing close relationships with customers.
They have developed tools that allow the customer to solve simple customer
service tasks but require company assistance for the more sophisticated
solutions. The company, in exchange for this added expense, learns from the