Design of Business

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Tag: selling

How much money do you want?

English: The Miz's Money in the Bank briefcase

 (Photo credit: Wikipedia)

“I remember the first time I closed a big deal – was for about 50,000 bucks. That evening, I went out and got myself a fancy watch – that probably cost me half as much,” my friend Murali recounted. He’d been invited to talk to a group of young entrepreneurs, who were looking for mentors. “I was so ignorant, that I didn’t know that revenue is not profit,” Murali continued. “And of course, I knew nothing about revenue versus cash flow even. So here I was spending money that I didn’t have and in hindsight couldn’t have afforded to spend, even if I had it.”

 

Murali is by no means the first entrepreneur to fall into this particular hole. He’s the one that I’d seen recall it with the most relish and absolute candor. His point was that doing business requires a good understanding of financial basics. Not an MBA but just plain nuts and bolts of understanding, what revenues are, net and gross margins, cash flow versus revenues. In other words everything your mother, or for those of you lucky enough, your spouse, felt you should learn about budgeting and handling money. And of course if he could do it, so could you – was his unstated message.

This is never more evident or critical than when you set out to sell your company.

As entrepreneurs when we engage in sales conversations, we tend to focus on the “selling price” a great deal. And all too often, they mistake their selling price with the cash that may flow into their accounts. This is made a lot worse, especially when the negotiation is around selling their business.

“How much money do you want to have in your bank, after this whole thing is done?”

You’d think this is a simple enough question to answer. And it is. This is usually the first question I pose to entrepreneurs when they talk about selling their business. Most of them, after some initial hemming and hawing, are able to give reasonably specific answers – “A million dollars. five crores.”  It’s almost always a round number. I don’t ask why that number, whatever it is. But have a slew of other questions?  The first one I ask them, is this before or after taxes? And what if it is not in cash but in stock? What if it is deferred or staggered in time? Against deliverables or future performance? And how would you partners answer these same questions? By this time, the entrepreneur’s turned quiet and introspective. Given how often this conversation takes place, I reckoned it makes sense to capture these starter questions.

How much money do you want to have once everything is done? The answer to this obviously is a very personal thing. One woman’s 250K maybe another woman’s billion dollars. But this is the amount you want – never mind if you will get it – in your bank account with NO strings attached – no further taxes to pay and no assumptions about what more you may get. In other words, you would be perfectly willing to walk away from you business, for this much money in the bank NOW.

What taxes are you liable for? Knowing this is critical. Keeping the usual disclaimer, that I’m no tax expert and this should not be deemed as any sort of competent tax advice, consult your own tax advisor, recognise that you are liable for capital gains tax – which may vary from taxed as straight income (up to 33% in some cases) to varying degrees (long-term vs short-term, privately held vs publicly held) and liable to state or local taxes in some jurisdictions. In other words, if you wanted to still have that X million dollars, you may have to clear (x/(1-tax rate) (1.5M to have 1M left over after 33% tax for instance)

Will the cash all come in tomorrow or will some of it be deferred? Does this matter? It may if you need or want all the money now. It may also matter whether the amounts are deferred simply over time, to retain you for instance or they are tied to performance or other deliverables. In both cases, will you be ready to walk away if you got nothing beyond the first payment or tranche? If so would you revisit your answer to the first question?

Will it all be in cash? While our answer may always be yes, reality may not be. And getting some of it in stock may not be all bad – but as my mentor Chandrashekar would put it, balancing your need and greed is important. And how would this change your answers to the questions we’ve already asked?

Finally, how would your partners answer the above questions? Whilst what you need or want should, in an ideal world, be not influenced by what your partners want, reality is that a good deal can be consummated only if all parties are at least semi-clear on what they want. While this is NOT critical, as with salaries or many things in life, we might be happy with the answers we come up with, till we find out what the other guy is making. So thinking about it and factoring it in, helps our mental wellbeing if not our bank accounts.

In an earlier article, I spoke about Valuation 101 – how you can value your company. The reality is that your answer to the first question “How much money do you want to have once everything is done?” is really what sets the valuation of your company – or the walk-away price. So stop reading and get out a piece of paper or a spreadsheet if you prefer and begin answering these questions as the second step to selling your company. For those still looking for the first step – you can find it here.


As many companies that I’ve been involved with grow past their fifth or even seventh anniversary, they are facing new questions around exits – be the outright sales or mergers or in some case existential questions. I’m hoping to write about these questions in what I’d like to think of as “Selling your startup” series

Selling every moment – sales in an entrepreneurial firm

Selling Process

No one looks forward to a visit to the dentist, especially if it is a root canal that’s in the offing. Yet, most people would choose a root canal over haggling with a car dealer. The words ‘used-car salesman’ have come to epitomise our loathing for the selling profession. The sweet-sounding young thing who keeps calling offering me credit cards and personal loans, is most reluctant to answer when I ask her if it is a sales call. So it would appear even salespersons are at times ambivalent about their jobs.

In this scenario, how important is the sales function for an entrepreneurial firm? Before we answer this question we need to recognise that most entrepreneurial firms begin selling before they have a product and many even before they are a company.

As a founder, you have to sell your ideas to other founders, prospective employees, potential investors and future customers. Often, we fail to acknowledge this as selling as our passion and vision drives us to make believers of others. Selling, however, is what it is and it is critical for the success of your entrepreneurial firm.

Furthermore, it is far too important to be left to the sales folk alone. You need to be selling your company to all the stakeholders, selling your product and its differentiation to your own sales people and selling to customers and partners your unique value as a supplier and partner.

Founders as sales people have their share of risks — they are too close to the company, its products and their perceived benefits that they may not hear too well what customers are telling them.

As a start-up evolves to be a real business, the need to bring in professionals for the sales function grows. Salespersons spend most of their time outside the company and ensuring that they are aligned to your vision, values and goals is a continual process. If your sales people are to win hearts and minds even as they rake in the dollars selling your products, it is important that you stay involved after you bring on board the right salespeople.

Much like customer support, they will be the face of your company and the less they are perceived as ‘used-car salesmen’ the better you will be served.

Selling process For a company’s sales team to be consistently successful it requires a clearly spelt out process for selling.Many companies discover that writing code or building a product is all too easy to get started without adhering to a well spelt out process. However, disaster in the form of poor products or, in the worst case, a shuttered company, is the likely outcome in the absence of such a process. Similarly, too many start-ups think about sales, if at all, late in the game. Even when they plan for it, they grossly underestimate what’s required and make erroneous assumptions such as “the product will sell itself” or marketing or the technical personnel will be able to sell it. However, to continuously, predictably, and most importantly, profitably sell your product you need the right professionals with the right tools and a strong selling process.

The most common tool or process in sales, be it multi-million dollar selling to major accounts or one-on-one retail sales, is the Sales Pipeline. Simply put, it is a series of steps, such as figuring out who your likely customers are (prospect identification), which of them have money to buy, are likely and desirable (qualifying the buyers), and understanding what need they are trying to fulfil (understanding needs).

The accompanying table shows one such sales process; your own may have fewer or more steps depending on the nature of your business. Even in a restaurant or store, good salespersons go through this process, figuring out which customers are browsing as opposed to buying, what it is they are looking for, is the wife or the friend the decision maker, can they up-sell you with accessories (or appetisers or drinks in a restaurant), negotiating price and closing the deal.

However, in high complexity sales such as technology products or high-value selling, the time taken between the first step in the sales process and the order closure may be several weeks to months. And, when you have many such prospects and sales deals in the air, without strict adherence to the process, your survival will be in question.

The term pipeline is used to refer to the sale process, as the sales organisation will aspire to continuously move customers from the first step (identification) through the last step (payment receipt and asking for referrals). At any time, a good sales organisation will have a number of different prospects at each stage of the sales pipeline. Ensuring that the pipeline never runs dry and that a bottleneck is not created at any stage (proposals or negotiations for instance) is critical for predictability and sales success.

Daily discipline Selling, in my view, is the most unforgiving of all jobs in that it requires a level of daily discipline and commitment that few other jobs require. In engineering or marketing you can afford to have an off day; put something off for tomorrow or next week. However, in sales, the consequences of putting something off for tomorrow or next week are often disproportionate and tend to last longer. For instance, when you don’t call on that new prospect you had intended to or make that follow-up phone call about your proposal, that’s when that key decision maker goes off on his six-week sabbatical or your client has an organisational restructuring or budget cuts! Though a good sales person bounces back from this setback, it may take another three-six month selling cycle before she has another shot at the account.

This is made worse by the fact that sales people face rejection every day — from prospects and customers who tell them why their competitors’ products are better and of course less expensive and, worse yet, customers who love the product and your company but they are not buying right now! One week in the shoes of any of your sales people is about the most sobering experiences any of your non-sales employees can have.

Successful salespeople attribute their performance to attitude, discipline and perseverance. The discipline they refer to is in how they manage their sales pipeline.

Typically, regardless of the number of steps in it, the sales pipeline is broken down into three segments. Segment A – those accounts that are nearest to closure, Segment C – those that you have just started working on and are still in the early stages and Segment B — all those in the middle between A and C. Great sales people work their pipeline in the order A-C-B, spending maybe 20-30 per cent on A, 40-60 per cent on C and 20-30 per cent on B. Novices and less effective folk by focusing predominantly on A or A and B tend to let their pipelines run dry or at the very least become very unpredictable.

What time management people refer to as Quadrant II activities — namely the important but not urgent activities such as getting to know the decision making process or the decision makers — are typically Segment C activities. If like the industrial ant, you don’t work your C accounts on a daily basis, like the proverbial grasshopper you are likely to starve once the spring of A accounts passes.

Relationship building If you spend a week accompanying your top sales person, you will discover as one of our engineers recently remarked, “It’s not the product or even the sales pitch but the relationship and trust that the sales person has with the customer that brings home the deal consistently.” People like buying things from people they trust and like. Relationships, especially ones that engender trust, are not built overnight. This is the ultimate Quadrant II activity that separates the great sales people from the merely competent.

With today’s constantly evolving (and rapid obsolescence of) technology, products get rapidly commoditised and features contribute far less to differentiating your offering. So how do your sales people stand apart from the din of competing offerings? Recent selling research and literature talk about consultative selling. From the days when the pyramids were built, great salespersons have always been consultants and partners first. They strive to understand the real issues customers are trying to address and provide them the best possible solution within their constraints. That may, at times, even mean sending them to the competitor. No good deed goes unrewarded especially when a strong relationship has been built.

Those that have built good relationships are not only rewarded with more deals, but are less likely to be perceived as used-car salesmen or worse than a root canal!

This article first appeared in the Hindu BusinessLine print edition in June 2008.  

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