my business does not have enough 'gravitas'

[bazaarboy]

been in business for 6 years, developing specialised intranet web applications
I've developed my product entirely on my own, and there's only me in the company - my current turnover is about 100k
so far my work has been small-fry and I'm happy to admit that

the industry is changing however, and my product has become the focus of a number of (much) larger companies, and I've been made take-over offers - essentially they want my IPR, and at least 2-3 years of my time to lead development to take the product to the next level - my remuneration will be contingent on an earn-out contract

problem is, I'm not ready to sell out. I want continue developing my product, and ideally recruit staff into my company, expand, and keep my IPR
unfortunately, I'm told, my company doesn't have the gravitas to pull something like this off - this may well be correct...

one practical example is the idea of managing corporate risk. if the product fails, eg servers crash, a bug in the system means they make a mistake etc etc and they blame my system, there is the potential for litigation
a small company therefore would seem unable to handle this sort of risk...
having said that, I believe you can get bespoke insurance that underwrites this sort of risk...

so, overclockers - can you give me any suggestions as to how I can increase the 'gravitas' of my company - or do you think selling-out is the better option

PS: i know i've not given you much in the way of detail, so please ask away!

 

[bazaarboy]

A lot of it would depend on what the buy out package looks like and the rather more personal question of why do you work?

If your purpose in working is to provide a comfortable life for you and your family and the buy out package was enough to do this then it would seem sensible to do it. However if you work for the challange and feeling of sucess then it may not be as attractive a propostion.

very much the challenge - financial reward ranks pretty low for me, but i'm fanatical about my product and I constantly work to improve it in any way that I can - my ambition is to see my product being used nationally

in that regard, selling out now is not particularly attractive - I have reached a plateau though, and I'd have to expand to progress further - but even if employ 10 people I'm still tiny compared to my competitors who have hundreds of staff, and 200M+ turnover!

 

[bazaarboy]

Was it the potential buyers who told you that you lack gravitas? Because they may be a bit biased...

it's complicated because the two organisations that want to buy me out are one my clients and a competitor
understandably, part of their argument is to highlight that my position is vulnerable - which I don't dispute, and which I want to address by expanding and offering an underwritten product

I don't object going into partnership with a larger company as long as I have full partner status in the articles of incorporation

 

[bazaarboy]

Instead of selling the company, license the rights to the product? You might want to speak to a business lawyer.

I already have a solicitor who specialises on commercial law - plus accountants, they can offer opinions on specific legal or tax issues, but not broader business policy or advice on what to 'do next'

a re-seller arrangement is actually a good idea, I'm slightly cautious about divulging too much of the system code and know-how in case they rip me off
of course you can specify in the re-sale contract that they can't copy the system, and also use encryption / obfuscation techniques for the core parts of the system - but it's still a worry

 

[bazaarboy]

D'you have a web site you can link to?

nah, it's not a product aimed at the public

 

[bazaarboy]

They will reverse engineer it if they can. I can guarantee you that much!

damn right they will! glad I'm the only one who's paranoid lol

 

[bazaarboy]

Just don't be bullied into selling. You can build 'gravitas' eventually by doing progressively larger jobs. This all wreeks of BS anyway, if you can do the job you're big enough to do the job. Public and products liability insurance is par for the course, I don't see their point.

I would definitely prefer to stay in control, get bigger and become more established
To complicate things even more, the competitor who wants my product is, themselves, getting bought out by an even larger company...
they divulged that their own buy-out arrangement is subject to hitting an 8 figure sales target in 4 years

 

[bazaarboy]

Go on Dragons Den.


kd

have definitely considered that - not sure how good I would be explaining what my system does in 5 minutes, my close friends and family are not quite sure what I do exactly lol

 

[bazaarboy]

Hang on in there if that's what you want to do. Look to protect your IP at all costs. Indemnity insurance may well cover your corporate risk, but I would spend time in the lab ensuring your product is stable for all eventualities.

Don't forget, smaller software house companies normally rake in the fees based around maintenance / support contracts rather than the licence of the product itself.

The reason you want to hang on and not get drawn in to any "packages" of earn-out contracts is simple. A friend of mine had a bespoke conferencing company. He sold it a few years ago for a couple of million £. He's 50, has 3 kids, and no job. He's pretty much unemployable as all he knows is his own company, which he no long owns. After a house purchase and putting his kids through uni and enjoying life, he now really needs a job.

for me the license has to be main form of income, mainly because the support element is minimal - I designed the system to be self-maintaining as much as possible, and the clients look after it themselves
the other reason is that I'm also working full time (almost) as a doctor so free-time is definitely a premium

 

[bazaarboy]

I would continue to grow the company at a steady rate.

ideally yes, but I've hit a plateau - if I recruit staff then I have to start worrying about making sure PAYE, NI, annual leave etc etc are all done properly, they would never work the sort of hours I put in, which I completely understand...
perhaps using outsourced services, like using temp staff, IT specialists on an hourly basis, outsourced telephony services etc might be the way forward

 

[bazaarboy]

How about x % royalties every time they sell your product and a minority shareholding retained in your company. Then you can just kick back in the Bahamas and watch the dollars roll in .

tried that one, they are very resistant in letting me keep the IPR or going into partnership - they want full ownership of the IPR and me to work for x number of years on a salary to further develop the system

 

[bazaarboy]

Contract staff will cost you a lot of money and if gaining familiarity with your product requires specialist long-term knowledge, then holding onto decent people becomes important.

okay, say I put together a team of 10 people - that's as small as possible i believe:
2 programmers, 4 support staff, 4 sales staff and it may take 2 years or more before the company breaks even
how much capital would I need, and where do I get it from??

 

[bazaarboy]

Just out of interest. If you are a Doctor how would you manage this at the same time? Or would you give up the Doctors job?

kd

depends - I'd never give up the day job, but I can do shift work, if I get a team together I may well need to do lots of clinical work to pay for the staff initially!

 

[bazaarboy]

Who has told you it doesn't have enough gravitas?

erm the guys who want to buy me out, at a low price? lol
I know what you mean though -

they have a point however - as part of the procurement process, the organisations that would use my system would take into account the company size - and this limiting factor is working against me

 

[bazaarboy]

How come you need to go straight from 1 man to 11? Can't you hire one or two to start with, or is that the minimum you feel you need to fulfill the big contracts?

Even as a doctor I'd hold on, it could be an epic retirement fund in 20 years .

That sort of company size is the right start - imo
Smaller means that I'd need to be thinking about recruiting all the time, or worse: there won't be enough momentum to take off properly
If/When I need expand further then the formula will already be tested

in terms of retirement - I don't I'll ever retire lol if I don't work at least 12h a day it feels like the day was wasted

 

[bazaarboy]

Then employ a few people over time. I'll start at £50,000 per annum, and throw in my existing consultancy for free .

bargain! ok to work on an earn-out clause?
what do you consult people on?

 

[bazaarboy]

Anything you want me too.

that's the can-do attitude I want to see! email in trust

 

[bazaarboy]

I might be missing something here but if you've got a product that you can provide currently as a one man set-up then why does it suddenly need the jump to 10(ish) people? Is there no scalability at all here? Could you get by on 1 additional programmer, 1 or 2 sales staff and 1 or 2 support staff? Why is that number of staff a good start compared to any other number?

A prime cause of failure for businesses is trying to expand too rapidly so even if your turnover is good if you're not collecting the money in a decent timescale you're effectively overtrading.

Essentially a lot of thought would need to go into your business plan before you're likely to convince anyone to invest in you. I have no idea what you're like so this is just offered as a general comment but just because you're good at making this product doesn't automatically suggest you'd be good at managing a team of staff to continue with it, you may be great but it's another reason why starting smaller might be better.

you raise valid points, and it could be that hiring an office manager is a good idea for taking care of the administrative part of taking care of staff and day-to-day tasks of running a business.
also, I might not make a good team leader etc - the risks are clear

in terms of minimum size, I'm not sure I can expand slowly

I currently have few clients which I can manage personally
If we start seeking out business then the nature of the business changes immediately:
a team needs to on the road to demo the system and discuss sales and support options
we'll need a business premises, one or two office juniors, at least two programmers and at least one sales person - plus the office manager mentioned before - that 5-6 people already. What happens if someone's on leave, or sick?
ok add another one or two (say one more in sales and one more programmer / support) to ensure a full complement at any time - that's now gone up to 8 people

 

[bazaarboy]

You would indeed benefit from the right sort of venture capital and business partners / associates rather than a buy-out.

If your product and business are in order and you have the platform and orders to support some up-scaling look for an external investor or even better someone to joint you as business partner / investor. You do not need to go on the Dragon’s Den to achieve this

You can manage and indemnify against risks.

Alternatively, rather than targeting your product at the big corporates continue to grow and develop with smaller businesses.

When you are growing a small business focus on profit and your own earnings not the business turnover. If you expand for turnover you may find core costs increase at a disproportionate rate due to overheads, staffing, indemnities, liabilities, office accommodation and so on.

I assume as you are effectively a 1-man operation most of the turnover becomes your income whether this is through salary or dividend?

If you work towards a business where turnover is £1m your profit may be quite low initially during growth. Say gross profit is 5-10% you may not be much better off but you will have a lot more liabilities and risks to manage. Your own income (assuming it is currently principally through dividends) may even go down, where you may have to pay yourself a better salary rather than through dividends but then you end up paying more tax, as you will need to re-invest business income back into the business and ensure it has sufficient contingencies and reserves built up over the next couple of years.

A reduction in net profit, in the face of an expansion phase, doesn't worry me - as I've mentioned, my main interest is the success and establishment of the product and profitability is a secondary concern
I've even considered going down the open-source route, but clients seem to hate that as they feel it can't "as good" as a paid product, but that's another discussion...

the aspect that worries me is the unknown element of managing staff and a business that's becoming all "grown-up"
I admit I'm not a businessman, though I'm willing learn and adapt

 

[bazaarboy]

Proceeding on the basis that you do need 8-10 people immediately to make the next step then I suppose you need to work out costings, what do relevantly qualified programmers, sales staff and support staff cost? Will you have to pay them a bit extra to encourage them to come to a company that is just starting up or can you sell it to them based on your vision and (possibly) an incentive scheme whether that be a percentage of the profits if successful or bonuses? Are you willing to give up a percentage of your business to someone offering capital or are you going to try and get a commercial loan where it's purely to get repaid? There's also a question of whether you are too closely tied to the product for it to be initially viable without your input e.g. if the worst comes to the worst and you become too sick to work for a few months then would the business be able to continue to grow or at least carry on without you?

I've been asked at least 30 times what would happen if I got run over by a bus...

You'll now also need a suitable location and accomodation for all these staff, someone to administer the HR and payroll (don't forget to put in place procedures for grievances/hiring/firing etc), professional insurance, heating/lighting/water, council tax and so on. Are you going to be providing company cars/uniforms for the staff or maybe giving them an allowance or is it all covered in their salary?

hence my initial thought of outsourcing (in the initial phase at least) if it all goes TU this would limit the costs / damages

I don't mean to teach you how to suck eggs and I've never started a business but these are all things that occur to me and it's far from an exhaustive list.

i need to be taught to suck eggs! lol