When the Sum of the Parts is Greater than the Whole

Howard Tullman

WHEN THE SUM OF THE PARTS IS GREATER THAN THE WHOLE

In my last blog post (See http://www.inc.com/howard-tullman/what-the-boss-can-teach-us-about-loss.html), where I talked about when it’s the right time to shut down an unsuccessful business, I said that — especially in the context of a “fire sale” — most tech startups and digital businesses don’t usually have too many hard assets to offer, but that, if the entrepreneur goes about the process correctly and doesn’t wait too long, there is still plenty of potential value to be realized. Sometimes, it turns out, that the sum of the parts is greater than the value of the whole.

I’ve gotten several inquiries and requests to detail the sale process a little more and specifically to describe in greater depth the kinds of residual assets which can retain some of their value even as the business itself slowly circles the drain. Knowing what you’ve got to sell and how to present it in the most favorable light is just as important as knowing when it’s the right time to sell. I’ve described a bunch of these “assets” (tangible and intangible) below, but it’s also very important to appreciate the overall context, some of the basic ground rules as you get the whole program started, and some of the complex psychology involved.

It’s critical for everyone (especially the founder) to be open and willing to approach and pitch as wide a population of possible buyers as the team can identify even when some of those meetings will entail eating a healthy helping of crow and other assorted and sundry humiliations. Having an outsider (with less emotional skin in the game) represent the business in any negotiations or discussions with prospective buyers makes a lot of sense as well. This is especially essential when the pool of prospective purchasers includes former competitors because, when you’re winding your business down, you can’t let the conversations get all tangled up in discussions about who won, who lost, and why or they’ll never go anywhere. The only goal is to get the relevant deals done – as quickly and painlessly as possible – and then to get on with whatever is next. Blame, anger, revenge, disappointment and everything else needs to be put aside.

And, as obvious as some of this may seem to outsiders, I’ve found that, when you’re stuck in the middle of the swamp and sinking, it’s hard to look objectively at the situation and try to make the best of where things actually stand. Entrepreneurs – by their very nature – regularly vacillate between the highest highs and the lowest lows and — when the end of the dream is in sight – they tend to get really down, to paint everything black with the same brush, and to undervalue some of what they have built and actually accomplished. It helps to have someone else (from the industry, but not the company) take a fresh look at all of the possibilities and evaluate all of the various assets.

And finally, specifically for the founder, even if you’ve made some kind of peace with yourself about the shutdown and you’re ready to throw in the towel and just walk away, that’s rarely the best action for all of the others concerned about and invested in your business. You don’t want to throw out too many of the babies you’ve built with the bathwater — even when that seems like the easiest and least painful course.

So, what are all these valuable assets?

(1)   Sell Your Systems and Your Software

This pretty much goes without saying, but it’s rarely fertile ground. And there usually isn’t that much to actually sell. In the world of the cloud and SaaS, most startups don’t “own” the administrative programs and systems they use (like Salesforce, etc.). So, there’s nothing to sell even if they have built custom tools that operate on top of these platforms because – as often as not – those adaptations and customized enhancements are very specific to the business itself, often rift with spaghetti code and poor documentation, and held together with digital duct tape.  Most acquiring competitors aren’t interested in paying up for or maintaining dual systems that perform essentially identical business functions. On the other hand, if you’ve really cracked the code and built some special, black-box, technology that competitively sets your business apart, then stand your ground, set your price, and don’t sell yourself short.

(2) Sell Your Customers and Your Supporters

By and large, customers want painless, cost-effective, and uninterrupted solutions to their problems. The clear emphasis is on maintaining business as usual. They are frighteningly indifferent to who actually supplies the tools and technology needed to meet their needs and, as a result, so long as midstream transitions can be made seamlessly and as invisibly to the clients and customers as possible, getting paid to switch your customers to a competitive platform is an attractive and common outcome in cases like this. Pretty much the same deal applies to social media assets like followers, etc. although the big social media sites haven’t made this process easy. Of course, the whole migration will be much easier if you have been careful not to spend a great deal of your time knocking the competition to your own customers. Transitions that entail transfers between arch enemies are never that appealing to customers. This is why it’s always safer to toot your own horn than to spend time raining on the other guy’s parade.

(3) Sell Your Sources and Your Suppliers

Every business has sourcing and supply chain issues and, in many competitive markets, suppliers have agreed over time to restrict their business dealings to only some of the players in their marketplace. You may have some of these exclusive or protected connections and relationships and providing access to them to someone not already in the inner circle is a highly valuable commodity. Endorsements and most favored nations deals are similar areas as are channels where suppliers have anointed only a few players to make direct connections to their resources with everyone else being required to deal with the designated gatekeepers.

(4) Sell Your Leases, Your Locations, Your Permits and Your Licenses

Putting your business where you did and securing favorable terms and leases may turn out to be among the very smartest things you actually accomplished. Certain businesses are mainly about “location, location, location” and you may be sitting on some of the best places to be in town. Sometimes it’s just as bad to be too early in your business as it is to be too late, BUT the early birds do tend to get great leases in parts of town that are still in transition, offer below market rates, and thus have substantial embedded value. In the same fashion, because regulators in new areas of disruptive innovation are constantly playing catch-up, you may have permits and licenses that are grandfathered or which were otherwise secured before the city or state or other governing body tried to pull up the drawbridge and shut down the approval process. These can be invaluable aids and assets to well-financed latecomers to your market.

(5) Sell Your Sponsors and Your Partners

Sponsors of B2B businesses are generally in it for the PR and the exposure and, as long as they’re seeing the prospect of increased opportunities in that area, they’re likely to ride along. Technology partners are in it for the products and services they can ultimately sell to you or through you to your clients and customers and, here again, those relationships and connections should be relatively easy to transfer. In the startup world, however, the tech players in particular are a very small set of companies and it’s a better than even odds bet that they’re already connected to most of the other players in your sector.

(6) Solve Someone Else’s Problem and Sell Them Your Secrets

You may have lost the overall battle to competitors in other parts of the country, but, in your home town, you may be the best there is and there are plenty of people elsewhere trying to figure out a quick and easy way into your market as they look at how best to expand their businesses. You can save them a lot of time, money and mistakes by smoothing the path for them. And don’t forget also that, in parts of the business, you may have figured out a better, faster, cheaper and more effective solution than the competition ever will and that’s a major asset to put on the block as well.

(7) Sell Your Staff

They’re not chattels, but they do need jobs and they also know almost as much about the business as you do. So, do them a favor and help find them a home. They may want to follow you loyally to the next great adventure, but you don’t have one at the moment so don’t let your ego get in their way. Loyalty is great except when it’s a liability.

(8) Sell Yourself

Suck it up and go to work for the buyers for a period of time. If you can pull this off convincingly, and not drive yourself crazy while you’re doing it, it will make all the other assets more valuable. And you might even discover that you’re better at doing simply what you love to do in your new role (like selling or designing) than you were at worrying about a million details and W2 forms at the old place. And a lot happier too. Not everyone needs or wants to be the boss.          

A little patience and some crucial perspective (usually gathered from people who’ve been there before) can make a great deal of difference in how the whole thing ends up. As surprising as it may seem, it’s really not all about you. On the other hand, as you do walk away, keep in mind that your work is just what you do, not who you are – it’s easy for entrepreneurs to confuse the two.

Making it too personal is a great way to make sure that it’s not productive.  Being honest with yourself and living with the ambiguity and very mixed feelings is crucial. As Death Cab for Cutie says in The Ghosts of Beverly Drive: “You wanna teach, but not be taught and I wanna sell, but not be bought”. Selling isn’t easy – especially selling yourself – but it’s all part of the grand bargain you make when you sign up to start something up. This is the business we’ve chosen. What you’re selling may change from time to time, but you’re always selling something.

 

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