When It's Time For A Small VAR To Tap Out
A Q&A with Elizabeth (Liz) Harr, Partner, Hinge Marketing
Forrester analyst Jay McBain's life's work is analyzing the channel. When he recently told Channel Executive magazine that 40 percent of the channel is poised for retirement over the next seven years, it got us thinking about exit strategies (and acquisition targets, but that's a future story). Liz Harr, the subject of this Q&A on, Business Sustainability Planning, orchestrated an exit strategy of her own. Today, Harr is a partner at professional services marketing firm Hinge and a frequent contributor to VARinsights.com, but not long ago she was a reseller of Microsoft CRM and ERP software. Here, Harr shares some wisdom on knowing when it's time to exit, optimizing the valuation of your company, and minimizing collateral damage in the process.
VARinsights: Please describe the reseller business you exited.
Liz Harr: I co-founded a firm in the year 2000 around a business model that resold Microsoft CRM and ERP software. Over the 9 year period that we were in business, we targeted small and mid-sized businesses in the Mid-Atlantic, but also served a fair number of not for profit organizations. As we grew, the majority of our revenues came from consulting and custom development, with a smaller amount coming from actual implementation work.
VARinsights: Why did you choose to exit your business to seek other opportunities?
Harr: By the time our firm hit the 8 year mark, the economy collapsed, and small firms like ours battled many fronts. Not only did new business decline, but current clients struggled to pay their invoices (one even asked if they could pay us in gift cards!). Further, all of our marketing eggs were in one basket so to speak – as a VAR in the Microsoft partner channel, we did very little of our own marketing and had more than enough business from the channel partner and referrals. Although we didn’t have the answer immediately, it was clear that a dramatic shift needed to take place in our business model. We explored the range of potential options that seemed to make sense: expand our target audience, focus more exclusively on just one technology (i.e. grow through specialization), expand beyond the single partner channel, or aggressively build and then grow an internal sales and marketing team. The option we gave the least amount of attention actually ended up being our ultimate path forward: merging with a friendly competitor. Navigating the extreme challenges of a down economy on our own – as a tiny VAR – seemed less and less feasible, no matter the strategy (expanding our target, specialization, etc.). Uniting with another VAR however – a firm who knew the technology, understood the client problem set, and sold complimentary (but not the same) solutions we did helped us increase our bandwidth and market share simultaneously.
Not everyone travels with a merger. I was more of the organizational development and growth person, while my partner was the domain expert. And while I loved the challenge of growing my own firm, I became interested in my “next chapter” being about growing firms in general vs continuing to grow my own firm within the much specified context of being a VAR and channel partner. The merger therefore was my exit, and I became a partner at Hinge, where I help multiple firms grow on a daily basis.
VARinsights: What were the critical planning considerations you needed to address when initially preparing to exit your business?
Harr: Taking the firm out of business was never on the table. We had clients and employees relying on its existence (challenging as that was). The very first step we took then – even before determining that we would merge with another firm – was to obtain a valuation of our business. This step gave us the critical information we needed to understand the best path forward – whether an acquisition (being acquired) or a merger. Our assets were primarily in our contracts and clients – we had not fully developed some IP we had been planning for so it came down to the fundamentals. Once we determined that, based on our valuation, a merger was the best option; we then sought out candidate partners. Culture was of course a priority, but so too was the potential for the absorption of our people. In the end, our clients didn’t have interrupted service and a few of our people decided to continue in the new merged entity.
VARinsights: What challenges did you need to address while executing your exit strategy?
Harr: As exiting goes, our experience was fairly painless and straightforward. The entire strategy took nearly 10 months – so we had plenty of time to properly plan and account for the details.
VARinsights: What advice would you give other VARs or MSPs considering exiting/selling their business to pursue other ventures?
Harr: Always have an eye on your assets. Surprises happen. Just like you keep a constant pulse on certain metrics like your revenue, your wins, your leads etc., you’ll do well to give equal priority to considering those assets that have the most probability of adding value to your firm. Whether your key assets are your lists, IP, contracts, ongoing relationships, or published expertise (just to name a few), ensure that part of your quarterly or monthly planning involves checking in on the health of these assets. This can also keep you focused as a firm on your brand and what you stand for – which in turn can foster healthy and sustained growth. https://hingemarketing.com/blog/story/firm-growth-a-primer-for-professional-services
Cultivate – and prove – your expertise. While a healthy roster of contracts, steady growth rate, strong revenue and the like are all inputs to your valuation, expertise is that intangible that is so attractive to potential suitors because it’s so hard to come by organically. Published expertise won’t necessarily impact a valuation, but it can impact your ability to be on a potential acquirer’s radar. Now that I work with multiple firms simultaneously on their path to growth, sometimes which results in an exit or acquisition, I find time and again that the more of a known expert you are, the easier your transition into another venture will be. Even if you’re pursuing a path that’s dramatically different from the firm you’re exiting, being able to demonstrate that you know what it takes to build high visibility around your expertise signals to the outside world that you’re a unique bird in an otherwise commoditized world.
Elizabeth (Liz) Harr, a nationally recognized expert in high-growth marketing, leads Hinge’s Technology and Consulting practices. She writes regularly on marketing, branding, and high-growth strategies for top industry publications and Hinge’s blog. She is co-author of two books: The Visible Expert® and Inside the Buyer’s Brain. In addition, Liz speaks at conferences around the country.