by Diccon Hyatt
Joe Allegra knows a thing or two about selling companies. He sold his software firm, Princeton Softech, in 1998 for $43 million. In 2001 he became a venture capitalist, and is currently a partner at Edison Ventures, where he specializes in investing in companies that have $4 to $20 million in revenue. Edison likes to buy a company, build its business, and sell it again about five years later for a healthy profit.
Since Allegra joined Edison, the Lenox Drive-based venture firm has invested in 190 companies, and has overseen more than 100 exits. Allegra has managed about a dozen of those company sales. He has also served on the board of directors for 25 companies.
So, if you’re a small business owner, when should you start thinking about selling your company? “You should know when you start your company,” says Allegra, who will speak Wednesday, April 9, at 6:30 p.m. at the Princeton Marriott for the New Jersey Entrepreneurial Network session on “Exit Strategies — Why, When, and How to Sell Your Business.” Visit www.njen.com. Tickets are $50.
Allegra says a company founder should always be mindful of her plan for selling a business, because selling a company doesn’t begin with a search for buyers. It begins by developing a strategy for organizing the company for a potential sale. For instance, Allegra says, a business owner should have goals, and a timeline in mind. A company might, for example, plan to go from $5 million in revenue, increase it to $25 million, and sell the company for $75 million, within five years. Any potential investors in the company should know that timeline up front.
Allegra says a disagreement between investors about this can torpedo a sale. He recalls one incident where a company’s owners got a good offer for the company, but didn’t sell it because one of the other investors had bought into it at such a high valuation that they had to hold out for more. Unfortunately, the company’s fortunes took a turn for the worse and they had to sell it later at a loss.
Shop Around. Allegra says it pays to understand who the strategic players are in your industry, and to build relationships with them. Larger companies find it easier to acquire companies with whom they already have a relationship. “I often think the best acquisitions come from existing business relationships, where people can work with you and see that there is value to what you do,” Allegra says. The idea is to make it easy for them to imagine integrating your company into theirs.
Specialize. Allegra says small companies tend to have more appeal when they specialize in a niche product. Larger companies tend to have a whole suite of products. They look for small companies to fill holes.
“Not only does it help them to sell more of your stuff, but they might lose in competition because they didn’t have you,” he says.
Be Prepared. Allegra says it’s a good idea to always be prepared to exit, in case an opportunity comes along that was unexpected. In the current environment, Allegra says, companies are flush with cash, but their operations are slim from cost cutting during the great recession. That means many are on the lookout for ways to expand their business, including buying smaller companies.
Allegra says it’s essential to keep financial reports in good order in case someone wants to look at your books. “I always used to say, when I was running a company, that you need to run it like you’re going public,” Allegra says. In a way, you might be, without knowing it — if you are bought by a public company, your financial reports will have to be integrated with theirs. “If it’s not clean, it elongates the process and can cause people to walk away,” Allegra says.
Bail Out. That’s all well and good if your company is thriving, but what about selling a business that is on a downward trajectory?
“I always tell people, if you have a great company, you have choices of how and when to exit,” Allegra says. “If your company is going downhill, you may be forced to exit.” There are still things a business owner can do to make the best of a forced exit.
“The key issue is survivability,” Allegra says. “If your company is going down, you need to get it to profitability. Then you can survive. If someone wants to buy your company, even if it’s not in great shape, and they sense you’re in tough financial shape, that’s something companies will sniff out and they will take advantage to the max.”
The key to avoiding a beating is to retain the ability to say “no” to an offer. “You put your fate in your own hands by being cash flow positive. Cut your expenses to the bone. Do whatever you have to do to be cash flow positive, even if you’re not doing well, at least you’re surviving. If you can show the ability not to jump at the first offer, you’re in much better shape.”
Don’t be a Techno-Fantasist. From working in the tech industry, Allegra has learned not to become too enamored of a company’s technology. “Really look at what it is you do and make sure that you’re addressing it to real problems,” he says. “At the end of the day, people buy software to solve problems.”
Allegra recalls that Princeton Softech had developed technology that allowed different software systems to communicate with one another. It was an impressive bit of engineering, and the company decided to market it as a way to connect financial systems together.
Allegra says one of Softech’s competitors had similar software that could perform similar tasks, but was doing so on a very shallow level. In Allegra’s view, they had an inferior product, but were getting business anyway. To solve the mystery, he went on a “listening tour” of his customers to find out what they were actually using his product for. What they told him went against everything he had believed about his own product.
“Inevitably, they’d tell me this very long story about problems our software was solving. I could never figure out what it had to do with our product.” He said the customers would tell him about problems they had been having at their office, where their systems weren’t working well, and that it was affecting their ability to close sales. Allegra asked his clients if other companies in the industry had the same problem, and it turned out his product was a good solution for an industry-wide problem.
When Allegra started advertising his product as a solution to the problem, it took off.
“We’d call people and ask, ‘hey, do you have this problem with this product? Well, we just solved it for this or that company.’ We immediately got an audience. People might have been interested in it before, but not quite sure why they’d use it. Now, there was an urgent problem that it fixed. That’s a lesson for all of us. You shouldn’t be selling based on what you can do, you should be selling based on what a customer is looking for.”
Allegra grew up in Hawthorne, where his father was an insurance salesman for Prudential and his mother was a homemaker. He was an economics major at Rutgers, and later got an MBA at the New York University Stern School of Business. A self-taught programmer, Allegra got a job with McDonnell-Douglass Automation — a now defunct branch of the defense contractor, where he was a field support technician. He then went to work for famed Princeton software company Applied Data Research. He stayed at ADR for a while after it was acquired by Computer Associates in the late 1980s and then struck out on his own to found Princeton Softech.
He says his experience in product management as well as the finance side of operations has given him good insight into how companies work. Allegra says those are good things for any venture capitalist to have. “So when you talk to the entrepreneurs, you know a little bit about what they’re going through,” he says.
In retrospect, Allegra believes he could have done better with the Princeton Softech exit. He says business owners need to decide early on if they are going to run their companies indefinitely, or whether they plan to sell, and plan accordingly, he says.
“If you want to make a big capital gain and a big exit, get people to help you and guide you, and be prepared for it,” he says.
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