Peter Helmer — November 20, 2016 Harry Smith has built a $ 35 million (sales) business over the last 30 years. He is now thinking about retirement and wants to sell the company.
He’s talked to several investment bankers. All of them have told him The Harry Smith Company (HSC) is not worth his asking price.
Harry has a couple of problems. One, HSC’s sales are stagnant. Two, Harry dominates the company. This is especially true in the sales area.
How can a new owner be confident that customers will remain loyal after Harry leaves?
To get his asking price, Harry must build a sales organization that can (a) grow the company and (b) run without him.
Current Situation
Harry has a sales manager and five salespeople. But he is a key rainmaker.
He has strong relationships with HSC’s four largest customers who generate 40% of the company’s revenue. Many of his relationships go back more than twenty ears.
Harry’s sales manager, Mary, nominally oversees the five-person sales team and a marketing manager. However, Mary has extensive sales responsibilities and does relatively little managing. Harry runs the show.
HSC has about 15 customers. The customers are based in the Northeast and most have sales of $ 500 million or more.
HSC’s sales team develops deep relationships with customers via face-to-face selling. The sales team focuses on HSC’s higher-end products―$ 100,000 plus. The company’s sales cycle is usually six to twelve months.
The company faces several sales challenges:
- Competition―More competitors are entering HSC’s market. Traditional barriers to market entry have eroded over time
- Concentration―HSC generates most of its business from a very small number of customers.
- Consolidation―HSC’s customers are being acquired by larger companies not likely to buy from HSC
- Relationships―Harry and his sales team have their primary customer relationships with executives nearing retirement age.
Next Steps
Harry is aware of his problems. He is willing to invest a lot of money to make HSC more salable.
He plans to take the following steps:
- Set aggressive but realistic revenue goals.
- Create a sales strategy to achieve those goals.
- Determine what kind of sales organization he needs to implement the strategy.
- Create the sales organization.
Here is what that process looks like:
He realizes that it will take three years to years to build a sales organization that can penetrate new markets and another two years to make it truly effective.
Step #1―Set Sales Goals
HSC’s sales have been flat for the past three years. The investment bankers told Harry that to attract buyers, HSC needs to generate at least $ 50 million and grow by at least 5% a year after that.
Harry’s goal is to get from $ 35 million to $ 50 million in five years. That’s a compound growth rate of 7.4% a year.
Harry commissioned a market research study which suggests that there is a very large―and growing―market for HSC’s lower end products. Those products now represent only about 15% of HSC’s current sales.
The market consists primarily of smaller companies with sales of $ 5 to $ 25 million. Whereas HSC’s current target market includes some fifty large companies in the Northeast, the new market has hundreds of companies across the US.
Step #2―Develop a Sales Strategy
Now comes the hard part. How will Harry reach his new market?
His key tasks are:
- Identifying the best market segments.
- Developing a message and compelling offerings.
- Designing a sales organization to reach the market.
- Developing a plan and time line to attack the market.
Step #3–Designing the Right Sales Organization
To implement its sales strategy, HSC needs a completely different sales organization.
HSC’s sales team now focuses on face-to-face selling to a relatively small group of customers in a relatively small geographic area, the Northeast. That won’t work with the new sales strategy.
Trying to reach hundreds of companies around the US with a field sales force would be prohibitively expensive. It would also be inefficient.
HSC needs to build an inside sales team which can reach the target market effectively. This means selling primarily by phone and email.
Harry can’t create a new sales organization overnight. He must find a way to maintain his existing customers while he builds a sales organization to service future customers.
He needs two parallel sales efforts: a field sales team focusing on the larger accounts and an inside sales team focusing on the smaller accounts. Harry also needs to drastically reduce his involvement in sales.
Step #4―Building the New Sales Organization
Harry will need three years to build his new sales organization and get it up to speed. And he’ll need another two years to build sustainable growth.
Here is the timeline:
- Year #1―Develop strategy, design the sales organization and processes and begin implementation.
- Year #2–#3―Continue to build the sales team.
- Years #4–#5―Strengthen team and expand markets.
Creating Value Isn’t Easy
Harry realizes that making his company more valuable will take a lot of time, effort, and money. But he is willing to make the investment.
There could be a huge payoff for building a growing company with an effective sales organization. The alternative for Harry is continued stagnation and a declining valuation.
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