Entrepreneur 2 Entrepreneur: Chris Heim on exits

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Chris HeimThank you to Split Rock Partners  for underwriting the Entrepreneur 2 Entrepreneur series.

Veteran Minnesota tech entrepreneur Chris Heim has identified what he considers to be a “brain defect” that keeps him coming back to the entrepreneurial table again and again.

His journey began as an intern with HighJump Software — the same company that he would eventually sell for $90m to 3M in 2003.  From 2006 – 2011, Heim and partner Dan Mayleben acquired and grew Amcom Software to $52m and 250 employees before liquidating for $163m.

Their latest venture involves the purchase of Axium Software through 2ndWave Software, with backing from General Catalyst Partners.  Their intention with Axium is the same approach: scale revenues through organic growth and complimentary acquisitions.

“There’s a lot of similarity in terms of how successful enterprise software companies operate…I’d go so far as to say that 99% of it is the same mechanics,” Heim says.  He almost makes it sound easy.

Advice #1 – Focus on creating a great company and the exit will take care of itself

There was a time when we were at HighJump that we undertook strategies to make ourselves attractive to a particular acquirer. The acquirer never showed much interest so we decided to refocus on creating a great software company with growth, profit, sterling customer satisfaction and innovative products. We put this together and potential acquirers emerged including the one that we originally tried to attract.

From time to time, we encounter an entrepreneur that says they are building the company to be acquired by a certain company. We think that is a mistake and instead they should focus on creating a great company and the exit will take care of itself.

Advice #2 – Build the company not to need money

The biggest mistakes I made as an entrepreneur were after I raised a bunch of money. Every idea was a good idea and because we had money in the bank, we felt like we had to spend it. There is tremendous discipline running a bootstrapped company where every dollar you spend must be scrutinized to make sure it is moving the company forward. This is the time to experiment with things like the right business model without the scrutiny of outside investors.

Once you have a business with growth, profits and the right business model, then you can raise money to step on the gas. If you can get to this point without a ton of outside capital, you will retain more equity for your team and you will have your choice of investors. Many times we encounter an entrepreneur who believes raising money will solve all his ills but his business is clearly not ready for that.

Split Rock Partners

Advice #3 – Hire good advisors

There is not necessarily a correlation between the best advisors and the price to get a job done which is a lesson I learned the hard way. I once setup a stock option program with a local lawyer and when I got the bill, I was shocked at the size because he needed to research stock options and had to write a plan from scratch. I later used one of the two largest, most prestigious firms in town to do the same thing and the price was a fraction because they do this all the time. This plan also contained a number of time tested elements that saved us aggravation.

Hiring good advisors that specialize in your business does not necessarily cost you more and can protect you down the road.

Advice #4 – Run a clean shop

There are common mistakes that we see in many small software companies that we look at that hurt the ultimate price that is paid for the business. These include sales tax (it is easy to owe sales tax in a state if you do business there), revenue recognition (the rules are constantly changing here) and agreements around intellectual property. Some of these areas are very difficult and expensive to clean up after the fact so if you can address proactively up front that is best. We once bought a company where the entrepreneur never had a formal intellectual property agreement with a contractor that he had used for 20 years. The contractor later claimed he owned the software that the entrepreneur had paid him to develop and it cost the entrepreneur about 500K to resolve. This should have been resolved with a quick signature on a short document at the start of doing business with the contractor.

Advice #5 – Avoid common mistakes

While we personally have made every mistake in the book, we have the opportunity now to see common mistakes in many businesses. Some of these include the CEO who does not listen, the failure to deal with a poison employee or unrestrained optimism on the part of the entrepreneur. The failure to deal with a poison employee is almost a given in most small companies. There is usually one person that might be very talented but is extremely divisive in a small company. The business usually operates much more smoothly when this person is gone but many entrepreneurs don’t deal with this much to the chagrin of most of the other employees. This tends to be an early win for us as acquirers.

Advice #6 – Be prepared

You never know when someone will come knocking on your door with an interest in buying your company. For that reason, you should always have an updated PowerPoint deck that would interest a potential investor or acquirer on hand and be able to sell that deck effectively. You should be prepared for these opportunities that may or may not come along too often.

Comments

  • Bryan

    This is good advice that I’ll listen too…

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