Selling a Startup: Cashing In Doesn't Always Mean Checking Out

In 2004, software entrepreneur John Springer-Miller sold his 20-year-old hotel software company -- Springer-Miller Systems in Stowe, Vermont -- to Par Technology, a worldwide business software and hardware provider. But selling didn't mean saying goodbye.

Instead, Springer-Miller stayed on as CEO of his division and kept his management team intact until early 2010, when he took a part-time position as chairman. He also continues to be the landlord of the division's 30,000-square-foot office building.

Entrepreneurs like Springer-Miller who decide to sell a thriving startup usually have a second crucial decision to make: Whether to stick around and work for the new owners. Giving up the decision-making reins of a startup while keeping a hand in day-to-day operations can be liberating, or it can be a spirit-sapping exercise in frustration. How the story turns out often depends on the choices a small business owner makes long before they actually sign off on a sale.

Shared Outlook, Shared Respect

Springer-Miller saw his company thrive under its new owners, and he has enjoyed a solid, successful long-term relationship with Par Technology's senior management. As far as he's concerned, that success was no coincidence.

"We came close to selling a few times, but I worried if any of the suitors would take the proper care of our customers," Springer-Miller said. When Par Technology approached him, he felt that the company's CEO, John Sammon, was on the same page -- something that had not been apparent with other prospective buyers.

"We had a common business philosophy and a shared respect," Springer-Miller stated. They also agreed that Springer-Miller would continue to serve as the face and voice of the company, enabling him to quell customers' fears about a disruptive ownership change.

The second consideration for Springer-Miller was purely pragmatic: Par Technology was 10 times the size of Springer-Miller Systems and had a worldwide presence. Those turned out to be key advantages, allowing Springer-Miller Systems to grow its sales significantly since being acquired without increasing the division's 200-employee base.

Ultimately, Springer-Miller said, he views the sale as a success because he took his time and was careful in selecting the right company to sell to.

Culture Clash

Not every acquisition story, however, has such a happy ending.

Just ask Bruce Carlisle, who sold his 7-year-old digital marketing agency, SF Interactive, to boutique advertising agency Butler, Shine, Stern & Partners in 2003. Carlisle was paid in stock and stayed on as president of the company for a year. After leaving, he founded Conference Hound, an online directory of business conferences.

For several years before the sale, Carlisle had been friends with Greg Stern, CEO of Sausalito, California-based BSSP. "The friendship and sense of a shared philosophy toward business probably masked the cultural difference between our two companies," Carlisle said.

Carlisle subsequently realized that the creative culture of BSSP didn't understand the tech-driven culture of SF Interactive. As a result, he said, there was "subtle and not-so-subtle disparagement of the tech side, which sometimes hurt employees who took pride in their work."

In hindsight, Carlisle admits he should have recognized the culture clash and fought it more than he did: "Don't minimize the impact of culture clash. Expect it, and deal with it head-on."

Carlisle came up against another problem that often impacts founders who decide to stick around after the sale of their company: His role as president was never clearly defined. "It's a challenge to find your place" in a buyer's organization, he said. As a result, he now advises anyone in his position to clearly plan with the new owners what their role will be before closing the sale.

It's Never Just About the Numbers

Mary Kamp, a Houston business broker, has made the transition from owner to employee many times over. For years she owned AllSource Business Brokers, which helps entrepreneurs sell their businesses. Then, in 2010 she became the client, selling her brokerage to Tier 2, a national consulting, website services, and business brokerage firm. As part of the deal, Kamp agreed to work as a consultant for Tier 2 for six months, eventually extending her employment contract for an additional 12 months.

Throughout those 18 months, as she shifted from owner to consultant, Kamp said she faced many of the same issues she saw other sellers confront. "It was a difficult adjustment to accept the changes the new owners made to the business, which were very different from what I would have done," she said. Sales volume also dropped after the change in ownership, which only made matters worse.

Still, Kamp stuck it out, taking a pragmatic approach to dealing with the challenges. "I'm paid a consultant fee each month, and I figure I'm being paid fairly to be OK with all the changes," Kamp stated.

Entrepreneurs often agree to work for the new owners as part of the sale, with their compensation rolled into the sales price. Kamp thinks that's a bad idea; instead, she believes, a seller who stays on should be paid as an employee or contractor and should have a clear job description.

Kamp also advises sellers to keep their employment contracts as short as possible. If necessary, they can always negotiate an extension, as she did.

When Kamp ran AllSource, she brokered the sales of small businesses, such as shops, restaurants, and tanning salons, as well as the mergers of multimillion-dollar oil industry companies. Her professional and personal experience taught her that selling a startup is never just about the numbers.

"Any sale is very emotional and involves personalities that don't necessarily get along," she said. Commitments that the entrepreneur makes to the buyers need to take that into account, which is why many sellers seek buyers who share their values and business philosophies.

A 'New Era' for a Family-Owned Business

Wine industry executive Pete Seghesio took many things into consideration when he decided to sell his 106-year-old Seghesio Family Vineyards to Leucadia National, a New York investment company. Wine is a small niche for Leucadia, which has more than a $1 billion in annual revenue from holdings in manufacturing, oil and gas drilling, gaming, real estate, and medical devices.

The sales contract requires that Seghesio work for the company for four years. But instead of being CEO, he is now the wine grape grower, running the farming operations and representing the brand in marketing and promotions.

He's currently basking in the afterglow of the deal. "This is the tallest I've walked for years because I have less weight on my shoulders," he said. Instead of working 60 hours a week and waking up at night worrying about problems associated with running a winery, Seghesio now works 45 hours a week and enjoys his time off.

He said that before the sale, he was drowning in "HR negotiations, safety meetings, employee meetings, motivating the sales force. I'm very good at running a winery producing 70,000 cases. But we were up to 100,000 cases and it was darn near killing me."

A big factor in Seghesio's choice of Leucadia as a buyer was his nine-year friendship with Erle Martin, head of Crimson Wine Group, the wine division of Leucadia. Both men, Seghesio stated, are equally intent on not interrupting the quality of the wine or the winery experience for customers.

Nevertheless, a massive holding company is likely to make different business decisions than owners of an historic family winery would make. Does Seghesio think he has the emotional distance to handle that? "I haven't experienced a need for that yet," he answered, after a thoughtful pause.

Then he added, "I look at it this way: This is a new era, and the new owners will be making the choices now."

Selling a Startup: Advice from the Pros

Are you negotiating the sale of -- or thinking about selling -- your startup to another company, and wondering whether you should stay on? Here are some things to think about, from entrepreneurs who have been through the experience.

• Work out a clear plan for what your role will be before the sale is completed. Don't wait until after the sale to see how you fit into the new company's culture and executive mix.
• Make sure your business philosophy and values match those of the new company's executive team. Or at least decide whether you will be able to adapt to a different set of values.
• A good friendship does not necessarily make a good business relationship. When talk turns to one friend buying another one's company, the conversation needs to be about how the companies will function, not about the friendship.
• To be sure you will be fairly compensated as an employee, negotiate a salary or a consultant contract. Making your salary part of the sale price leaves little room for later negotiations.
• Initially, negotiate a short-term employment contract, so that you can see how things work out. You can always negotiate an extension.