Buyer, beware!

Clayton Christensen has noted that companies are often at their most profitable shortly before they die. As a software developer this has a certain resonance. Say, for example, that you owned a software development company, with a client base that paid annual maintenance fees.

Now look at your expenses. Those software developers you employ sure are expensive, aren't they? So why not cut back on their numbers? Lets say by about 100%. Yes, that's right - sack the lot! And give the sales team bigger bonuses! Now look at your revenue stream - new sales, annual maintenance fees, and a huge chunk of your expenses gone. In fact the company has never been more profitable!

But there is a tiny problem here: the competition. Maybe, just maybe, they haven't been as greedy. Although nowhere near as profitable, they have been investing heavily in their product. With time, your profits are going to diminish as your customers, increasingly unhappy at their level of service, slowly (1) drift to the the competition. But if all those excess profits go into your back pocket, do you really care?

Hmm. Lets say that you are a little more clever than this. Sack that old, experienced, expensive development team, and replace them with a much smaller team of fresh recruits straight out of college. Your expenses are substantially cut, and you can still rake in the profits. Sure the new development team is struggling, but  they are able to fix bugs, and even get the occasional new release out the door. Again, your company has never been more profitable. Your customers are getting increasingly unhappy, but you are able to spin them a yarn, and they see signs of change in the product, so their drift to the competition is a lot slower.

Now here comes the scam - you sell your company! The potential buyer sees a great story - good profit margins, a cheap development team, and an established customer base. Get the timing right, and an unwary buyer will pay top dollar for the company. What constitutes an unwary buyer - well, anyone who doesn't know anything about software development. And that means just about everyone (and even some people who call themselves software developers). But do you care? You have the profits from the sale in your back pocket, and life is good. Even better than that, if the company fails, you can point to the new management team and say "Hey, look how bad they were - they ruined my company - I made it great, you know!"

Everyone recognises a rundown building when they see one, but who recognises a rundown software company?

So how do you avoid being stung like this? How are the innocent protected?

A software company I know of has had three different owners, and not once did the people conducting due diligence on behalf of the purchasers come around and interview or evaluate the development team. Surely this is something that should have been done as part of the purchase process? Especially if developers are like, you know, assets?

1: I say slowly, because customers of software products do often find it very expensive and costly to switch to another vendors products.

9:49:51 AM