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Virtual Organizations and their Impact on M&A

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Virtual organizations are on the rise, especially among start-ups.  The cloud has replaced the “garage” as the 21st century laboratory for collaboration and innovation.   What’s most exciting about this trend is the fact that the barriers to entry for an intellectual property-driven business (whether it be a software firm, professional services, or an online business) have never been lower.   The free video conferencing of today is better than what many companies paid tens of thousands of dollars for just 10 years ago.  Instant messaging and online collaboration platforms like Yammer, Chookka, Salesforce Chatter, Jive and others are making real-time and asynchronous collaboration more seamless all the time.   Why limit your business to local talent when you can find great software engineers in Bulgaria, Pakistan, or Taiwan?

The December 2014 issue of Harvard Business Review features an excellent article by Keith Ferrazzi titled “Getting Virtual Teams Right“.   In the article, he references his own survey of 1,700 knowledge workers, in which he found that 79% reported that they always or frequently work in dispersed teams.

Virtual teams work. I’ve seen it work in every industry, from consumer products to healthcare services.  But I’ve also seen virtual teams fall down when they try to scale too quickly, or without appropriate management control.   Experienced knowledge workers with a discrete task and well-defined scope of work can work independently and produce from their kitchen table or hotel room just as well as they could from a cubicle.   But as the business grows, communication and accountability become exponentially more challenging.  According to Ferrazzi’s article, a Deloitte study of IT projects outsourced to virtual work groups found that 66% failed to satisfy the clients’ requirements.

So what is the impact of Virtual Organizations on M&A?

In short, acquirers are afraid of the unknown, the complex, and the risky.   Buy “virtual” is in the eye of the beholder.   Obviously, a business with 20 people working from 15 locations would be considered “virtual”, but what about a business with 200 people and three primary sites housing 80% of the staff and the remaining 20% working remotely?   For some buyers, neither scenario would raise an eyebrow – for others, virtual teams are a wildcard, or even a red flag.   Most businesses have had their own experience with remote employees, job sharing, and outsourcing, and for many those experiences may have been less than positive.   Therefore, we’ve represented businesses where the most obvious buyers took a pass simply because their key employees were working remotely.   That’s not to say those businesses can’t be sold, but fewer buyers (even if it’s only one buyer who passes) means less competition, and may result in a lower valuation.

How do you avoid getting penalized for a virtual organization?

Nothing succeeds like success.   If your business has demonstrated success over time, and has scaled up to a revenue level that most competitors fail to reach, buyers will take note.   Of course, “scalable” is also in the eye of the beholder, but a few milestones would be $10 million of revenue for a technology business or $25 million for a manufacturer.  Scaling up requires management to implement systems and controls such as a real sales team where the founder is no longer the leading sales person, a CFO, and an HR function.   If your virtual organization has reached this level of scale, it becomes harder to argue with your success.