ON THE CASE

A young tech company attracts unwanted attention from a key partner.

THE SITUATION: SMALL GROWING COMPANIES ALWAYS ATTRACT ATTENTION, USUALLY FROM OUTSIDE INVESTORS AND COMPETITORS, BUT SOMETIMES FROM PARTNERS LOOKING TO EXPAND THEIR OWN CAPABILITIES. JEFFREY MCDALE, FOUNDER OF ETLANSYS TECHNOLOGIES, A CALGARY-BASED DESIGNER OF COMPUTER PARTS AND ACCESSORIES, HAD JUST RECEIVED SUCH AN OFFER FROM SGP DISTRIBUTORS. SGP’S OWNER SAMUEL LINDEN WAS OFFERING $7.5 MILLION FOR THE 80% STAKE IN ETLANSYS THAT IT DID NOT OWN, WITH A DEADLINE OF DEC. 1 FOR A RESPONSE FROM MCDALE. IT WAS NOV. 19, GIVING HIM TWOWEEKS TO REVIEW HIS OPTIONS.

“I like the fact that we have an offer from our distributor, but this is coming at the wrong time,” McDale said. He wanted another two years to launch his new range of desktop computer accessories for which he had applied for at least six patents. This suite of products was still in the R&D stage, but McDale was aiming to show them at the Consumer Electronics Show in January 2015. “In 18 months, we could double our sales with these unique products,” he said. “One option is for meto push back, to rebuff the offer.”

The current offer for Etlansys valued the company at nine times its earnings before interest, taxes, depreciation and amortization, or

EBITDA. The language in the offer stated that all of the firm’s intellectual property would have to be included as part of the sale. “If I did not have the next generation of IP ready to launch, I would say the current offer fairly values the company,” McDale said.

From a standing start in 2008, McDale had built his one-product company — high-efficiency CPU fans for desktop computers — into a $15-million concern that now sold a range of CPU fans, keyboards and wireless cards in more than 30 countries. McDale had a team of seven people, most of whom were engineers helping to design the products. Manufacturing of the products had been contracted out to three different firms in Taiwan and mainland China.

McDale, who had spent two decades as an engineer for IBM, had accepted seed money from Linden, a classmate from his days at Western University, in exchange for 20% of his firm. Linden owned SGP, a firmthat his father had started in the 1980s, and it had offices in Canada, the U.S. and Europe, and 40 employees in total. Linden took on the responsibility of distributing Etlansys’s products, investing about $80,000 to promote them over three years.

SGP had the exclusive right — expiring at the end of 2015 — to sell Etlansys’s products to more than 5,500 independent computer retailers around the world, with most of the revenues coming from retail doors around the U.S. west coast. “I’ve spent most of my waking hours growing this firm and our best years are ahead,” McDale said. “Our current products are robust, but they’re mostly similar to our competitors’. If I could summarize our current product philosophy, it would be this: Better, at a better price. Our new products will change that, if we’re given the chance to prove ourselves.” But Linden had indicated in an email to McDale that if the offer was not accepted,

SGP would look at all of their options, which could include de-listing Etlansys’s products.

Selling was an easy option since it would be hard for Etlansys to rebuild its distribution network without SGP. McDale was aware that there were several other distributors serving the same market, but the issue was that he would need to speak to three or four of them immediately. “SGP is the most highly regarded distributor. To find alternatives would mean I would be speaking with second- or thirdtier distributors and it would take about two years, assuming we are successful, to re-establish ourselves,” he added.

Etlansys had never sold product directly before and its website was rudimentary. “In any case, a web presence may not help that much,” McDale said. “Our products are purchased as part of a system, when a computer enthusiast walks into a dedicated store. Rarely do we see our parts sold individually on Amazon or eBay.”

There also wasn’t much money to grow the company independently. McDale had reinvested all of his spare cash into growing Etlansys and the company only started making money in 2013. “I estimate that I’ve taken out about $200,000, after taxes, from the company and have reinvested a third of that,” he said. He turned to Clarence Smith, his accountant, and asked: “If you were me, what would you do?”

This case study was prepared by Financial Post Magazine and the Pierre L. Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business (Western University). The case method is a key learning tool in the cross-enterprise leadership approach used at Ivey. The views represented here are solely those of the case authors. Some details may have been changed to protect privacy.