Book: Built to Sell by John Warrillow
Sellable businesses are specialized, standardized, with plenty of small recurring customers paying in advance, and autonomous salespeople and managers that are incentivized to stay long and raise profits.
- Don’t generalize; specialize. If you focus on doing one thing well and hire specialists in that area, the quality of your work will improve and you will stand out among your competitors.
- Isolate a product or service with the potential to scale.
- Don’t be afraid to say no to projects. Prove that you’re serious about specialization by turning down work that falls outside your area of expertise. The more people you say no to, the more referrals you’ll get to people who need your product or service.
Scalable business requirements
- Teachable to employees with a process, or can be delivered through technology.
- Valuable to your customers, which allows you to avoid commoditization
- Repeatable, in the sense that customers will buy them on a recurring basis
Recurring revenue business models
- Consumables. Like toothpaste
- Sunk money + consumables. Like printers and razor blades. Customer invest in a platform and then consumables.
- Renewable subscriptions. Like magazines and newspapers.
- Sunk money + renewable subscriptions. Like the Bloomberg terminal.
- Auto-renewal subscriptions. Like document storage
- Contracts. Like wireless phones.
- Owning a process makes it easier to pitch and puts you in control. Be clear about what you’re selling, and potential customers will be more likely to buy your product.
Get paid in advance
- Avoid the cash suck. Once you’ve standardized your service, charge upfront or use progress billing to create a positive cash flow cycle.
Have plenty of small customers, not a few big ones
- Relying too heavily on one client is risky and will turn off potential buyers. Make sure that no one client makes up more than 15 percent of your revenue.
Remove yourself from the company
- Don’t become synonymous with your company. If buyers aren’t confident that your business can run without you in charge, they won’t make their best offer.
Assemble a sales team
- Two sales reps are always better than one. Usually naturally competitive types, sales reps will try to outdo each other. And having two on staff will prove to a buyer that you have a scalable sales model, not just one good sales rep.
- Hire people who are good at selling products, not services. These people will be better able to figure out how your product can meet a client’s needs rather than agreeing to customize your offering to fit what the client wants.
- Focus on a single product to maximize the learning speed.
- Take some time to figure out how many pipeline prospects will likely lead to sales. This number will become essential when you go to sell because it allows the buyer to estimate the size of the market opportunity.
- Ignore your profit-and-loss statement in the year you make the switch to a standardized offering even if it means you and your employees will have to forgo a bonus that year. As long as your cash flow remains consistent and strong, you’ll be back in the black in no time.
- You need at least two years of financial statements reflecting your use of the standardized offering model before you sell your company.
- Build a management team and offer them a long-term incentive plan that rewards their personal performance and loyalty.
- Incentivize them to increase the profit by giving them 12 percent of profit below $200,000 and 20 percent above $200,000.
- Each year, take an amount equivalent to their annual bonus and put it aside in a long-term incentive account for each manager you want to retain. Allow the manager to withdraw one-third of the account’s balance each year after a three-year period. That way, a good manager must always leave a lot of money if he quits.
- Don’t issue stock options to retain key employees after an acquisition. Instead, use a simple stay bonus that offers the members of your management team a cash reward if you sell your company. Pay the reward in two or more installments only to those who stay long enough after the transition.
Selling your business
- Think big. Write a three-year business plan that paints a picture of what is possible for your business. Remember, the company that acquires you will have more resources for you to accelerate your growth.
- Prepare a description of:
- Your sales cycle
- How many salespeople do you have
- Your cash flow cycle
- Who are your customers
- How do you know if they are satisfied
- How often do they repurchase
- If you want to be a sellable, product-oriented business, you need to use the language of one. Change words like “clients” to “customers” and “firm” to “business.” Remove from your Website and communications any references that reveal you used to be a generic service business.
- Checklist to prepare for Due Diligence
- When does your lease expire and what are the terms?
- Do you have consistent, signed, up-to-date contracts with your customers and employees?
- Are your ideas, products, and processes protected by patent or trademark?
- What kind of technology do you use, and are your software licenses up-to-date?
- What are the loan covenants on your credit agreements?
- How are your receivables? Do you have any late payers or deadbeat customers?
- Does your business require a license to operate, and if so, is your paperwork in order?
- Do you have any litigation pending?
- Find an adviser for whom you will be neither their largest nor their smallest client. Make sure they know your industry.
- Avoid advisers and brokers who don’t help you start a bidding war for your business.
- Tell your management team only once you have a broker.
Tricks a buyer can use to check how dependant a business is dependant on its owner:
- They can try to change the meeting hour. Owners that are needed on the field have limited flexibility.
- They can compare the employee’s vision with the business owner’s vision.
- They can ask the customers why they like doing business with this company. If it’s for the products, that’s great. If it’s for the owner, that’s bad.
- They can send some mystery shoppers a couple of times. If the owner is absent all the time, it’s good. If he’s working there all the time, it’s bad.