The following is a guest post by John Warrillow.
Starting a new business? Follow these eight steps to build a business you can sell one day:
1. Identify a scalable product or service
Scalable products meet three criteria:
Once you’ve picked a product or service that is scalable, document for your employees how to sell and deliver it.
2. Create a positive cash flow cycle
The more working capital an acquiring company must put into your business, the lower its potential return on equity, and the less it will pay for your business. Create a positive cash flow cycle by charging up front or at least in staged billing so that you get paid before buying the products or services you’re selling. Leveraging online billing platforms like Freshbooks will allow you to send invoices electronically (saving the snail mail lag time) and to preprogram invoices to be deployed at scheduled intervals.
3. Put lead generation on autopilot
Most business owners are their company’s best salesperson. That may seem a positive, but if you want to build a company you can eventually sell, you need to show that sales are not dependent on you personally. Create a lead-generation engine that works when you’re sleeping by buying keywords from Google (you pay only when you get visitors), and start a blog to stimulate repurchases from existing customers (most blogging platforms are free). If your company sells face-to-face, replace yourself with salespeople.
4. Stop accepting orders for anything but your scalable product/service
You need to stop selling everything but the product/service identified in Step 1. Great companies are the best at one thing. It makes them referable and ultimately sellable. Acquirers do not want to buy the “padding” in your business. They want the one product or service that makes you famous. Once you have started to charge up front, you’ll have the cash to absorb any short-term revenue drop while customers adjust to buying only your scalable product.
5. Launch a long-term incentive plan for managers
A buyer needs to see your key people will stay after you’re gone. A long-term incentive plan sets aside a portion of an employee’s annual bonus in a locked-in account for three years. Upon the third year and in each subsequent year, the employee can pull out a third of the value. That way, he or she will always have to walk away from three years’ worth of bonuses to quit.
6. Find a broker
Selling your business may be the largest transaction of your life, so get a professional to represent you. Good brokers create competitive tension and earn the success fees they charge. To find a broker, contact American Mergers & Acquisitions Advisors (http://www.amaaonline.com), or you can visit BizBuySell.com, an online marketplace for businesses for sale (think eBay for small businesses). Contact a business broker representing companies that are similar to yours (e.g., in your city, industry, etc.).
7. Tell your management team
An acquirer will want to meet your management team before closing the deal. Explain to your employees how the acquisition will help them (e.g., career advancement) and consider offering a “success bonus” upon the sale of your company. Pay the bonus in two installments: one just after closing; the second, six months later to those who stay through the transition.
8. Convert offers to a binding deal
Your broker will (hopefully) generate offers for your business. Most of the time, these will be non-binding letters of intent (LOIs) that request a period of exclusivity to conduct due diligence. Like a home inspector, the acquirer will find warts in your business during diligence. Remain calm and expect the offer to be discounted from the number in the LOI. If the post-diligence offer meets with your approval, go ahead and close the deal.
Curious about whether you could sell your business (and for how much)? Take the 10-question Sellability Index Quiz at www.BuiltToSell.com.
John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently John transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to the Corporate Executive Board (NASDAQ: EXBD. In 2008 he was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers