Built to Sell

1. Identify a scalable product or service to build your business around

Scalable things meet three criteria: (1) They are "teachable" to employees (like the Stapleton Agency's Five-Step Logo Design Process) or can be delivered through technology; (2) they are "valuable" to your customers, which allows you to avoid commoditization; (3) they are "repeatable," meaning customers need to return again and again to buy (e.g., think razor blades, not razors).

Evaluate your offerings. Begin by brainstorming all the products and services your business currently provides. Plot them on a chart with "Teachable" on one axis and "Valuable" on the other. Eliminate any one-time purchase items.

Identify the ideal offering. Look for a product or service that strikes the right balance between being teachable to employees and valuable to customers. It should also be something customers need to purchase repeatedly. This might involve combining multiple existing offerings or creating a new one entirely.

Differentiate your offering. Once you've identified your scalable product or service, give it a unique name and document the process for delivering it. This helps you own the offering and set its terms, moving away from commoditization. Revamp your customer communications to consistently describe this new, differentiated process.

2. Create a positive cash flow cycle by charging upfront

To create a positive cash flow cycle, charge your customer in full or in part for your product or service before you pay the costs of whatever it is you provide.

Improve financial stability. By charging customers upfront, you create a financial cushion that allows you to make strategic changes and investments in your business. This positive cash flow cycle also increases the value of your company to potential acquirers.

Implement upfront charging. Once you've documented and differentiated your unique offering, you're in a position to require at least partial payment before delivery. This might not be possible for all products or services, but aim to get as much payment in advance as you can.

Understand the impact on valuation. A positive cash flow cycle makes your business more attractive to buyers. It reduces the amount of working capital an acquirer needs to inject into the business, potentially increasing the purchase price they're willing to offer.

3. Develop a standardized process and document it

Use examples and fill-in-the-blank templates where possible to help ensure that your instructions are specific enough for someone to follow independently.

Create an instruction manual. Document each step of your process for delivering your core product or service. Be as detailed and specific as possible, using examples and templates to ensure clarity.

Test and refine. Ask team members to follow your instructions without your involvement. This will help you identify areas that need more clarification or detail. Expect to go through several drafts before you have a comprehensive, easy-to-follow manual.

Standardize communication. Once you have your process documented, ensure all customer-facing communications consistently describe your offering and process. This includes updating your website, brochures, and other marketing materials.

4. Build a sales team to remove yourself from selling

If you have others delivering the product or service but you're still the rainmaker, you will not be able to sell your business without a long and risky earn-out.

Hire the right salespeople. Look for individuals who enjoy selling and are enthusiastic about your product. Avoid hiring from professional services companies, as these individuals may be inclined to customize your offering for each customer.

Create healthy competition. Aim to hire at least two salespeople. This fosters a competitive environment and demonstrates to potential acquirers that your product can be sold by multiple individuals, not just one superstar.

Focus on selling your company. As the business owner, your time is best spent working on the business rather than in it. By building a capable sales team, you free yourself to focus on strategic initiatives and potentially selling the company itself.

5. Stop accepting projects outside your core offering

Stopping yourself from accepting projects outside of your scalable product or service is the toughest part of creating a business that can thrive without you.

Resist temptation. It's easy to be lured by the promise of additional revenue from non-standard projects. However, this can lead to loss of focus, customer confusion, and the need to hire additional staff to deliver these custom projects.

Stay committed. Expect pushback from employees and customers when you start refusing non-standard work. This is normal, but you must remain resolute in your focus.

Benefits of focus:

• Increased efficiency
• Clearer brand positioning
• Easier scalability
• More attractive to potential buyers

Allow time for adjustment. It may take time for customers and employees to fully accept your new, focused approach. Be patient and consistent, and eventually, they will recognize and respect your commitment to your core offering.

6. Operate your focused business for at least two years

You need at least two years of financial statements reflecting your use of the standardized offering model before you sell your company.

Prove your model. Operating your newly focused business for at least two years demonstrates to potential buyers that your model is sustainable and successful. This period allows you to iron out any kinks in your processes and build a track record of success.

Resist personal involvement. During this time, avoid the temptation to get personally involved in selling or delivering your standard offering. Instead, focus on improving your systems and processes when issues arise.

Enjoy the benefits. Many business owners find that this period brings significant improvements in their quality of life. With a more focused business model, cash flow often improves and customer headaches decrease. Some even decide to continue running the business indefinitely rather than selling.

7. Implement a long-term incentive plan for managers

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.

Demonstrate management stability. To attract buyers, you need to show that you have a capable management team that will stay with the company after acquisition. This reassures potential buyers that the business can continue to thrive without you.

Avoid equity-based incentives. While it might seem logical to offer stock options, this can complicate the sale process and dilute your ownership. Instead, opt for a cash-based incentive plan.

Design an effective plan. Create a long-term incentive plan that rewards managers for both their personal performance and their loyalty to the company. Consider a structure where bonuses are paid out over time, encouraging managers to stay with the company through and after an acquisition.

8. Prepare your business for sale by demonstrating its ability to thrive without you

Your job as an entrepreneur is to hire salespeople to sell your products and services so you can spend your time selling your company.

Shift your focus. As the business owner, your primary role should be to build a company that can operate without you. This means hiring and training others to handle day-to-day operations and sales.

Build systems and processes. Develop standardized procedures for all aspects of your business. This not only makes your company more efficient but also more attractive to potential buyers.

Demonstrate scalability. Show potential buyers that your business model can be replicated and expanded. This might involve opening satellite offices or exploring new markets.

9. Navigate the due diligence process and negotiations with potential buyers

Every negotiation reaches a point where you need to communicate to the other side that they've pushed you as far as they can.

Prepare for scrutiny. The due diligence process can be grueling. Expect potential buyers to examine every aspect of your business in detail. Be prepared to provide extensive documentation and answer numerous questions.

Stay focused on performance. While going through the sale process, it's crucial to maintain your business's performance. Keep your eye on your current-year projections and ensure they're being met.

Be prepared to negotiate. It's common for buyers to lower their offer price after due diligence. Be ready to stand your ground and communicate your limits clearly. Remember that walking away is always an option if the deal doesn't meet your needs.

10. Understand the importance of working capital in acquisition offers

If your offer does not include details on the working capital calculation, be sure to lock that number down before you agree to anything.

Look beyond the purchase price. When evaluating acquisition offers, pay close attention to how working capital is calculated. This can significantly impact the actual value of the deal.

Understand the implications. The working capital calculation determines how much cash you can withdraw from the business before the sale closes. This is particularly important if you've been charging customers upfront and have accumulated significant cash reserves.

Negotiate favorable terms. Work with your advisors to ensure the working capital calculation in the offer is favorable to you. This can potentially increase the overall value of the deal by allowing you to extract more cash from the business before the sale.

Last updated: July 23, 2024