8 criteria to meet for building a business you can sell
Ninety-nine out of one hundred businesses are not sellable because their owners, as the experts, are requested by customers personally. Thus, the business becomes centered around owners, and a business that is too dependent on its owner is not sellable. You can be part of the one percent who create a sellable business by following these eight steps:
1. Identify a scalable product or service. Scalable products and services exhibit three qualities. First, they are broadly valuable so that more people will want them . Second, providing them is a teachable skill so that you’re not the only person who can operate the business. Third, they are scalable, so that the owners can take the valuable and teachable products and services and grow the business.
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.
3. Hire a sales team. Most business owners are their company’s best, and sometimes only. 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. Hire at least two salespeople, and an acquirer will see a sales system—not just one great salesperson.
4. Reduce your dependence on 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.
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. p>
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 Merger & Acquisition Advisors.
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 (for example, 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. A stay bonus plus a long-term incentive plan should be enough to keep your leadership team intact before and after closing the deal.
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. 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.
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell. His latest book explains how to build a business you can sell. Learn more about the eight steps by reading John’s blog, Built to Sell, and you can follow him him on Twitter @JohnWarrillow.