Built to sell

The first step in creating a business that can thrive independently is to identify a scalable product or service. Such products or services must meet three key criteria: they must be teachable, valuable, and repeatable. Teachable products are those that your employees can deliver, not just you. Valuable products are those that customers are willing to pay for because they solve a significant problem. Repeatable products are those that customers need to purchase repeatedly. Moreover, these products should not require customized production lines but should be deliverable using your existing production capacities and operations. Evaluating your current offerings against these criteria can be challenging, as you may find that most of your products are bought only once, or the teachable products are the least valued by your customers. However, to build a business that can be sold, it's crucial to develop an offering that meets all three criteria.

Creating a positive cash flow cycle around a specialized product or service often involves charging customers up-front, either fully or partially, before incurring costs. This practice is common in product-based businesses. For instance, magazines sell annual subscriptions even though later issues won't be produced until later in the year. Similarly, when purchasing computer equipment, customers pay the set price upon delivery, not after a year of use. This up-front payment strategy is crucial for establishing a positive cash flow cycle.

To make your company attractive for acquisition, it's crucial to establish a predictable and reasonable sales formula. This involves hiring salespeople who can generate sales independently, without your direct input. It's advisable to hire two sales reps initially, as their competitive nature can drive them to outperform each other, demonstrating a scalable sales model. This might raise questions about the affordability of adding two permanent staff members. However, as you transition from a generalist to a specialist firm, you may find existing staff lacking the new skill sets required. Replacing them with sales reps can create a future sales engine without significantly increasing your fixed costs. It's important to take time to determine the ratio of pipeline prospects to sales, a key metric for potential buyers. Initially, hire salespeople skilled in selling products rather than services, as customization can be costly at this stage.

Preparing your business for sale involves a challenging step of declining work offers from past clients. This is a test of your resolve to specialize, as these clients, unknowingly, will request more of the personalized products and services they received in the past. To have any chance of selling your company in the future, you must turn down this work.

Interestingly, once you start declining work outside your chosen area of focus, you become more referable. You transition from a generalist to a specialist in your field, earning respect from customers. People can describe your work more readily to their friends, as you no longer offer a range of generic services and products but focus on excelling in one specific area. Over time, for every generalized project you turn down, you win a new assignment based on your new product offering. However, resisting the temptation to accept projects outside of your scalable product or service is tough, as these sales boost your revenue and cash flow. Employees will test your resolve, customers will ask for exceptions, and you will second-guess yourself. This is normal, and you must resist the temptation.

When building a management team for your growing enterprise, it's crucial to consider how to motivate and compensate your managers effectively. Rather than offering equity in your business, which can complicate future sales and dilute your holdings, consider implementing a long-term incentive plan. This plan should reward managers for exceeding set targets and align their incentives with the long-term growth of the company.

One way to structure this plan is to offer an annual bonus if the company's targets are met, paid out within 30 days of the end of the financial year. Additionally, an equivalent amount to each manager's annual bonus should be set aside in a long-term incentive account. Managers can withdraw one-third of this account's balance each year after a three-year period. This means that after the initial three years, a successful manager could effectively double their annual bonus with the top-up from their long-term incentive account.

When it's time to sell your business after a couple of years of growth, the choice between a business broker or a merger and acquisition (M&A) firm depends on your turnover. For companies with less than $2 million in sales, a business broker is the best representative. However, if your sales are $2 million or more, a boutique M&A firm would be a better choice. The best way to find either a broker or an M&A firm is to ask for recommendations from other entrepreneurs who have sold their companies. Most brokers specialize in specific industries, so the right broker for your business will likely be apparent from the start. It's crucial to find a broker or M&A firm that understands and values the work you've done to grow your business and recognizes that you've created something special deserving of a higher compensation rate. The broker should fit the scale of your business, meaning you should not be their largest or smallest client.

When considering selling your business, it's crucial to involve your management team early in the process. This transparency ensures you're acting in good faith and not operating in secrecy. Your team's involvement is also necessary for the development of a three-year business plan, a document that potential buyers will want to review. Furthermore, your management team is a key selling point for your business, and they should be prepared to answer in-depth questions from potential buyers. It's normal for them to feel uneasy about a change in ownership, so it's important to provide incentives, such as career advancement opportunities with the acquiring company or a success bonus added to their long-term incentive plan if a deal is finalized.

When you begin to solicit offers for your business from serious buyers, two immediate challenges arise. Firstly, you must continue to grow your business and meet your projections, even while you're engaging with your broker and potential buyers. This period can be intense, but a solid management team can help maintain and grow the business. Secondly, you must remain composed when meeting with prospective buyers. Each question they ask must be addressed thoughtfully and deliberately, with the ultimate goal of eliciting an offer from them. This can be challenging, as buyers will invariably ask why you want to sell your business. If you express fatigue or a desire to spend more time with family, buyers may look elsewhere. They want to hear that you envision a bright future for your company and need their assistance to reach the next level. They also want reassurance that you plan to stick around to help achieve projected growth, even if that doesn't end up being the case.