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Steps to starting a business that can be eventually sold at a profit
John Warrillow is the author of Built to Sell:Turn Your Business Into One You Can Sell.
Identify a scalable product or service that meets these three criteria:
Once a product or service is chosen that is scalable, document for company employees how to sell and deliver it.
- Teachable—you can train people or program technology to deliver them.
- Valuable—your customers want to buy them.
- Repeatable—you can show an acquirer a future stream of income.
Create a positive cash flow cycle:
The more working capital an acquiring company must put into the business, the lower its potential return on equity, and the less it will pay for that business. Create a positive cash-flow cycle by charging upfront, or at least in staged billing, so that the company gets paid before buying the products or services you’re selling. Leveraging online-billing platforms like Freshbooks will allow the company to send invoices electronically (saving the snail-mail lag time) and to preprogram invoices to be deployed at scheduled intervals.
Put lead generation on autopilot:
Most business owners are their company’s best salesperson. That may seem a positive, but if the goal is to build a company to eventually sell, the owner needs to show that sales are not dependent on him or her personally. Create a lead-generation engine that works when the owner is sleeping by buying keywords from Google (paying only when you get visitors), and start a blog to stimulate repurchases from existing customers (most blogging platforms are free). If the company sells face-to-face, replace the owner with salespeople.
Stop accepting orders for anything but scalable product/service:
The company needs 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 a business. They want the one product or service that makes it famous. Once the company has started to charge upfront, it will have the cash to absorb any short-term revenue drop while customers adjust to buying only the salable product.
Launch a long-term incentive plan for managers:
A buyer needs to see the key people will stay after the owner is 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.
Find a broker:
Selling a business may be the largest transaction of an owner’s life, so get a professional to represent the company. 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 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 the company (e.g., in your city, industry, etc.).
Tell your management team:
An acquirer will want to meet the management team before closing the deal. Explain to employees how the acquisition will help them (e.g., career advancement) and consider offering a "success bonus" upon the sale of the company. Pay the bonus in two installments: one just after closing; the second, six months later to those who stay through the transition.
Convert offers to a binding deal:
The broker will (hopefully) generate offers for the business. Most of the time, these will be nonbinding letters of intent (LOIs) that request a period of exclusivity to conduct due diligence. Like a home inspector, the acquirer will find warts in the business during diligence. Remain calm and expect the offer to be discounted from the number in the LOI. If the postdiligence offer meets with the owner’s 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.
Edited by Carolyn Allen