Built to sell is a story of Alex, who owns a design company.
When Alex starts his company. He has a dream that he will hire the best talent in the city. Create a magical environment in which an organization, as well as coworkers, can grow. He wants to stabilize the company that can run without his presence. So that later he can sell the company and can live on the fruit of his labor.
But, Alex design the company doing all kinds of projects. And it is difficult for a small company to hire experts in every field.
Alex knows, he has a mediocre staff. And he was expecting an excellence work from inexperienced folk. He even tiredof meeting every client himself and then educates the team about the project.
Alex decides to sell his business. When the thought of selling comes to the surface in his mind. He thinks to meet one of his family friends Ted.
Ted is an entrepreneur and sold many businesses over the year. Ted not only achieves success in business but he also achieves success in life.
When Alex meets Ted, and tell that he wants to sell his business. Ted said, why you want to sell the business?
Alex tells every tiny detail of the business, his lumpy cash flow, mediocre team and how every client wants to deal with Alex only.
Then, Ted asks Alex to describe his company.
Alex’s agency is a marketing agency that helps people to create logos, brochures, print ads, and posters.
After listening business details, Ted said, Alex, you cannot sell your business, at least, at this moment.
And, if you want to sell the business. You need to make some bold changes. And Ted ensures Alex, that he will help you throughout the process. Ted also tell Alex to meet every Tuesday evening so we can discuss about your business and make some bold changes.
Ted gives Alex to do homework. Make a list of every project Alex company completed. Then, separate the good project from the bad. Once you have a list of projects, figure out key projects you are good at.
The answer is making logos.
Ted informs Alex to focus your business on making logos and refuse every other project from the client.
But, in the beginning, Alex refuses to do that. Because 40 percent part of the revenue comes from one client. And the client does not use that much of logos as a project.
Ted said, To sell your business, you should have a variety of clients where no one company makes up more than 10 to 15 percent of your revenue.
Lesson: Do not rely on a single client. As it will turn off your potential buyer. And make sure no single client can give more than 15 percent of your revenue.
Suggested Reading: Purple Cow Summary.
Ted explains if you are taking every kind of project. Then you also need all kinds of talent in your company. And as you are a small company. It will be a little difficult for you to hire experts as big companies can hire. All you are doing hiring inexperienced people to do specialist tasks. So the result is weak.
If you want to build a business that you can sell you need to stop accepting other projects.
Lesson: You can enhance the quality of your work. And can stand out from the competitor. If you concentrate on doing one thing well.
Alex’s agency did not specialize in anything. And the agency takes any project client through at them. But once the company figures out that they are good at making logos. The company starts pitching the design logo process to other clients.
Alex also agreed, while pitching for a design logo project. He feels confident as he is offering something valuable.
Lesson: You can sell more products, once you clear about what you are selling.
Train Every Person to handle the project on its own.
To sell your business. You need to train every person in the organization to handle the design logo process. You do not need to become the guy handling every client project on your own.
In the beginning, Alex’s company is a service company that provides services to different clients. But, Ted suggests to Alex to change his mindset and become better at making a logo. So Alex can describe his company as product making company.
Because when the service company is selling. The owner of the company gets some amount in advance. And the rest of the money depends upon hitting the performance goals in the year ahead.
Ted describes this is an earn-out process. And in this process, the owner needs to stay connect with the company for a few more years to get their money.
A service company is a sort of people who are experts and offer their service to the market. But, the drawback of a service company is, they customize their offer to fix client issues.
Ted suggests Alex, to think the logo design process not as a service but as a product. So you can charge in advance. We are habitual of paying in advance for a product. But, for the services, we pay, when it is rendered. In service, a task will perform first then you pay the bill, but, case of product, you pay first before you use it.
Lesson: Standardize your product so you can charge in advance. It will help you to create a positive cash flow cycle.
Lesson: Prove your client that you are serious about specialization. Say no to other projects that fall outside of the area of your ability.
Meeting with Sales Representative.
In a Tuesday meeting with Ted, Alex describes that he meets two kinds of sale representatives. In two of them, one is specialized in selling tangible products while another in selling services.
Ted educate Alex based on his experience that sale representative who used to work in a service business are good at consultative selling. These chaps ask open-end questions to reveal customer fear and need. Once a customer reveals innermost fear on the table. These chaps customize the offer to meet the demands.
But, sale representatives who sell products, are used to do a mental workout. To place the product according to the customer needs without any customization. Product sale representatives do not have the luxury to customize the product. So they have to position the product to suit customer needs.
Business Can Only Grow With Sale Engine.
To sell your business, you need to prove potential buyers that you have sale engine. The engine will produce predictable recurring revenue, even after company is sold. You even have to figure out how many sale people you need to drive the sale engine.
Always hire two sale representatives. Two people are better than one. As they will compete with each other. Plus, it also demonstrates that your sales engine is not dependent on anyone skillful sale representative.
Lesson: Hire sale representatives who are good at selling products, not services. Sale representatives who sell the product have skills to place the product according to customer needs than customizing the offer to fit customer demands.
While selling your business you need to paint a picture in the potential buyer mind that the business can run on its own. Show the buyer that you have a management team. A team that can keep the business running.
But, it does not mean you have to hire a team from outside. Instead, you can select the people from different departments in your organization and assign them the responsibility of management.
When you assign new responsibility to the people in your organization. It is not necessary to give hike in the salary. But you can align their compensation with their milestone. You can do this with tiny bonus.
Create two kinds of bonus for your newly assigned management team member. Either you can create a performance bonus for achieving certain goals or you can create loyalty reward.
In this, you might need to tie a bonus, if a person works up to some date in the future.
The best approach to use a long-term incentive plan, to reward the management team based on the performance as well as loyalty to the company.
An acquiring company will always desire that the management team will stay in the business, even after the business is sold. The way to do this is to create a long term incentive plan.
Lesson: You can make the best offer to sell your business. If the potential buyer knows that the business can run on its own.
Lesson: Build a management team and offer them a long term incentive plan that rewards them on loyalty and performance criteria.
To ensure that the management team will stay in the organization during the transition process. Use a simple stay bonus. Reward your management team during the transition in two or more installments.
Lesson: Use stays bonus for the management team during the transition.
Now the next step is to sell your business. You need to start interviewing a broker, a broker for whom your business is neither too large nor too small.
Lesson: Find a broker for whom your business is neither too large nor too small. Make sure the broker knows your industry well.
Kinds of Buyer.
While selling, you will meet two kinds of buyers: Strategic and financial buyers.
A strategic buyer will pay more because you are worth it. The Strategic buyer will identify how you would perform as a business if they applied all of their resources to your business.
Create a plan that paints a picture in an acquire mind of what is possible for your business. The company that acquires you will have more resources to accelerate your growth. Think big. Create a three-year business plan that demonstrates the height your business can touch.
However, a financial buyer will only take for a return on investment. A financial buyer will offer you a lower price to ensure they will get a good return.
Service firm that gives service to people refers them as a client, while product firm gives service to people refer them as a customer.
An acquiring company will always put you in a box in their minds. There are two boxes, one is for service firm and another is for product firm.
If you land your business in a service firm. Then, you will get less amount in advance. Plus, the acquiring company will also tie you up in three to five earn-out plans.
So, if you want to sell your business. You have to replace words like client to customer, firm to business, and engagement to contract.
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Above article is the extract version of the book “Built to Sell: Creating a Business That Can Thrive Without You” written by “John Warrillow”.