“The best businesses are sellable, and smart businesspeople believe that you should build a company to be sold even if you have no intention of cashing out or stepping back anytime soon.”
Do you know the biggest mistake entrepreneurs make?
They build a business that depends too much on them. And so, they get so stuck in their business that they can’t sell it even when and if they want to.
The truth is, they don’t know that unsticking themselves from their business is the key to increasing its value.
Does all of this sound familiar? And do you find yourself in the same boat?
Well, get ready to know the 8 secrets you can use to turn your business into one you can sell.
In this blog, we’ll take inspiration from entrepreneur John Warrillow’s book Built to Sell: Creating a Business that Can Thrive Without You.
The 8-Step Secret Model to Sell Your Business and Increase its Value
It’s a common practice for small service firm owners to act as a business themselves.
They’re so good at what they do that they become the go-to person in the company.
Yes, we know what you’re thinking.
It sounds good, but such businesses aren’t scalable or sellable. So, owners have no choice but to keep hollering on.
Now, we’re not saying that you must sell your business. But you should always create options for yourself by building a company that is:
Keeping this in mind, let’s finally dive into the 8 secrets you need to work on.
1. Develop a Standard Service Offering
A Standard Service Offering or SSO is a consistent process for delivering a specialized service you focus on exclusively.
Here’s how you can develop an SSO:
Identify a Service – the service should be valuable to your audience and something you teach others.
Start by listing down all your current services.
Plot them along two axes:
- Audience value
Choose a service high on both axes and that your customers need regularly.
Document Your Process – break it down into specific repeatable steps.
Write an instruction manual, and include examples and templates to make it easy to follow.
Test it on your team and keep refining it until your team can deliver the service independently.
Brand Your Offering – name the SSO, each step, and the features and benefits for each step. Doing this helps you and your offering stand out.
Pro-tip: Be a Specialist
Cutting down to one service may feel scary because you’ve focused on a full-service agency for so long.
But remember this:
A small firm that tries its hand at many things hires mediocre generalists.
Your goal is to be a specialist and hire specialists to become #1 in your niche.
2. Build a Positive Cash Flow Cycle
The one thing that attracts buyers is a business’s positive cash flow. To achieve that, you must charge upfront for your SSO.
Though it’s ideal for getting the full payment, you can also use progressive billing, so you have enough cash to cover the expenses as you work on each project.
It also helps you operate without extra loans and get a higher valuation from interest parties.
Pro-tip: Think like a product company, not a service company.
Clients are willing to pay upfront for a product and rarely for a service. Besides, services rely on people who come and go anytime.
In comparison, standard products are delivered without relying on any person, including the owner.
3. Hire a Sales Team
A sellable business is one where you don’t need a superstar to bring sales, and that has a diverse clientele.
Once you develop an SSO and build positive cash flow, you can build a sales engine that delivers predictable and recurring revenues.
Your goal is to set up a consistent sales process across all clients.
Avoid salespeople used to selling professional services – they often use consultative selling, ending with heavy customization.
Hire salespeople who love to sell and are strong in selling products.
Lastly, track your sales conversion rates to better estimate your market potential.
4. Stop Accepting Projects Outside of Your SSO
Once you’ve set an SSO, reject all other projects.
It may prove tough because your clients and team will push you to make exceptions, and you’ll be down with self-doubt.
But transforming a business for sale takes time. Therefore, you should resist the temptation to give in, stick to your SSO, and you will see a distinct shift over time.
Most importantly, ignore the profit and loss during the first year. Only focus on cash flow.
Your P&L may look bad on paper, but your cash flow will improve in the long run.
5. Launch a Long-Term Incentive Plan for Key Managers
It’s crucial to build a management team that can run the business without you and stays after you sell the company.
Here are some tips for an effective long-term incentive plan:
- Don’t use equity as a retention tool. It only complicates things.
Besides, equity is only valuable if there’s a demand for shares. And that’s not always the case for a small service firm.
- Reward managers with performance bonuses for achieving their annual targets.
You can also set aside matching annual bonuses into a long-term incentive account. Each manager can withdraw 1/3 of their funds after three years. The pool will keep growing to match their personal achievement, but they can only access it if they stay for at least three years.
6. Find a Suitable Broker
Make no mistake – your business will improve over two years if you follow the five secrets mentioned in this blog so far. So, it’s highly likely that you no longer wish to sell it.
But if you’re still committed to selling it for any reason, find an experienced broker to represent you.
Get recommendations from entrepreneurs who successfully sold their firms.
Avoid brokers who only propose a single buyer. The single buyer strategy is to use you as a pawn to please their top client.
You must remember that you need some competition to generate the best selling price.
An ideal broker:
- Has a proven track record in your industry
- Appreciates your SSO pushing for a competitive selling price
- Is of the right size for you to be neither their largest nor their smallest client
Your broker will work with you to create ‘the Book’ – a document that describes your:
- Future plans
Brokers charge a percentage of the deal value, but it’s always worth it.
7. Inform Your Management Team
Some business owners delay telling their management team about selling the company. That is, until the prospective buyer has to meet the team.
But it’s always best to inform your management team about the sales yourself than let them hear from the grapevines.
A few tactics to tactfully break the news:
- Present the sale from the manager’s perspective: help them see what’s in it for them if the deal goes through.
For example, you can highlight the following:
- Better career prospects
- Higher chances of hitting personal bonus targets
- Long-term incentives growth
- Offer a cash bonus if the deal is successful.
But pay it out in at least two installments, so people have a reason to stay.
8. Convert the Offer into a Binding Deal
Once you’re done with the management presentations, you may get offers in the form of non-binding letters of intent.
Often, the offer includes an upfront fee and an earn-out fee. You must review the offer based on the upfront fee.
Treat the earn-out fee as an optional bonus. That means you must be able to walk away anytime if things don’t go as expected after the sale.
Remember not to rely on your advisor – they have a vested interest in closing the deal.
You shouldn’t get swayed by promises that claim to help you achieve earn-out targets.
The process takes 60 to 90 days.
This due diligence period can be painful, but you must remain calm and present the best possible picture without lying. And since most offers are non-binding, the buyer may walk away, too.
The buyer may also reduce the offer price after the due diligence period ends.
You must review each offer objectively and turn it down if it doesn’t meet your goal.
Once you’ve chosen the best offer and converted it into a binding deal, it’s your cue to take a graceful business exit.
And then, it’s time to explore endless new possibilities.