How To Start
A Business You Can Sell
Starting a new business? Follow these eight steps to build a
business you can sell one day:
1. Identify a
scalable product or service:
meet three criteria:
can train people or program technology to deliver them.
customers want to buy them.
can show an acquirer a future stream of income.
Once you’ve picked a product or service that is scalable,
document for your employees how to sell and deliver it.
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. Leveraging online billing
platforms like Freshbooks will allow you to send invoices
electronically (saving the snail mail lag time) and to preprogram
invoices to be deployed at scheduled intervals.
3. Put lead
generation on autopilot:
owners are their company’s best 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. Create a lead-generation engine that works when you’re
sleeping by buying keywords from Google (you pay only when you get
visitors), and start a blog to stimulate repurchases from existing
customers (most blogging platforms are free). If your company sells
face-to-face, replace yourself with salespeople.
4. Stop accepting
orders for 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. Once you have started to charge up front, you’ll have
the cash to absorb any short-term revenue drop while customers
adjust to buying only your scalable product.
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.
6. Find a broker:
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 Mergers & Acquisitions Advisors (http://www.amaaonline.com),
or you can 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 yours
(e.g., in your city, industry, etc.).
7. Tell your
An acquirer will
want to meet your management team before closing the deal. Explain
to your employees how the acquisition will help them (e.g., 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
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 during
diligence. 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.
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