What comes first: a valuable company with an owner eager and ready to sell, or a not so valuable company with a desperate owner looking to jump ship as quickly as possible?
According to Built to Sell author John Warrillow, the moment you want to sell is usually when your business is the least valuable. On the flip side, many business owners are most reluctant to sell when the business is at its most valuable – and likely most attractive to actual buyers.
So how does a business owner looking to sell their company in the near or even distant future come to terms with the classic business conundrum?
The answer lies in a theme which should already be familiar: in order to create a valuable company that will be profitable, productive, and attractive to buyers, you have to create a company that can run and thrive without the owner.
John takes us through his own unique process for creating differentiation, building repeatable systems, and knowing when to let go.
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What’s the Difference Between Revenue and the Actual Value of a Business?
If revenue is through the roof and consistently on the rise, buyers will naturally jump at the chance to buy your company right? The surprising answer according to John is not necessarily.
While recurring revenue is one of if not the most important metrics of what John calls the eight key drivers of company value, what acquirers will look at when determining whether they want to buy your company, revenue alone is not enough to convince a buyer to write you a check.
The Build/Buy Lens
Simply put, potential buyers look at the companies they’re considering buying in one of two ways: is it more cost effective for us to buy this company, or can we just build our version?
Your recurring revenue may be through the roof, but that doesn’t mean that it wouldn’t be faster and cheaper for your potential buyer to become your competitor instead. That’s where value comes in.
Do you offer a product or service that’s so unique and specialized in your sector of the market that trying to build their own model would take years and turn out to be prohibitively expensive? In order to get the sale, you’ll want the recurring revenue, but you’ll need the value as well.
John uses the example of Microsoft’s acquisition of LinkedIn to drive this point home. Sure, Microsoft has the resources to build a proprietary professional social media and networking platform, but it would probably take years and possibly billions of dollars to replicate LinkedIn’s success. LinkedIn had already built the wheel and owned the market, so it was an easy buy for Microsoft.
Always Be (Thinking About) Selling
As we’ve already established, if you want to own a job and retain full control, you build a company that can’t thrive or survive without the owner’s direct involvement.
If you want to build a scalable and acquirable business, you have to build a company that can be transitioned away from the owner’s direct involvement. That requires – you guessed it – a system of repeatable processes, and a decision making process that considers how attractive the company will ultimately be to a buyer, even if the sale is five or ten years down the road.
Look at your business from the perspective of an outside buyer by asking a few basic questions:
- Would I buy this company for what I think it’s worth? (If not, why not?)
- Is it too dependent on the owner?
- Is there too much customer concentration?
- Does the brand need work?
- Have you done a good job of implementing repeatable systems and documenting your essential processes?
- Does your pricing model make sense?
“Start prepping for a sale as soon as possible. Think about what an acquirer would value; this will help you make better decisions,” says John. It can also save you time and money by keeping you from investing resources into products or initiatives that won’t add value or worse – actually make your company less attractive to potential buyers.
The Connection Between Process and Value
How do you create a more process focused company? What is the first step in trying to create a sellable asset? According to John, having repeatable systems in place and documenting your processes so that the company can function without the founder/owner is one of the most overlooked drivers of company value. In fact, John has found that a lack of urgency in documenting systems is a recipe for failure.
So how do you create urgency around a task or project that doesn’t feel urgent until it’s too late? You manufacture it.
The TVR Approach
Are your systems and processes teachable, valuable, and repeatable? Take stock of all the products and services that you sell and evaluate them against three key metrics: how teachable they are to employees, how valuable they are to customers, and how much recurring revenue can be generated from the product or service.
As we say at Trainual: learn to do it, then document it, then delegate it.
Take Ownership of the Nomenclature
If you’ve built the next LinkedIn or a company that completely disrupts the market, congratulations! The battle is (almost) won. But you don’t have to be the next LinkedIn or Google to build a valuable business that someone will want to buy.
If you’ve locked down all of the other factors but operate in a space with a lot of competition, the key to driving buyers is to differentiate the brand and highlight what makes you unique in the marketplace. Design a brand that paints a vivid picture and sets you apart from everyone else in the marketplace.