I discovered Tony when I stumbled into his hair salon one day, running late for a meeting, and asked for a quick trim. Tony obliged and had me out the door 15 minutes later, cleaned up and $28 poorer.
I thought $28 for a haircut was a lot, but I liked Tony, and I assumed he had some considerable expenses given his location in downtown Toronto. His salon was right across the street from my office, so I went back to see Tony a month later.
Each time I returned, Tony welcomed me by name and ushered me to his chair with an easy smile. I became loyal to Tony and went back every five weeks or so for 10 years. Sometimes I would call for an appointment on Tony's day off and be offered another hairstylist, but I usually waited, preferring Tony's easy banter about life back in Italy and his low-key demeanor.
Since selling my last business, I no longer go downtown every day, so Tony's salon has become less convenient. One day I was in a rush and bolted into Supercuts down the street from my house.
Supercuts has a different model. It doesn't take appointments. Clients are served on a first-come, first-served basis. I get a different person cutting my hair every time and am charged $15. The Supercuts location is close to my home, and I usually get in and out quickly. I'm now loyal to Supercuts.
Even though they are both in the haircutting business, the Supercuts model is more scalable and sellable than Tony's. In fact, Supercuts is one of the brands owned by Regis, a multinational Fortune 500 company traded on the New York Stock Exchange with a market capitalization of more than $800 million as I write this column.
The Supercuts model scales because its formula is independent of any one hairstylist. I was loyal to Tony, not his company. Now I'm loyal to Supercuts, not any one stylist.
If you'd like to sell your business one day, you need customers who are loyal to your company, not you personally. An acquirer will need to see how your business will perform when you're gone. If it looks like too much of your revenue is tied up in your personal relationships, you may get stuck with an offer to buy your business using an 'earn-out' formula.
An earn-out is the enemy for an entrepreneur. It's a formula used by a buyer to minimize their risk in acquiring a company. Essentially the buyer offers to pay for some or all of your business over time based on results you are able to achieve. It sounds reasonable in theory, but no matter how good your lawyer is, you will lose some control in agreeing to an earn-out. You have essentially traded your ownership status for a glorified job.
Talk to ten business owners who have agreed to an earn-out and you'll hear seven or eight horror stories. Issues range from the annoying (bureaucratic procedures of the new owner) to the conniving (applying bloated head office expenses to your P&L, dragging down your profitability) to the catastrophic (the buyer goes bankrupt and you end up standing in line for your money with all of the other creditors).
If you want your money up front when you sell your business, make sure your customers are loyal to your company, not you personally.
John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently John transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which was acquired by The Corporate Executive Board. In 2008 he was recognized by BtoB Magazine's 'Who's Who' list as one of America's most influential business-to-business marketers.