You may have seen recently that General Motors has, after three excruciating years, finally turned a profit.
Selling cars is indeed a tough way to make a living.
Volkswagen—arguably the most successful car company in the world—has a market capitalization of around 30 percent of revenue. Volkswagen is the proud owner of such powerful brands as Audi and Bentley, yet they are not even getting one times revenue for their business. Not even close. As taxpayers, our collective investment in GM would fetch an even lower multiple, no doubt. Cars make for a horrible business, but they offer cautionary lessons for anyone thinking of building a company they'd like to sell one day.
Create a cash flow–positive business
Car companies sop up gobs of cash as they buy plants, parts and the steel they need to make their product. If your company is cash-hungry, expect to take a big haircut on your valuation because potential acquirers would need to invest most of their money into the working capital your company needs to run. This, of course, will diminish their appetite to write you a fat check.
Make your business less dependent on people
Most car companies are wrought with old, bloated unions that hold the company hostage every time it attempts to become competitive. If your business relies on the frailties of human beings, expect to take a discount when you go to sell. Document your systems so that you can replace person A with person B without interruption or histrionics.
Both Chrysler and GM almost went away for good in 2008 because they have been commoditizing themselves for decades. All the way back to the 1970's, they have been putting a fresh wrapper on old products, trying to convince us there's a difference between a Mercury Capri and a Ford Mustang or a Chevy Blazer and a GMC Jimmy. Perhaps with the exception of Ford in recent years, North American car companies have consistently put out such bad products they've commoditized themselves to a point where the only thing they can use to get us to buy their cars these days is deep discounts and government-engineered programs.
It's not surprising that the only real innovation in the automotive sector is coming from outsiders. California's Tesla offers an electric-powered sports car that will do 0 to 60 in 3.9 seconds.
Toronto-based start-up ZENN Motor Company provides a zero-emissions car with no noise. Despite being cash-hungry, ZENN has a market capitalization of about $100 million, which equates to 71 times its $1.4 million in annual revenue in 2009. Now that's being paid for innovation.
Want to sell your company for a mint? Innovate. Create a better mousetrap. Google acquired Aardvark for $50 million because they had figured out a way to get obscure questions answered by your friends; Google acquired DocVerse for $25 million because they offered a better way to drive the adoption of Google Docs. DocVerve and Aardvark were not sitting around churning out lousy products in expensive factories with swollen union labor. They create smart, scalable products that maintain fluent cash flow.
Personally, I'm glad GM and Chrysler are still around. Not because I want to drive their cars or buy their stock (as a taxpayer, I already own enough, thank you), but because they provide a perfect illustration of how not to create a valuable company.
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.