Over the years I have met many entrepreneurs who hope to sell their companies. Some built their companies to sell from day one. Others built lifestyle businesses and are just ready to move on. The big thing to remember when selling your business is that if it's not valuable to you, it won't likely be valuable to someone else either, especially if the entrepreneur can't step out upon sale.
There are certain criteria you have to meet if you want to make your company sellable. In doing research for his new book, , Inc. Editor and best selling author Bo Burlingham surveyed dozens of entrepreneurs who'd exited and found that about half were happy at the end of the process and half were miserable. One of the key factors in determining how satisfied they were had to do with their success--or lack of success--in building a sellable business. So what makes a company sellable? Burlingham highlights the groundbreaking work that exit guru John Warrillow has done with his company TheSellabilityScore.com. Warrillow surveyed entrepreneurs and private equity investors and identified eight key factors that determine whether--and for how much--a private company can be sold. Do it right and you get to walk away a rich person. Don't ignore any of these key factors.
1. Financial Performance
Tech deals like Zappos and Whatsapp cloud the mind from conventional thinking about business. Those deals are the exception, not the rule. Warrillow points out most companies are valued on how much they sell and, even more importantly, how much profit they make. Warrillow also explains that smaller companies are discounted for higher risk. So maybe bigger is better.
2. Growth Potential
Warrillow gives great insight on how your rate of growth can impact value. Investors are trying to buy something that has the ability to scale. Otherwise there is little upside to them to pay a high price or even be interested. Warrillow outlines several creative ways to grow and expand.
Having a giant client is great for fast growth, but when they are more than 15 percent of your business, that can be a red flag for a purchaser. There is a risk of attrition when a company is sold, and if the big player leaves they may take all the profit with them. No need to drop the big customer, just get more of them.
4. Cash Flow
If a buyer has to invest more than the purchase price to make the company achieve maximum value, they are going to discount the sale. Warrillow says the highest value companies are those that can finance their own growth internally. Hoard that cash and grow steadily. Focus on cash management and efficiency to get top dollar.
5. Recurring Revenue
John Warrillow has been a recurring revenue evangelist ever since he first took the stage. Customers who have to renew save on cost of acquisition and stick around longer. Companies with recurring revenue and low attrition provide bankable models that attract buyers with deep pockets looking for long term, low risk ventures. If you currently eat what you kill, find a way to make your product or service renewable and addictive.
6. Unique Value Proposition
A commodity business will bring low value due to low margins. Only competitive advantage can warrant premium pricing and create barriers to entry. If your competitors can't match your differentiation without investing time, money and effort, buyers will pay more to have your edge.
7. Customer Satisfaction
Any business with unhappy customers will be in decline in short order. Warrillow is an advocate of using Fred Reichheld's Net Promoter Score to demonstrate your customer loyalty and referral opportunities. Grow your customers and you'll grow your value. It's that simple.
8. Strength of the Management Team
If you are wondering how you are going to achieve all of these great things with your business, you probably don't have the right management team. If you are the only one who can make things happen at your company then buyers will only want to buy you. Warrillow makes clear that the buyer wants to invest in a company, not an entrepreneur. Save that sales job for the investors.