♻️

Built To Sell

🔖How would I describe this book in 1 sentence?

Extremely simple but insightful, a must read for every entrepreneur.

🗺️What was the role of this book in my journey?

I was right on time to start listening this book. At the time, we were in the process of building OB Trading company and this book impacted how I make my management and business decisions.

I was also one foot in the service business of web & mobile development and this book helped me to view service businesses from a completely different perspective.

This book also influenced the initial strategic approach for Scalifier project.

Overall, it had an immense impact on me, my professional journey, and how I make business decisions.

💡Key Insights

  1. The number one mistake entrepreneurs make is to build a business that relies too heavily on them.
  2. If you focus on doing one thing well and hire specialists in that area, the quality of your work will improve and you will stand out among your competitors.
  3. Owning a process makes it easier to pitch and puts you in control. Be clear about what you’re selling, and potential customers will be more likely to buy your product.
  4. Relying too heavily on one client is risky and will turn off potential buyers. Make sure that no one client makes up more than 15 percent of your revenue.
  5. People are used to paying for products up front and services after they have been rendered
  6. Turn down work that falls outside your area of expertise. The more people you say no to, the more referrals you’ll get to people who need your product or service.
  7. Two sales reps are always better than one.
  8. Think big. Write a three-year business plan that paints a picture of what is possible for your business. Remember, the company that acquires you will have more resources for you to accelerate your growth.
  9. For company acquisition process, find an adviser for whom you will be neither their largest nor their smallest client. Make sure they know your industry.
  10. If you want to be a sellable, product-oriented business, you need to use the language of one. Change words like “clients” to “customers” and “firm” to “business.” Rid your website and customer-facing communications of any references that reveal you used to be a generic service business.
  11. Don’t issue stock options to retain key employees after an acquisition. Instead, use a simple stay bonus that offers the members of your management team a cash reward if you sell your company. Pay the reward in two or more installments only to those who stay so that you ensure your key staff stays on through the transition.
  12. Of the three criteria for a scalable product or service—teachable, valuable, and repeatable—I found the single most important factor in driving up the value of my companies was ensuring my revenue was repeatable, meaning customers had to repurchase somewhat regularly.
  13. If you want your business to be profitable, enjoy fat margins, and thrive without you, you need to stop responding to RFPs and start carving out your own one-of-a-kind product or service.
  14. Avoid hiring salespeople who come from professional services companies; they will likely want to reinvent your product or service for every customer.
  15. Documenting every step of the operational process into a repeatable action will allow you to scale up the business.
  16. The best company is the one that can run without you

🦅Key Principles

  1. Run the company as if it will last forever
  2. Think of your business as an asset that has its price. Think of your company as though it will be sold one day. Take it into consideration when making any business decision
  3. Make business decisions to increase the value of your company as an asset
  4. Don't spend time on activities that don't bring a company a long-lasting value
  5. Focus on building processes so that the company can operate without you
  6. Delegate activities to other people once processes are established
  7. Don’t generalize; specialize
  8. Don't rely on a single client to support your business (15% rule)
  9. Be clear about what you are selling
  10. Transform your service into a product
  11. Create products that are scalable
    1. They are “teachable” to employees (like the Stapleton Agency’s Five-Step Logo Design Process) or can be delivered through technology;
    2. They are “valuable” to your customers, which allows you to avoid commoditization;
    3. They are “repeatable,” meaning customers need to return again and again to buy (e.g., think razor blades, not razors).
  12. When developing a business model, focus on generating recurring revenue
  13. Don’t be afraid to say no to projects
  14. Estimate market size before getting heavily invested into business
  15. Hire people who are good at selling products, not services. These people will be better able to figure out how your product can meet a client’s needs rather than agreeing to customize your offering to fit what the client wants.
  16. Retain key employees and managers by offering long-term incentive plans that reward their personal performance and loyalty
    1. Only use equity as a last resort for motivating and retaining your management team. Consider alternative forms of long-term incentive plans.
  17. Create a positive cashflow cycle.
  18. If your company generates excess cash, an acquirer will usually pay more for your business because he or she doesn’t have to commit funds to working capital.

    If you get an offer to buy your company, the second most important number on the page may be the working capital calculation. If your offer does not include details on the working capital calculation, be sure to lock that number down before you agree to anything.

  19. Avoid selling side products or non-core products
  20. If you received an offer to sell your company, tell your management team
  21. If you received an offer to sell your company, convert offer(s) to a binding deal
  22. Write procedures for repeatable business activities

✍️Notes

The Five Big Ideas

  1. You should always run a company as if it will last forever.
  2. The best businesses are sellable—even if you have no intention of cashing out or stepping back anytime soon.
  3. Once your business can run without you, you’ll have a valuable asset.
  4. If you focus on doing one thing well and hire specialists in that area, the quality of your work will improve and you will stand out from your competitors.
  5. Make sure that no one client makes up more than 15 percent of your revenue.

3 Criteria For Scalable things

  1. They are “teachable” to employees (like the Stapleton Agency’s Five-Step Logo Design Process) or can be delivered through technology;
  2. They are “valuable” to your customers, which allows you to avoid commoditization;
  3. They are “repeatable,” meaning customers need to return again and again to buy (e.g., think razor blades, not razors).

6 Forms of Recurring Revenue (presented from least to most valuable)

NO. 6: CONSUMABLES—TOOTHPASTE

If you sell a consumable, start tracking your repurchase rate from existing customers. This will be a number that acquirers will use to calculate your projected sales into the future—and to calculate how much they’re willing to pay to buy your company today.

NO. 5: SUNK MONEY CONSUMABLES—RAZOR BLADES

More valuable than basic consumables such as toothpaste are “sunk money consumables.” In the case of these items, the customer has made an investment in a platform. When I started using Gillette Sensor razor blades, I first had to buy a handle. Now I buy a new five-pack of blades every month, and I can’t bring myself to try Schick because then I’d have to purchase its handle mechanism.

NO. 4: RENEWABLE SUBSCRIPTIONS—MAGAZINES

Even better than having loyal customers who repurchase is having revenue that is guaranteed into the future. For example, I am a loyal subscriber to Outside magazine. Each year I get a re-up letter, and I send a check to cover my next twelve issues. Outside recognizes one-twelfth of my subscription fee the month it receives the check and each of the next eleven months.

NO. 3: SUNK MONEY RENEWABLE SUBSCRIPTIONS—THE BLOOMBERG TERMINAL

When customers make an investment to do business with you, they become very sticky. If they buy on a subscription model, you will have one of the most valuable businesses in your industry.

NO. 2: AUTO-RENEWAL SUBSCRIPTIONS—DOCUMENT STORAGE

When you store documents with Iron Mountain, you are charged a fee each month until you ask for your documents to be shredded or you agree to pick them up.

NO. 1: CONTRACTS—WIRELESS PHONES

The only thing more valuable than an automatic renewal subscription is a hard contract for a defined term. As much as we may despise being tied to them, wireless companies have mastered the art of recurring revenue. Many give their customers free phones as long as the customer locks into a two- or three-year full-service contract.

8 Steps To Transform Service Firm Into A Sellable Company

To transform a service firm into a sellable company, follow this 8-step process. Before you start the process, engage a good accountant with experience in helping entrepreneurs with succession planning. Depending on your tax jurisdiction, there will be tax planning strategies your accountant can put into place now that will minimize your tax bill when you sell your business. Do not wait until you have an offer to see an accountant. Timing is critical; get an accountant to devise a tax minimization strategy before you start the 8 steps.

Step 1: Create a Standard Service Offering

The first step in building a sellable company is to find a service your clients find valuable that you can teach someone else to perform. Brainstorm all of the services that you provide today and plot them on a simple diagram with "Teachable" on one axis and "Client Value" on the other.

Often, you'll find the most teachable services are the ones that clients value the least. That's normal. Alternatively, you'll probably find the services your clients value most are the least teachable. Work through all of the services you offer and eliminate services that a client needs to buy only once. Of the remaining services, pick the one that is plotted closest to the top right corner of the diagram above, which means that clients both value it as a service and you can teach it to someone to execute. This becomes the Standard Service Offering.

Sometimes you'll find that, by combining one or more services, you can create the ideal offering. Experiment with bundling a few services together to stake out the top right corner of the diagram.

Once you've isolated the service that clients value, need often, and is teachable, document your process for executing this type of project. You'll recall the conversation when Ted helped Alex to define and document the Five-Step Logo Design Process. Define each of the steps so that you can repeat the model in the same way each time.

Once you have a Standard Service Offering, write an instruction manual to deliver it. Make sure your instructions are specific enough for someone to follow independently by using examples and fill-in-the-blank templates where possible. Test your instructions by asking someone or a team to deliver that service without your involvement.

Getting the instruction manual done right will take time. Expect it to go through many drafts. Be patient.

Next, name your Standard Service Offering. Naming your offering gives you ownership of it and helps you differentiate from potential competitors. Once you are the owner of something unique, you move from offering a commoditized service to one where you decide the terms of its use. There's a market for whatever generic service you provide and you don't want customers comparing your price to others. Instead, name your offering and each of the steps you take to deliver it to differentiate the service so that you can set the price and payment terms.

Once you've named your Standard Service Offering and each of the steps, write a short description of the features and corresponding benefits of each step. Once you have the steps to your process and the corresponding copy, revamp all of your customer communications (e.g., website, brochure) to describe your process.

Step 2: Create a Positive Cash Flow Cycle

Next, create a positive cash flow cycle by charging up front for your Standard Service Offering. This will be possible if you branded your offering properly. Depending on your service, you may not be able to charge for the entire amount in advance, but you can try. You'll be surprised at how many clients agree. It's not unheard of to have clients pay $100,000 or more up front for a Standard Service Offering that is delivered over a year. If you charge up front, you will create a positive cash flow cycle, which will give you the cash you need to operate without diluting yourself with other shareholders. Acquiring companies will also give you a higher valuation when you sell your company because they will not have to commit as much of their own capital to your company.

Step 3: Hire a Sales Team

Once you have created, packaged, and started to charge for a Standard Service Offering, you need to remove yourself from selling it. If you have others delivering the service, but you're still the rainmaker, you will not be able to sell your businesses without a long and risky earn out. Instead, you need to hire salespeople. If you have done a good job packaging a consistent service, the best salespeople will be those used to selling a product. Look for salespeople like Angie Thacker who enjoy selling first and the product second. Avoid salespeople who come from professional services companies, as they will want to re-invent your service for every client.

If at all possible, hire at least two salespeople (not just one). Salespeople are competitive and an acquirer will want to see that you have a product that can be sold by salespeople in general and not just one superstar salesperson.

Step 4: Stop Accepting Other Projects

The next step is to stop taking on projects that fall outside of your Standard Service Offering. It's tempting to accept these projects because they bolster your revenue and cash flow. If you're charging up front for your service and your salespeople are selling it, then you shouldn't have to worry about cash flow. That leaves revenue as the reason to accept these projects that fall outside of your process. The revenue may feel good at first but it comes at an unacceptable cost: your team will lose focus; realizing that you're not serious about your process, clients will see a chink in your armor and start asking for customization of their projects; and you will need to hire other people to deliver. Most importantly, when you go to present your business to an acquirer, they will see the mixture of revenue from both your Standard Service Offering and project work and determine that you're just another service business.

I've had the opportunity to speak with hundreds of business owners who have made this transition and most have told me that clients who used to ask for custom services respect the change they made to their business model. Many clients actually buy more once the service is standardized. Clients are smart; they often know you're overreaching your capabilities in accepting assignments that fall outside of your sweet spot. In most cases, they will use you for these services because they know, like, and trust you. That doesn't mean you need to accept them.

Stopping yourself from accepting projects outside of your Standard Service Offering is the toughest part of the process of creating a sellable company. You will have employees testing your resolve and clients asking for exceptions, and you will second-guess yourself on more than one occasion. This is normal; you have to be strong on this and resist the temptation. There is a point where the wind will start blowing the other way and your clients, employees, and stakeholders will finally realize that you're serious about focusing on one thing. It takes time. It will happen, and when it does and you feel like the boat has actually shifted, you will have taken a giant step in creating a sellable company.

Once you have focused on a Standard Service Offering for which you will charge up front, and you have sales reps who are capable of selling and employees who are capable of delivering without your involvement, you need to create a two-year run of increasing business and financial performance. This is often frustrating for business owners who have made the decision to sell their business. Be patient and remember that these two years dramatically increase the cash you get up front for your business and minimize your reliance on an earn out.

Expect the year that you make the switch from accepting projects to focusing on your Standard Service Offering to be a bad financial year on paper. Your cash flow should be fine if you're charging up front but your accountant will need to change the way he or she recognizes revenue by spreading it out over the life of the delivery period of your Standard Service Offering. This has an effect of lowering your revenue in the current period and allowing you to go into future months with revenue on the books.

Spend two years driving the model as far and as fast as you can. Avoid the temptation to get personally involved in selling or delivering your Standard Service Offering. Instead, when you get asked for help, diagnose the problem and fix your system so the problem doesn't recur.

Many business owners realize a tremendous uptick in their quality of life in these two years. Business improves, cash flow grows, and client headaches decrease. In fact, many business owners like this stage so much, they shelve their plans to sell their company and decide to run it in perpetuity. If this happens to you, congratulations! If you still want to sell your business, continue on to the next step.

Step 5: Launch a Long-Term Incentive Plan for Managers

You need to prove to a buyer that you have a management team who can run the business after you're gone. What's more, you need to show that the management team is locked into staying with your company after acquisition.

Avoid using equity to retain key management as it will unnecessarily complicate the sale process. Instead, create a long-term incentive plan for your key managers. Each year, take an amount equivalent to their annual bonus and put it aside in a long-term incentive account earmarked for each manager you want to retain. Allow the manager to withdraw one third of the pool each year after a three-year period. That way, a good manager must always walk away from a significant amount of money should they decide to leave your company. You can go to

to find a template for a long-term incentive plan.

Step 6: Find a Broker

For those business owners who are committed to selling, the next step in the process is to find representation. If your company has less than $2 million in sales, a business broker will best serve you. If you have more than $2 million, in sales, a boutique mergers and acquisitions firm is probably your best bet. Look for a firm with experience in your industry, as they already know many of the potential buyers for your business. To find an M&A firm or business broker, ask other entrepreneurs you know who have sold their firm for a recommendation.

Make sure your broker appreciates what you have done to transform your business. If they continue to see you as the same as the commoditized service providers in your industry, move on. They need to appreciate that you have created something special and deserve to be compensated at a higher rate.

Once you have an M&A firm or broker engaged, they'll work with you to create The Book. This document describes your business and its performance to date along with a business plan for the future.

Your broker will typically charge a percentage of the proceeds of the deal in the form of a success fee.

Step 7: Tell Your Management Team

Your broker will set up management presentations for you and your team to meet with a prospective buyer. Telling your management team can be a daunting task. Think about it from their perspective and make sure there is something in it for them if the deal goes through. An acquisition can often mean significant career opportunities for your managers and that may be enough. Emphasize that, by being acquired, your managers will be more likely to hit the personal bonus targets, which will benefit them twice if you have created the long-term incentive plan as described in Step 5. You may also want to offer key employees a simple success bonus if a deal goes through. Offer to pay the success bonus in two installments, with one installment coming 60 days after the close and the other at some point in the future. An acquirer will like the fact that you put a deal-related incentive in place for your key employees to stay.

Step 8: Convert Offer(s) to a Binding Deal

Once you have completed your management presentations, you will hopefully get some offers in the form of a non-binding Letter of Intent. As you review it, keep in mind that your advisor will be trying to sell the benefits of the offer to you because: a) they'll get paid if the deal goes through; and b) they want to remind you of the hard work they have done to justify their fee.

This is normal and to be expected, but do not be swayed by it. Study the offer. It will likely contain an amount of money (or some other currency like stock) up front with another chunk tied to one or more performance targets for your business after the sale, which is often referred to as an earn out.

Treat the earn out portion as gravy. An earn out is simply a way for an acquirer to minimize their risk in buying your company. This means that you take most of the risk and they get most of the reward. Some earn outs have proven lucrative for the owners who accepted them. Most business owners who have sold a service business, however, have a nightmare story involving an overbearing parent company not delivering on what they promised in an earn out contract. As long as you get what you want for the business up front, and treat the earn out as gravy, you can walk away when things get nasty. If you feel like you have to stay to get full value for the business, then life will get uncomfortable for the duration of the earn out.

Keep in mind that the Letter of Intent is usually not a binding offer. Unless it includes a break-up fee (rare for smaller companies), they have every right to walk and you get nothing. Deals often fall through in the due diligence period, so don't be surprised if it happens to you.

The due diligence period usually lasts 60-90 days and a veteran entrepreneur I know likes to refer to it as the entrepreneur's "proctology exam." It isn't fun and the best strategy is often to just survive it. Due diligence can make you feel vulnerable and exposed. If the buyer is a professional, they will dispatch a team of MBA-types to your office who will quickly identify the weak spots in your model. That's their job. Try to keep your cool during this period. Try to present things in the best possible light but do not lie or hide the facts.

Once the due diligence period is over, there is a good chance that the offer in the Letter of Intent will be discounted. Again, don't be surprised if this happens to you. Expect it and you'll be pleasantly surprised if it doesn't happen. You'll need to go back to the math you did when reviewing the Letter in the first place. If the new discounted offer meets your target cash up front, then you can go ahead and agree. If the discounted offer falls below the threshold, walk away no matter how much the acquirer promises to help you hit your earn out.

If you accept the revised offer or the due diligence period ends, you'll have a closing meeting. Typically held at the acquirer's law firm, this is where the formalities are handled. You sign a lot of documents and, once the documents are signed, the law firm will move the cash portion of the sale from their account to yours. The deal is done