Want to sell your business one day? Follow these eight steps to build a business you can sell.

InformationWeek Staff, Contributor

March 17, 2010

5 Min Read

JohnWarrillowJohn Warrillow

John Warrillow is an entrepreneur, author, and speaker. Throughout his career, John has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy specializing in studying and reporting on the small business market into a recurring revenue model subscription business, which he sold in 2008 to Corporate Executive Board. Warrillow is the author of "Built To Sell: Turn Your Business Into One You Can Sell".

Half of all small business owners want to sell their business yet only a tiny fraction does it successfully. Based on his own experience selling his business, Warrillow presents the following eight steps that business owners need to take to build a business that can be sold.

Don't Miss:
"Built To Sell" Chapter 1: A Company In Chaos "Built To Sell" Chapter 2: A Worthless Business? "Built To Sell" Chapter 3: Putting The Process Into Practice "Built To Sell" Chapter 4: Pressure From Within

Step 1: Identify A Scalable Product Or Service

Scalable products meet three criteria:

  1. Teachable-you can train people or program technology to deliver them.

  2. Valuable-your customers want to buy them.

  3. Repeatable-you can show an acquirer a future stream of income.

Once you've picked a product or service that is scalable, document for your employees how to sell and deliver it.

Step 2: Create A Positive Cash Flow Cycle

The more working capital an acquiring company must put into your business, the lower its potential return on equity, and the less it will pay for your business. Create a positive cash flow cycle by charging up front or at least in staged billing so that you get paid before buying the products or services you're selling. Leveraging online billing platforms like Freshbooks will allow you to send invoices electronically (saving the snail mail lag time) and to preprogram invoices to be deployed at scheduled intervals.

Step 3: Put Lead Generation On Autopilot

Most business owners are their company's best salesperson. That may seem a positive, but if you want to build a company you can eventually sell, you need to show that sales are not dependent on you personally. Create a lead-generation engine that works when you're sleeping by buying keywords from Google (you pay only when you get visitors), and start a blog to stimulate repurchases from existing customers (most blogging platforms are free). If your company sells face-to-face, replace yourself with salespeople.

Step 4: Stop Accepting Orders For Anything But Your Scalable Product/Service

You need to stop selling everything but the product/service identified in Step 1. Great companies are the best at one thing. It makes them referable and ultimately sellable. Acquirers do not want to buy the "padding" in your business. They want the one product or service that makes you famous. Once you have started to charge up front, you'll have the cash to absorb any short-term revenue drop while customers adjust to buying only your scalable product.

Step 5: Launch A Long-Term Incentive Plan For Managers

A buyer needs to see your key people will stay after you're gone. A long-term incentive plan sets aside a portion of an employee's annual bonus in a locked-in account for three years. Upon the third year and in each subsequent year, the employee can pull out a third of the value. That way, he or she will always have to walk away from three years' worth of bonuses to quit.

Step 6: Find A Broker

Selling your business may be the largest transaction of your life, so get a professional to represent you. Good brokers create competitive tension and earn the success fees they charge. To find a broker, contact American Mergers & Acquisitions Advisors or you can visit BizBuySell.com, an online marketplace for businesses for sale (think eBay for small businesses). Contact a business broker representing companies that are similar to yours (e.g., in your city, industry, etc.).

Step 7: Tell Your Management Team

An acquirer will want to meet your management team before closing the deal. Explain to your employees how the acquisition will help them (e.g., career advancement) and consider offering a "success bonus" upon the sale of your company. Pay the bonus in two installments: one just after closing; the second, six months later to those who stay through the transition.

Step 8: Convert Offers To A Binding Deal

Your broker will (hopefully) generate offers for your business. Most of the time, these will be non-binding letters of intent (LOIs) that request a period of exclusivity to conduct due diligence. Like a home inspector, the acquirer will find warts in your business during diligence. Remain calm and expect the offer to be discounted from the number in the LOI. If the post-diligence offer meets with your approval, go ahead and close the deal.

Curious about whether you could sell your business (and for how much)? Take the 10-question Sellability Index Quiz at www.BuiltToSell.com.

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