I liked the simplicity of the book so much that when John followed up with me, we decided to conduct a Q&A so readers -- that's you! -- could get a true understanding of what the book's about and why he wrote it in the first place. Here's the result.
LD: Why did you write "Built to Sell?" What's in it for you? What's in it for your reader?
JW: I used to own a market research company with a special niche of studying business owners. One statistic that jumped out at me was that more than half of all business owners want to exit their companies in the next 10 years yet just one percent successfully sell their company each year.
"Built to Sell" is about how to build a valuable company you could sell – whether you want to sell next year, 10 years down the road or would just like to sleep well at night knowing you could sell your business if and when you’re ready.
LD: Does your ideal reader have a particular age or revenue base?
JW: The ideal reader is a business owner whose growth has stalled and they feel trapped by their business. Customers ask to speak to the owner, the owner gets involved in serving customers and then customers have the expectation the owner will serve them the next time. With customers loyal to the owner, they reach a ceiling they can’t bust through.
LD: In addition to a business owner building a business where "they" are the business, what is the second biggest mistake owners make when they are ready to sell their business and why?
JW: Assuming the offer they receive is a binding deal. When an acquirer makes an offer for your business, it is typically a non-binding letter of intent. Many business owners see the offer and spend the money in their mind without realizing that the acquirer can walk away at any time during due diligence with no penalty. Their offer is often discounted during diligence (I spoke with a deal lawyer for an article I was writing and he claimed 100% of the deals he has worked involved a discount in price between the offer letter and the binding agreement) so there is still a lot of work and negotiation to be done between agreeing to a non-binding letter of intent and a binding agreement.
LD: How important is a company's international base of customers when they go to sell their business? For example, say my company sells to more than 27 countries and generates 33% of its overall sales overseas. How attractive is that to a potential buyer? If it depends, how so and why? What is the likelihood then that my company might be acquired by a company located in another country? What's it based on?
JW: I think having international customers will increase your value and you’ll get a better multiple for your business when you sell. The price you get for your business is governed by supply and demand – the more people who want to buy your company, the higher the price you’ll get. With international customers you will be seen as an international company and buyers may come from countries where you have customers.
The weakness of the U.S. dollar in relation to some other world currencies also means you should definitely include countries outside of the U.S. as possible acquirers. For example, two years ago, the Canadian dollar was worth 78 cents to the U.S. dollar. Today the currencies are at par, meaning Canadians are buying more U.S. businesses with their newly strengthened currency.
LD: One of the tips you offer in your book is positioning your service business as a product business by way of a process. Without giving away too much, can you explain how that came about and touch on its advantages?
JW: Acquirers try to quickly put your business into one of two buckets when they are evaluating a possible purchase: They have a “service business bucket” and a “product business bucket.” If you get stuck in the service business bucket, they will reason that the assets are the people, and they will value your business much lower (lower multiple etc.). Whatever money you do get for your business will be tied to a risky 3-5 year “earn out” which involves trading your ownership stake in your company for a glorified job in the acquiring company. An earn out is the enemy for any entrepreneur so you want to do whatever you can to get put in the “product business bucket” and get as much of your cash up front.
LD: What tactical steps should small business owners be taking now to maximize value for when they sell their business? If they have a product or service offering that is not scaleable, would you suggest they scrap it and start over or ...?
JW: Yes. In a recession, it's tempting to offer more stuff to grasp whatever revenue you can, but that revenue comes at an unacceptable cost in the time and money it takes away from what you’re best at. Jim Hindman identified oil changes as the one service of the typical auto service center that could scale beyond him. He started Jiffy Lube and ultimately sold it for $42 million. Arguably now more than ever it is important to be the world’s best at one thing rather than being good at a lot of things.
LD: If there was one strategic thing that a business owner should focus on while building a great, enduring enterprise that can be sold later on for a gazillion dollars, what would it be?
JW: Create a positive cash flow cycle by charging for all or some of your product/service up front. A positive cash flow cycle will allow you to use your customers' money to grow your business without going outside for capital, and when you’re ready to sell you’ll get a higher multiple because the acquirer does not need to commit extra cash to fund the day-to-day operations of your business.
There are lots of examples of companies that have turned their cash flow model from negative to positive. Probably one of the most famous is Dell. At Dell they used to pay for the inventory to build the computers and then advertise to get a customer to call. They had to outlay all of the cash from the inventory and advertising and almost choked on their own growth. Now they take the customers' money and wait to order the parts based on orders they received. They process the customers' credit card when they make the purchase and don’t pay their vendors for 60 or 90 days, allowing them to use their customers' cash to fund the business.
LD: If you had it to do all over again, what would you have done differently in terms of how you built and sold your first company?
JW: I’ve started and exited four companies. My first was a graphic design company where we would do anything for a buck. I had read too many books about how the “customer is king” and heard too many stories like the guy who returns snow tires to Nordstrom’s despite not buying them there (Nordstrom’s doesn’t sell snow tires). I mistakenly believed the key to an enduring business is treating the customer well. Now I think that’s crap. A business owner needs to lead their customers by offering something of value on terms that allow the business owner to scale their company. I wasted a lot of time bending over backwards trying to “serve” customers when I should have picked one service, taught others to execute and built a business. Instead we were just a collection of people, hawking hours.
LD: With the Internet and globalization, how do you see the future when it comes to buying and selling businesses? Will it be easier, more competitive, more complex or all of the above?
JW: It's becoming a lot more fluid and global. In the past, if you wanted to sell your business, you had to rely on a business broker who knew your local geographic market. Now the same broker will list your company for sale on www.bizbuysell.com and get access to potential buyers from around the world.
More information can be found here:
Go here for an overview of the book.
Visit Warrillow's blog here.
His column in The Globe & Mail (Canada's national newspaper) here.
And his website: www.BuiltToSell.com
Posted by: The Global Small Business Blog