Entrepreneurs should think much earlier about how, when and to whom they want to sell a business.
Most business owners give some thought to an exit strategy. Often this is a stand-alone scenario that comes into effect a few years prior to the planned sale of the business.
According to British-Canadian serial entrepreneur John Warrillow, this is the wrong approach. By doing so, the seller does not optimize the value of his business and he does not differentiate himself from all other businesses. He believes businesses should be set up for a potential sale from the outset. He wrote a popular book about it, Built To Sell, published in 2010. Warrillow's main lesson: Look at your own business through the lens of a buyer or investor.
Calculate enterprise value
Before starting Built To Sell, he had no preconceived plan to write a book, Warrillow says via Skype: "I had started four businesses, made many mistakes and learned a lot. After I sold my last business, the need to document and organize my mistakes and lessons grew.'
That spontaneous stream of thought resulted in a practical book with a clear view of entrepreneurship. Later, Warrillow tested his own findings against the experiences of thousands of other businesses. Based on this research, he developed The Value Builder System, a method by which businesses can determine their business value ("Value Builder Score"). The higher this score, the higher the potential market value.
He also devised a test that businesses can use to measure their own "sellability. Those who achieve a 'Selleability Score' of more than 80 (out of a total of 100) along this yardstick can count on a sales price 71 percent higher than average, Warrillow promises.
Getting your business ready to sell
Although Warrillow believes a business should be set up for a possible sale, he rarely talks about an exit strategy. Rather, he talks about an options strategy. The difference is fundamental, Warrillow explains.
'It means running a business in such a way that you keep all options open for as long as possible. One option is to sell to the highest bidder. Another option is to step back yourself and leave the day-to-day management to a manager. Finally, there is the option of a managerial buyout or a business transfer to the next generation. The point is not to focus on one possible exit.
A valuable business has a clear focus, argues Warrillow: "One of the biggest pitfalls for entrepreneurs is selling too many things to too small a group of buyers. Many small and medium-sized businesses have a similar life cycle. They start with an activity they are good at. Then customers ask if they can provide other, related, services or products.'
'Entrepreneurs cross over, based on their passion for the business and their knowledge of the industry,' Warrillow continues. 'Almost imperceptibly, they start developing more and more activities in which they are not distinctive. Before you know it, such a business is a mile wide and an inch deep. Often the broadening of the range of services or products goes hand in hand with a narrowing of the customer base. Thus you create a business that is not interesting as an acquisition candidate, even if it makes a profit.'
Increase business value: introduce subscriptions
According to Warrillow, the best way to increase business value is to introduce subscriptions. Indeed, at his current business, these are the core of the revenue model. Even if only a small portion of revenue comes from subscriptions, it significantly increases business value.
The importance of "recurring revenue" is touched on sideways in Built To Sell. 'A big mistake,' Warrillow now thinks. 'At least half the book should have been about that.' With this advancing insight, he wrote a the just-published The Automatic Customer. In this book, Warrillow explains that subscriptions can be used in virtually any industry.
After all, you have more to gain from subscribers than customers, he argues: "Subscription revenue shows investors and valuers that you have a regular customer group that you can communicate with. That offers more opportunities for cross-selling. The buying behavior of customers changes once they become subscribers. At Amazon, they understood that well.'
Warrillow: "They created Amazon Prime, a subscription for customers who want extra service. As a subscriber, your products ship for free within two days. Also, the subscription entitles you to a streaming video service, similar to Netflix. Worldwide, 40 million people pay $99 a year for a Prime subscription. On average, they spend $1,500 a year in the Amazon store. That's $1,000 more than the average Amazon customer. People simply want to "get their subscription out."'
Selling the business as a finish line
Warrillow's lessons are tailored to SMEs. For owners of small and medium-sized businesses, sell a business is something they do at most once or twice in their lifetime. Preparing for it is difficult - tricky, but not impossible.
Warrillow draws the comparison to the pilot who made a successful emergency landing on the Hudson River near New York on a United Airlines plane in 2009: 'That man knew the plane inside out, knew everything there is to know about flying, but he had never made an emergency landing on water. Yet he knew exactly what to do when the time came.'
A common mistake entrepreneurs make is to think of selling their business as the finish line of a running race, Warrillow believes: "A bit like the marathon runner who crosses the finish line cheering and then collapses exhausted along the sidelines. In reality, sell a business is a multi-year process. There is often an earn-out arrangement, or some other kind of transition period, where the selling entrepreneur has to stay on for another year or two and meet certain goals.'
Above all, remember that your "finish line" is a "starting block" for the buyer, warns Warrillow: "That buyer is not terribly interested in the history of the business and all the milestones you may have achieved. What matters, what you're selling, is the future of the business. That's where your focus should be. Build a business that thrives even without you, without a "finishing sprint."' Selling the business is the finish line.
The right time of business sale
In Built To Sell, fictional adviser "Ted" is vehemently opposed to an earn-out. Although sometimes inevitable, an earn-out is not the most desirable deal, Warrillow believes: "Of course an earn-out can work out well. But the risk is high. Entrepreneurs are used to being at the helm. Now suddenly they have to be accountable, often even functioning in a corporate culture. I know many examples of entrepreneurs who couldn't handle that well.'
Warrillow is also critical of a pre-exit, in which an entrepreneur, in anticipation of the real exit, sells part of the shares via redeployment to an investment company or a strategic buyer: "In America, this usually involves private equity parties. They buy the first part of the shares at a low valuation, hoping to increase the value of the business in a short time. In my opinion, there are cheaper and less stressful ways to increase the value of your business. Partners in private equity firms are mercenary investors. Their loyalty lies with their own shareholders.
'I would only go into business with them if you bring them not only a bag of money, but also a valuable network, knowledge and strategic advice.' Whether Warrillow has any further tips for entrepreneurs looking to sell a business?
He doesn't hesitate. "Don't wait too long. Often entrepreneurs try to "time" the sale so that they sell at the peak of the market. They forget that they are dealing with the same inflated economy when they want to spend their earned capital, for example, on stocks or real estate. Moreover, good timing is almost impossible. Often people wait too long, hoping for an even better selling price. By the time they go to sell, the momentum has passed and the market is already down. Sell your business when it is as successful as you can make it, regardless of what else happens in the economy.'
