Earn Out - When a service company is sold, the owner typically get some money up front and the rest of their money is contingent on hitting performance goals on years ahead.
- To sell yourself, you need to demonstrate to a buyer that have a sales engine that will produce predictable, recurring revenue
- In order to sell your company, you need to create a business that can exist without you so when you sell it you're not obliged to stick around for years to come.
Summary of Ted’s tips
- Don’t generalize; specialize. 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
- Relying too heavily on one client is risky and will turn off potential buyers. Make sure that no one client make up more than 15 percent of your revenue
- Owning a process makes it easier to pitch and puts you in control. Be clear about what you’re selling and potential customers will likely to buy your product
- Don’t become synonymous with your company. If buyers aren’t confident that your business can run without you in charge, they won’t make their best offer
- Avoid the cash suck. Once you’ve standardized your service, charge up front or use progress billing to create a positive cash flow cycle.
- Don’t be afraid to say no to project. Prove that you’re serious about specialization by turning 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.
- Take some time to figure out how many pipeline prospect will likely lead to sales. This number will become essential when you go to sell because it allows the buyer to estimate the size of the marker opportunity.
- Two sales reps always better than one. Usually naturally competitive types, sales reps will try to outdo each other. And having two on staff will prove to a buyer that you have a scalable sales model, not just one good sales rep.
- Hire people who are good at selling product, 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.
- Ignore your profit and loss statement in the year you make the switch to a standardized offering model before you sell your company.
- You need at least two years of a financial statement reflecting your use of the standardized offering model before you sell your company.
- Build a management team and offer them incentive plan that rewards their personal performance and loyalty.
- Find an advisor for whom you will be neither their largest nor their smallest client. Make sure they know your industry.
- Avoid an adviser who offers to broker a discussion with a single client. You want to ensure there is competition for your business and avoid being used as a pawn for year adviser to curry favor with his/her best client.
- 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.
- 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 communication of any reference that reveals you used to be a generic service business.
- Don’t issue stocks 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 on through the transition.
- A buyer wants to hear that you see a future for your business and you want their help to get you to the next level.
- Buyers understand that entrepreneurs want to put some cash in their jeans, but no buyer wants to buy a sinking ship where the captain is about to jump.
- They need to feel like you see a future for the business and that you’re excited about exploiting the assets they have.
How to create a business that can thrive without you
Step 1: Isolate a product or service with the potential to scale
- They have to be teachable to employees or can be delivered through technology (eg. Five - Step Logo Design Process)
- They have to be valuable to your customers, which allows you to avoid commoditization
- They have to be “repeatable”, meaning customers need to return again to buy (eg. think razor blades, not razors).
Step 2: Create a positive cash flow cycle
- By creating a positive cash flow cycle, you’ll have the financial cushion and confidence to make the difficult changes.
- To create positive cash flow cycle. Charge your customer in full or in part for your product or service before you pay the costs of whatever it is you provide.
- A positive cash - flow cycle will also increase the value of your company.
Step 3: Hire a sales team
- If you have others delivering the product or service but you’re still the rainmaker, you will be able to sell your business without a long and risky earn - out.
- Avoid hiring sales people who come from professional services companies; they will likely want to reinvent your product or service for every customer.
Step 4: Stop selling everything else
- Stop taking on projects that fall outside of the standard offering.
- Customers are smart; they often know you’re over reading your capabilities in accepting assignments that fall outside of your sweet spot.
- Your team will lose focus and customers will lose interest.
Step 5: Launch a long-term incentive plan for managers
- If you want your business to sell, you need to prove to a buyer that you have a management team who can run the business after you're gone. Also, you need to show that the management team is locked into staying with your company after acquisition
- Avoid using equity to retain key management through an acquisition, as it will unnecessary complicate the sale process.
- Instead, create a long-term incentive plan for your key managers so that way, a good manager must always walk away from a significant amount of money should he/she decide to leave your company
Step 6: Find a broker
- If your company has less than 2 million in sales - Business Broker
- If your company has more than 2 million in sales - Boutique Mergers/Acquisitions firms
- Look for a firm with lots of experience in your industry b/c they will know many potential buyers.
- Your broker needs to recognize that you created something special and deserve to be compensated at a higher rate.
- Brokers typically charge a percentage of the deal in the form of the success fee.
Step 7: Tell your Management Team
- An acquisition can often be a significant career opportunity
Step 8: Convert offers to a binding Deal
- A letter of intent is not a firm offer. Unless it includes a breakup fee (rare for smaller companies), the buyer has every right to walk away.
- Study the offer
- An Earn-out is bad for the seller b/c earn-outs have proven lucrative for the owner who accepts them.
Tricks used by acquirer
Trick #1: Juggling calendars. By asking to make a last-minute change to your meetings time, an acquirer gets clues as to how involved you are personally in serving customers. If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of your business is so dependent on you that you have to be there.
Trick #2: Checking to see if your business is vision impaired. An acquirer may ask you to explain your vision for the business which is a question you should be well prepared to answer. However, he or she may ask the same question of your employed and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business lives only in your head.
Trick #3: Asking your customers why they do business with you. A potential acquirer may ask to talk to some of your customers. He will expect you to select your most passionate and loyal customers and expect to hear good things. The acquirer is trying to see where your customers loyalties lie.
Trick #4: Mystery shopping. Acquires often conduct their first bit of research behind your back, before you even interested in buying your business. They may pose as customers, visit your website, or come into your company to understand what it feels for the customers. Avoid personally being involved in finding or serving new customers b/c if any potential acquirers see this they will think that the business can’t thrive without you.