Today I am going to show you how to build a sellable business.
Building a business is the fastest way to grow your net worth. Selling a business is the fastest way to turn that growth into cold hard cash.
Unfortunately, only 1% of businesses ever sell.
The good news is that if you build your business right from the start, you have a good shot of beating the odds.
Here’s what makes a business unsellable:
- Low-to-no earnings
- Reliance on the owner
- Non-standardized service
- Client concentration
- Poor management
But, with a little planning, you can overcome all these hurdles.
Here’s how to do it, step by step:
Step 1: Grow your earnings
There are two ways to increase the value of a business:
- Increase earnings
- Increase the earnings multiple (the amount a buyer pays for those earnings)
Buyers pay a higher multiple for more earnings; this is called multiple expansion.
Let’s illustrate this:
If your business has low-to-no earnings, you’re selling a headache, not an asset.
Conversely, a slight increase in earnings can skyrocket the value of a business.
Here’s how a $100k increase in earnings can lead to an $800k increase in value (because of a higher multiple.)
By maximizing the multiple, you’re maximizing the valuation. The easiest way to increase your multiple is to increase your earnings.
Step 2: Don’t be an icon
Most founders act as the mascot for their business, so customers view staff as substitutes of lesser value.
If replacing you would hurt sales, your presence impacts the business value. No one wants a business with an “icon problem.”
Step 3. Standardize your service
A hard-to-run business is a hard-to-sell business. Standardizing your services makes fulfillment easier, which leads to a more consistent outcome.
For a business to be scalable, its offering must be:
- Teachable to employees
- Valuable to customers
- Consistently repeatable
Increase the value of your business by:
- Standardizing your pricing
- Delivering consistent service to every client
- Having a written process for everything that happens in your business
Approach standardization as an ongoing exercise. Set aside time each month to document, review, and update processes.
Step 4: Diversify your client base
Your business is less valuable if one client makes up more than 15% of your revenue.
I know a lawyer that was selling his firm; two clients represented 80% of his business. During due diligence, both clients left. It killed the deal and tanked the valuation of the business.
A business with a diversified client base will be far more attractive to buyers.
More clients = less risk.
Step 5: Build a strong management team
A buyer wants to see someone (that isn’t you) responsible for:
Buyers want to acquire assets, not headaches. Few things are more challenging than hiring and training key staff members.
Business value = Earnings x Earnings Multiple
Your earnings largely determine your earnings multiple.
So increasing earnings is the easiest way to increase valuation.
Standardizing your service, hiring a strong management team, and diversifying your client base will also increase your earnings multiple.
Focus on these 5 things and you’ll have a sellable business.
See you next week 🤙.