June 11, 2014

Is now really the “perfect” time to sell a business?

Yesterday the Dow Jones Industrial Average flirted with 17,000 points.

Last month, GF Data reported “Middle Market multiples jump in Q1” as private equity buyers and their amnesic bankers jacked up offers on mid-market companies.

Knight Frank recently reported the cost of a London flat is up 7.5% over the same time last year; and similar trends can be seen in many real estate markets around the world.

Internet stocks are fetching multiples of their revenue again.

It seems everywhere you look, valuations are up. All this froth could lead a business owner to say that now is the perfect time to sell.


But most owners who sell will have to do something with the money, which usually means buying into an equally inflated asset class.

Let’s imagine you own a business throwing off $2 million of Earnings Before Interest Taxes Depreciation and Ammortization (EBITDA). Given how frothy the market is, you decide to sell when a Private Equity Group – pockets lined with cheap money from the bank –offers you 6 times earnings.

You win the lottery and walk with $12 million before expenses and taxes. Now you have to decide what to do with your money.

Buy stocks? Well, the Dow has more than doubled since 2008 and could be cut in half again. Maybe you decide to play it safe and put your money into a vacation home in Phoenix. While homes are still cheap there, the average price of $190,000 in April 2014 was up 75% since May 2011.

Would you want to put all your eggs into a real estate market that has almost doubled in the last three years?

Instead of real estate, maybe you decide to buy some technology stocks like, which is trading at almost eight times revenue.

Missing the market

Now let’s imagine you wait. You ride it over the top, and the market for privately held businesses tanks. Financing dries up. The Dow drops to 11,000 (still more than 50% higher than it was in 2009) and the best offer you can squeak out is four times EBITDA, or $8 million.

Are you a loser?

Maybe, but you get to invest your $8 million (less after closing costs) into a stock market at 11,000 points, which means if the market climbs back up to 17,000 – a 55 % increase – then your $8 million goes to $12.4M – half a million more than if you had sold at the top.

The problem with timing the sale of a privately held business is that the owner(s) still needs to do something with the money.

So, is now really the perfect time to sell? Or is it perhaps better to wait until your internal operations and metrics are sound and then sell when you’re ready, regardless of what is happening with external markets – because whatever market you sell into, you will have to buy into the same market conditions.

February 13, 2014

Instinctive leadership vs. The CBO

Are there elements of your own personality within your company’s brand?

If you’re like most owners, your company’s brand evolves naturally from who you are as a person. Phil Knight ran a 4:10 mile before he started Blue Ribbon Sports, the company that would go on to become NIKE. It is therefore no surprise that the NIKE brand celebrates competitiveness as one of its core attributes.

Herb Kelleher is himself a colorful personality so it is no surprise that Southwest Airlines includes “fun” as one of its brand attributes and allows flight attendants to sing the in-flight announcements to the tune of Call Me, Maybe.

My friend Ted Matthews, the author of Brand: It ain’t the logo calls this “instinctive leadership.” You don’t need to tell an employee of an entrepreneurial company how to act; they can see what the company stands for whenever you’re in the building.

You don’t need to bore employees with posters displaying the words Trust, Integrity, and Team Work. Those values are nothing more than words emblazoned on half the boardrooms of America. They mean nothing to a group of jaded employees. Instead, your people will know how to act based on how you react to specific situations.

They’ll know to treat subordinates with respect when you acknowledge and thank the waiter at lunch.

They’ll know your company values vulnerability when you offer a personal story of your own shortcomings.

They’ll know teamwork is important when you personally roll up your sleeves and help out when the team is in a pinch.

Most of the founders I know get this, and they do a great job of being “instinctive” leaders. The challenge comes when you have grown your company beyond just a handful of employees. When they no longer see you day –to-day, you have to make the shift to what Ted calls a Chief Brand Officer (CBO).

The role of the CBO

The role of the CBO is to codify your brand into a document – Ted calls it a Brand Foundation – that allows people to understand what you stand for. The Brand Foundation worksheet in the back of Ted’s book encourages you to answer the following questions:
• Why do you exist as a company?
• Where are you going and how will you know when you are there?
• What do you believe in?
• How do you act?
• What is your voice?
• How do you make a difference?

Once this is written down and shared with employees, the CBO’s job is to constantly remind employees of the foundations of the brand. Ted has found that one of the most powerful ways to make brand attributes stick and spread is through storytelling.

It is one thing to say “we believe in having fun.” It is another for Herb Kelleher to stand up at a companywide meeting and acknowledge the flight attendant who gave the funniest safety announcement of the year.

It is one thing for Phil Knight to say “NIKE’s brand stands for competitiveness.” It is quite another for Knight to send an email to all staff congratulating a junior employee on qualifying for The Boston Marathon.

Once you have the brand foundation, it is the storytelling that makes it stick.

If you haven’t read Ted’s book, do it now. I’m onto my third reading and I learn something new with each pass. I’ve also asked Ted to join us in Las Vegas at Built to Sell: The Workshop so you can build your own brand foundation with the help and guidance of the branding guru himself. Ted just agreed yesterday to come to the Vegas workshop, so I’ve decided to extend the registration deadline for a few days to allow those of you who haven’t yet met Ted Matthews and heard him speak, to make the decision to come. Sign up here.

February 05, 2014

5 dirty tricks buyers use to acquire your company for less than it’s worth

There’s a school in Chicago that teaches buy-side finance people how to acquire companies on the cheap. They have a steady stream of private equity firm partners lining up to learn how to fleece business owners out of their company.

I’m not sure why a school for buy-side mercenaries bugs me so much, but it does.

In the public markets, disclosure rules mean that buyers and sellers have the same information about an investment thesis. The market is liquid and you can buy something for pretty much what the market says it’s worth.

In the private markets, buyers and sellers have imperfect information. The waters are murky—which leaves virgin sellers susceptible to being taken advantage of. Here’s a smattering of the typical sleazy techniques buyers learn in school:

The Inflated Working Capital Calculation

The Con: The buyer surprises you with a generous offer but intentionally omits their proposed working capital calculation or leaves it vague. After you agree to an offer price, the buyer proposes a punitive working capital calculation, forcing you to leave more of your money in the company the day you hand them the keys.

The Result: Your after-tax proceeds from the sale of your business are lower than if you had accepted one of the other offers with a more favorable working capital calculation.

The Defense: Have a buyer spell out their proposal for calculating working capital before you agree to a Letter of Intent.

The Proprietary Deal

The Con: The buyer woos you into signing an exclusive deal to acquire your company before you create a competitive market for your deal.

The Result: You lose negotiating leverage and ultimately get a lower price for your business.

The Defense: Do not sign an exclusivity agreement until you’ve shopped your company to a shortlist of strategic buyers.

The Bait & Switch

The Con: The buyer agrees to purchase your business for X price. At the end of the due diligence period, when you’re emotionally drained and committed to a sale, she drops the agreed-to price.

I once asked a veteran corporate lawyer how common Bait & Switch tactics are in mid-market M&A. Over a 20+ year career, he had never worked on a company sale where the original offer was not discounted in some way before the deal closed.

The Result: You sell your business for a price lower than originally agreed.

The Defense: Assume the buyer’s price will drop 15% during due diligence; so only accept a Letter of Intent if you could live with selling for 85% of the offer at the LOI stage.

The 100% Vendor Take-back

The Con: The buyer agrees to your price but insists you finance all or most of the sale. Most buyers ask the seller to finance a minority portion of the deal, but asking a seller to finance all of it is the equivalent of walking into a Starbucks, reaching into the till, grabbing a wad of cash, and using the store’s money to “buy” yourself a coffee.

The Result: If you end up financing most of the sale of your company, the buyer has little or no skin in the game, which means they will walk (leaving you as the proud new owner of your company again) at the first sign of trouble.

The Defense: try to get at least 50% of your proceeds in cash so the buyer has something to lose if they can’t make a go of your business.

The Earn-out

The Con: The buyer agrees to a valuation for your business that includes a portion of your proceeds “at risk” in an earn-out. If you don’t hit your goals, the earn-out vanishes.

The Result: Your proceeds from a sale can be less than if you had accepted a lower all-cash offer.

The Defense: Expect an earn-out, but treat it as gravy. Only sell if you’d still be happy with the deal if the earn-out never materialized.

This is just a smattering of the dirty tricks used by the highly trained mercenaries on the other side of what will be your negotiating table. We’ll pick this conversation up in a few weeks at Built to Sell: The Workshop where I’ll take you through my eight laws for negotiating the sale of your business. See you in Vegas.

January 27, 2014

Planning to exit in 5 -10 years? Here are 10 things to do right now.

You may have been surprised to see Stanislas Wawrinka beat Rafael Nadal to win the Australian Open last weekend. After all, Nadal was the clear favorite, having won all 26 combined sets in their 12 previous matches.

But Nadal’s lower back started to seize up in the first set, and Wawrinka was prepared to take full advantage. In fact, Wawrinka has been preparing for his moment in the sun since he was fifteen years old, when his parents pulled him out of school so he could focus on his tennis career. He turned pro back in 2002 and ever since then has been preparing for his shot at winning a Grand Slam.

Will you be prepared for your moment in the sun?

As a business owner, you too need to be prepared when opportunity strikes. The two most common reasons owners sell their business are:

• Getting approached with an unsolicited offer; and
• Having a health scare (e.g., heart attack, stroke, etc.) that lands them in the hospital.
In either case, you’re not in control of the timing, but you are in control of how prepared you’ll be when opportunity (or necessity) strikes.

Whether you want to sell in five or ten years, here’s my list of 10 things to do right now to get your business ready to sell:

1. Make sure your customer contracts include a “survivor clause,” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business.

2. Cultivate a group of a dozen “referenceable” customers that an acquirer could interview. When you sell, the buyer will want to speak with your customers; so you need a group of people – customers who are also friends – that would be willing to say good things about your company. In particular, the acquirer will be looking for assurance that the customer will keep buying after you leave, so make sure your referenceable customers are loyal not just to you but also to your business.

3. Start tracking your Net Promoter Score (NPS). Increasingly, acquirers (both “strategics” and Private Equity Groups) have standardized on NPS as a way to predict the future of their portfolio companies.

4. Write a “teaser.” A teaser is an anonymous letter an M&A professional uses to solicit interest from an acquirer to buy your company. Writing your teaser now will crystallize the important attributes of your company and ensure you focus on the right metrics in the coming years. Your teaser should cover the Who, What, Where When and Why of your business:

• Who: describe why your management team is a winner.
• What: describe what you sell and why customers choose you.
• Where: where are you located and what is the potential to expand geographically?
• When: how long have you been in business?
• Why: What are the strategic reasons someone would want to buy your company? Do you have a niche? Is your product a world-beater?

Carry your teaser around with you and update it constantly. Keep making decisions for your business now through the lens of how the results of your decisions would be perceived by a potential acquirer down the road

5. Identify 10 companies with a strategic reason to buy your business. Once you have a short list of potential buyers, study their M&A activity. What do they buy? What do they list as the strategic reasons for their acquisition in their media releases? Who are their lead corporate development executives?

6. Do business with your short list. Once you have a short list of potential acquirers, try to do business with as many of them as you can. Companies buy companies they know; so if you can find a way to work with a potential acquirer (either as a partner, supplier or customer) it’s a chance for them to become familiar with your company.

7. Professionalize your bookkeeping – there’s nothing that freaks a buyer out more quickly than sloppy books.

8. Protect your gross margin. Oftentimes, when leading up to being listed for sale, businesses grow by chasing low-margin business. You tell yourself you need top-line growth, but when an acquirer sees your growth has come at the expense of your gross margin, she will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.

9. Stop doing the selling. If you’re the rainmaker, nobody will buy your business without a soul-crushing earn out. Keep in mind that sales people take time to train and to hit their stride. Depending on your industry, it may take them a year or even two to start cranking out deals, so now is the time to hire and train them – not six months before you want out.

10. Register for “Built to Sell – The Workshop” that takes place February 28 – March 2. We’ll spend a few days together maximizing the sellability and value of your business. We’ll talk about how to attract a strategic buyer without telling them you’re for sale. I’ll reveal publicly for the first time the eleven subscription business models I’ve been researching for my new book due out in 2015, and we’ll go through my eight laws for negotiating the sale of your business in the face of a mercenary buyer – any one of which could make (or save) you six or seven figures. I’ll explain the three most common mistakes owners make in selling their business and how to avoid each pitfall. Early registration closes this Friday. Do it now!


January 20, 2014

3.6 or 6.1 times earnings — which offer would you prefer?

We’ve just done some analysis with the data from the users of The Sellability Score since we launched back in 2012, and we’ve discovered companies that are “Built to Sell” get offers that are 71% higher than average:

Background On The Survey

After writing the book Built to Sell, I hired a team of researchers and we developed a scoring system that allows readers to understand the “sellability” of their business. You can complete a forty-question survey and you’ll see how you performed on the eight key drivers of sellability.

We license this and other tools to Sellability Score Advisors (people like accountants and M&A professionals) who invite their contacts to complete the survey and get their score. During the survey, we ask respondents if they have received an offer to buy their business, and if so, the multiple of their pre-tax profits the offer represents.

The Sellability Premium

We recently stuffed 6955 of our completed questionnaires over the last year or so into a mathematical model and churned out some interesting statistics, the most thought provoking of which is this:

Those businesses with a Sellability Score of at least 80 out of a possible 100 get offers that are 71% richer than the average business.

We call this 71% delta between the average business and a Built to Sell business “The Sellability Premium”. Take, for example, two companies each creating a million dollars in pre-tax profit. Business A has a Sellability Score of 65 and Business B has a Sellability Score of 82.

When we did the survey, the average multiple offered all businesses was 3.55 times pre-tax profit. Therefore, business A, according to our data, is likely to attract an offer of $3.55 million dollars ($1,000,000 x 3.55).

Business B is also generating a million dollars of pre-tax profit but they’ve been doing the hard – often unsexy – work of building to sell. With a Sellability Score of 82, Business B is predicted to get a 71% premium over the average business, thereby fetching something closer to $6.1 million ($1,000,000 x 6.1).

Yes, building to sell does make your business safer and more enjoyable to run, but it also makes it a whole lot more valuable when it is time to sell.

One final thought: if you’re planning to attend the Built to Sell workshop in Las Vegas from Feb 28 to March 2, we’ll invite you to get your score from one of our advisors prior to attending the event. That way, you can bring your report to the event and we can discuss your score together during our one-on-one. There are still a few spots available for the workshop and you can lock in your early bird discount of $600 by registering before January 31st.

January 16, 2014

Can you leverage one of the 11 subscription business models?

Have you seen the weather for the Australian Open tennis tournament this year?
Yesterday it apparently hit 108 degrees Fahrenheit in Melbourne, and Andy Murray for one was questioning the safety of the event.

I bet you the golfers over at the Royal Melbourne Golf Club (RMGC) were wearing shorts yesterday. And I bet they were shorts of the appropriate length with accompanying socks worn at least to mid calf; otherwise they would have been asked to leave. At RMGC they have strict rules that members must follow.

What do fancy shorts and mid-calf socks have to do with building a business?

I’ve been researching clubs like RMGC in my analysis of the various subscription models. So far I’ve discovered eleven different business models, and creating an exclusive club is one of the eleven.

The Private Club Model is a subscription business where you provide access to something rare. While it is most commonly associated with exclusive sports clubs like golf, tennis, skiing or yachting, it is also used by businesses selling to other businesses.

Consider the story of Joe Polish. Polish started his business career as a humble carpet cleaner. He learned how to build a successful carpet cleaning company and then began teaching those lessons to other carpet cleaners. He went on to broaden his reach to all industries by publishing Piranha Marketing, one of Nightingale Conant’s bestselling training programs for entrepreneurs.

Joe Polish now runs The Genius Network Mastermind, where, for a subscription of $25,000 per year, entrepreneurs, authors and innovators meet three times a year to share ideas. “It’s kind of like a wisdom network,” says Polish, “It’s where you find people who have incredible wisdom and you share it.”

Just like buying a membership to RMGC, subscribing to The Genius Network Mastermind is a decision you make with both the rational and the emotional sides of your brain. As any Porsche salesmen will tell you, exclusive things are bought on emotion and justified with logic.

For the logical side of your decision making, Polish offers three meetings per year at his headquarters in Arizona where you’ll learn with some of the brightest minds in marketing. But in attracting members to The Genius Network Mastermind, Polish also appeals to the emotional side of your brain. At least half of the value proposition of joining Polish’s group is who you’ll meet rather than what you’ll learn. Polish sells prospective members using reams of what he calls “social proof,” like interviews with happy and successful members describing what they get out of the network, and pictures of Polish with entrepreneurs like Richard Branson and Bill Gates.

Polish isn’t shy about his value proposition: “This is the group of people you would want to have access to in your ‘dream’ rolodex.”

Barriers to entry

One of the things that makes the Private Club Model work is the privacy itself. For some achievement-oriented people, the higher you make the barrier to enter, the more they want to climb over it.

Take, for example, the story of TIGER 21, which stands for The Investment Group for Enhanced Results in the 21st century. Think of TIGER 21 as the world’s most exclusive investment club where members pay a $30,000 per year subscription fee. Globally they have approximately 200 members, who collectively manage roughly $20 billion in assets. To get into this private club, you need a minimum of $10 million in investable assets.

TIGER 21 members meet monthly in small regional groups of about a dozen members each. Once the meeting starts, mobile phones are turned off, doors are closed to outsiders, and the members get down to business. At the center of every meeting is the “Portfolio Defense” – a one-hour presentation from a member who is asked to reveal the intimate details of their portfolio so their fellow members can critique their investment approach.

Asking high network investors, successful entrepreneurs and captains of industry to reveal the intimate details of their financial life is not easy, but it works for TIGER 21 because the Portfolio Defense is a requirement of all members. And because each member has met the minimum threshold of wealth for membership, there is a common respect among the group.

The Private Club subscription model involves providing something desirable where the supply is extremely limited. A large part of the value is not only accessing that which is rare, but also having the chance to meet with a network of other people who make the cut.

The other 10 subscription models

I’m going to present the Private Club subscription business model, along with the other ten models, at this year’s Built to Sell Workshop February 28 – March 2. If you haven’t bought your ticket yet and are planning to come, sign up here.

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