A friend of mine from Miami called me the other day wanting to talk. He’s not much for chit chat so I knew something must be up with his business.

He runs a very successful importing company with forty people across the U.S. He has fat profit margins, hedges his currency risk and has actually been able to grow through this recession. In short, he’s one of the lucky ones.

As our conversation unfolded, he revealed that, even though he’s more than a decade away from “retirement age”, he has decided to sell his business.

He started our conversation by giving me the strategic reasons for getting out now: he’s in a growing, consolidating industry and they’re coming off their best year etc. but I could sense there was a deeper rationale for why he wanted out. Finally, he came clean:

“I guess I just want to take some chips off the table.”

As soon as he uttered those words I was reminded of one of the strongest reasons I wanted to sell my last business: the desire to stop gambling.

The bigger the business, the more risky it feels

They say starting a business is risky but I don’t see it that way. When you have nothing to lose, you’re not risking much. Sure, smaller businesses have a higher failure rate than larger ones, but I think they are actually less personally risky for the owner. If the start up you’ve sunk $50,000 in fails, you’re out $50,000. Not fun, but also not a death knell.

As my last business grew, I started to get the sense I was gambling more than I would like. It was a subtle feeling that started innocently enough but grew as time went on. I had most of my financial eggs in one basket and every day I went to work, I was gambling it.

The more successful our business became, the more nightmare scenarios I imagined:

• What if xyz company starts competing with us?
• What if xyz person leaves us?
• What if we have a fire?
• What if our network gets hacked?

These thoughts kept going through my mind – usually in the middle of the night — to a point where eventually it was worth selling to stop the little voices in my head.

The risk that feels heavy to you, is light to somone else

And there is someone out there who is happy to take on your risk.  A business ten times your size might happily absorb the threats that feel heavy to you as a small price to pay for a chance to grow. For them, gambling on your little business might be fun money.

If you want to make the voices stop, consider these four strategies:

Option 1: Milk the cash cow

One tactic is to put the breaks on your growth and squirrel away enough cash outside of your business that your company becomes a smaller proportion of your overall nest egg. Usually this means shunning growth opportunities in favour of maximizing your profits, but if you do it right, you can reduce the feeling that your gambling and hang on to your entire business. Just make sure you keep your cash in a separate account outside of your company so that it is safe from creditors and law suits.

Option 2: Limit your risk on a vendor take back

The only thing worse than gambling on yourself is letting someone else gamble your money. When you sell a small business with less than a million or two in revenue, you typically have to finance part of the sale so you’re taking a risk that the buyer knows what they’re doing.

Take a hypothetical case of a business that sells for one million dollars. The buyer might scrounge up $600,000 and ask you to finance $400,000. You get an interest rate better than you would at the bank but you also get your business back – albeit in much worse shape than when you left it – if the buyer defaults on your loan.  The best way to limit the proportion of cash you lend the buyer is to get multiple offers for your business (use a broker to drum up the bids). Also do whatever you can to ensure a monkey could run your business (systems, tools, templates, manuals etc.). That way, even if the buyer is an idiot, they can’t screw your business up too badly before you get your money out.

Option 3: Take a second bite of the apple

Recently, some private equity companies have condescended to come “down market” and are considering businesses with “as little as” one million dollars in EBITDA. They used to consider $3 million in EBITDA the floor but they’re becoming desperate to invest the cash they raised in 2007 before they have to give it back. Taking money from a private equity company can allow you to pull some chips off the table while remaining in the game.

For example, you might sell 50% of your business to a private equity company for four times EBITDA and continue to hold 50% with the hopes of getting a better multiple on the second half of your shares. You get to pay off your house, and buy a boat (or ski chalet or whatever) and – at least in theory – get to sell your second tranche of equity at a premium multiple (maybe six, seven or more depending on the industry, your growth potential etc.) because the private equity folks have helped you scale up.   You sleep better and stay in the game. I say “in theory” because working for a private equity company is not for the faint of heart. More on that later.

Option 4: Sell

Of course, the very best way to stop gambling is to get liquid and sell. It’s not a fool proof solution because you’ll still have to leave some of your money in the business in the form of an earn out. You’ll also have to  leave about 10% in an escrow account for a year just in case the buyer discovers something they think you lied about during diligence.  But if stopping the voices is your number one priority then selling free and clear is probably your best option.

PS. If you’re thinking about options 2 – 4 in the next couple of years, consider coming  to the workshop I’m hosting in Toronto and Chicago week after next. I think it will be worth your while.

Flickr photo courtesy of JulieFaith

Most service businesses never sell. They are started by someone with a specific skill. Maybe that person hires a few people, but the clients still want to deal with the most knowledgeable person in the company – and that’s probably you.

So when the time comes to get out, you’re left with nothing. If you’re one of the lucky ones, you get approached by another service firm who offers to “buy” your company — but you actually don’t get a check. Instead you get a little card with a magnetic swipe that grants you access to the building where you have a job as a Vice President at a big company. You then must toil for three to five years for someone else,  and if the stars align and the economy improves and if you can put up with the nonsense of big company life, you might get some money from an earn out.

I know your pain.

I’ve started four service businesses – a little marketing and design agency, a radio production company, an event business and a market research firm. Back in 2002 I got asked to lunch by a business development guy working for one of the big agencies. He wanted to “buy” my marketing agency if I was prepared to give them my clients and submit to a three year earn out with no cash up front. No thank you.

So how do you escape the service firm trap? The answer, in my experience, involves re-making your business and positioning it more like a product company. It involves “productizing” your services by naming and branding them so that they can be sold by salespeople instead of only you. It involves turning the project-to-project hamster wheel off and creating a recurring stream of revenue. It’s a hard process, but not impossible, and it is made easier by applying some basic techniques that I’ve chosen to teach at a workshop I’m hosting in Chicago and Toronto in a couple of weeks.

If you choose to come, you’ll learn how to:

1. Put your business on auto-pilot:

One of the keys to successfully selling your service business is to systematize and automate your processes, so you can walk away from the business after the sale and it can still run smoothly and generate a profit without you. Not only will you attract more buyers and be able to sell your business for more money if you have the right systems in place, you’ll also benefit now by dramatically increasing your efficiency and results as the business owner. At the workshop, you’ll find out how to:

• Create a reliable stream of recurring revenue so you can stop charging by the hour or project and be able to see how your revenue is looking months into the future – a key factor in creating a sellable business
• Reduce your reliance on a few big clients so you can stop grovelling for work and worrying they might leave one day
• “Productize” your service so you can hire salespeople to do some of the selling for you
• Eliminate the need to respond to a Request For Proposal (RFP) and get clients to start giving you work without tendering
• Increase the number and quality of your referrals so you can grow more quickly and profitably through word of mouth
• Reward and retain key employees without making them a partner – that way you retain all of the equity

2.  Maximize the value of your business

Whether you want to sell your business now or in ten years, it’s nice to know you’re building a valuable asset as opposed to just walking on a tread mill. At the workshop, you’ll learn what drives up the value of your business and specific techniques to:

• Calculate the value of your company using the same methodology acquirers use so you’ll know if you’re getting low-balled
• Avoid the biggest mistake service firm owners make when getting their business ready to sell
• Structure your customer agreements to include the one sentence you need to sell your business for a premium

3. Negotiate with leverage

To get the best price (and deal terms) when you go to sell your business, you need to understand how to negotiate from a position of strength. Part of having a powerful negotiating position is being knowledgeable about the process, and it also means understanding the strategies you can use to:

• Shorten the length and importance of an “earn out” so you need not work for someone else
• Spot and interpret the second most important sentence on an offer to buy your company so you can clear more after tax cash from the sale of your business
• Get multiple competing offers for your business to drive up the price through competitive tension

The Agenda

About twenty of us will meet for dinner and get to know one another over a glass of wine and a good meal. The next day, I’ll lead the workshop. I’ll explain a concept and give you some exercises to help you apply each technique to your business. I’ll wander around and work directly with anyone who has a question or just wants a partner to brainstorm with. You’ll be given a booklet to write your answers in so you’ll have all of your key ideas and action items in one place at the end of the day.  With just a handful of people in the room, we’ll get plenty of one-on-one time together.

This is a one time thing

So why am I sharing these strategies now? And can you wait until the timing is better to attend one of my workshops? The short answer is no, this is a one time thing. The long answer is that, since my last business was acquired in 2008, I’ve been doing some writing and teaching. I like it all right but I’ve recently started to focus on a new software company I’m launching. A while ago I made a commitment to be in Chicago at the end of September. I live in France so I decided to make the trip a little more worthwhile and tack on a couple of days to teach this workshop. I have family up in Toronto so it made sense to tack on a day there too. I have no plans to repeat these sessions so if you’re keen you should come.

Turn $1,000 into $100,000

Another question you might have is, “will it be worth the $1,000 plus travel and a day out of the office?” Fair question. My response is that your business could be your most valuable asset if you set things up right so investing a little to make it more sellable could pay off many times over.

Let’s look at some numbers: according to my reader poll, most service business owners never get an offer to buy their company. Of the lucky ones I surveyed who did get an offer, the average bid was around three times earnings. I’m confident you can increase your multiple by following the techniques I’ll teach at the workshop. Four times earnings is very do-able. Five times is not out of the question. Six, seven —  even eight times earnings or more are all possible. But I’m getting ahead of myself. Let’s be conservative and say you have a business generating $100,000 in profit before tax. At three times earnings, it’s worth $300,000. If, by applying the techniques you learn at the workshop, you can make your business worth four times earnings, then all of a sudden it’s worth $400,000. You can do the math on your own financials. Either way, I’m pretty sure the workshop will be an investment that will pay for itself many times over. And if it doesn’t, flip me an email after the session and I’ll refund your ticket price, no questions asked.

The unmistakable, glorious feeling of control

It’s a special feeling going from grovelling for clients to owning a sellable company. My fellow Inc contributor, and 37signals co-founder Jason Fried went through a similar process. He started 37signals as a custom web development shop and made the switch to a “productize” his service business. He described the feeling of turning a service firm into a sellable company as follows,  “When you’re a consulting business, you have to say yes to big clients, who end up telling you what to do. You become beholden to the giant corporation who is paying you $60,000 for a project. I love the feeling of control I have now”.

Save $250 by registering today

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Chicago: September 29&30

Toronto: October 2&3