The cockpit suddenly went quiet. The pilot called air traffic control to request an immediate emergency landing, but it was too late.

With no thrust and only a few hundred feet of altitude, Capt. Chesley (Sully) Sullenberger decided his only option was to ditch US Airways flight 1549 into the Hudson River.

As it turned out, he greased that landing back on Jan. 15, 2009, but there was no rulebook for landing an Airbus A320 on the Hudson River. Nor did he get to practice a few times with an empty plane to get the hang of it. He had 155 lives in his hands and one shot to get it right.

In a lot of ways, I think selling a business is a little like trying to land a passenger jet on a river:  you’ve probably never done it before, you don’t get to practice, and there’s a lot riding on the outcome.

To help give you a sense of what to expect from the process of selling your business, I asked Brad Bottoset, an eleven-year veteran of selling companies, to answer some common questions I get from readers….

Warrillow: Can you explain the role of seller financing in selling a business? How common is it? How exactly does it work in layman’s terms?

Bottoset: It is estimated that 80 to 85% of all business transactions carry seller financing.  Why?  Many potential buyers don’t have the capital or lender resources to pay cash.  Even if they do, they often want to leverage it into buying a larger business with greater cash flow.  Buyers interpret the seller’s insistence on all cash as a lack of confidence in the business, the buyer’s chance to succeed, or both.  Of course, every transaction is different, but typically a seller should expect somewhere around one year’s cash flow as the down payment.  Just like banks use formulas to determine what someone can afford as a mortgage on a home, knowledgeable business brokers use formulas too – which generally point to the Note being paid off in 5 to 7 years.

Warrillow: Isn’t the whole point of selling your business to get liquid? Why would you lend someone the money to buy your business? If you’re not getting the cash upfront, why not just hold on to the business?

Bottoset: For most sellers, getting all cash upfront is their preferred route.   However, it may not be possible.  And there are a number of positives with seller financing:

• Making the terms attractive and attainable increases the pool of qualified buyers;
• Offering terms will command a higher price (buyers paying cash often demand a discount);
• Tax consequences can be advantageous.  Instead of being taxed in the year that the sale occurs, the seller’s capital gain is taxed over the life of the Note;
• With interest rates currently at their lowest in years, sellers can get a much higher rate (6%) than they can get from any financial institution.

Warrillow: What is the typical interest rate of a seller-financed deal these days?

Bottoset: Six percent.

Warrillow: I know one of the steps in getting a business ready for sale involves dressing up the Profit & Loss statement to show as much profit as possible. Can you give me some examples of things business owners often overlook?

Bottoset: When determining the value of a business, one of the key steps is understanding what levels of discretionary, non-business expenses the current owner is expensing through the business.  There are many standard types of “add backs” such as the owner’s car expenses, personal health insurance, etc….  However, we also have seen a number of examples of creative bookkeeping, such as trips to Europe classified as a “market research” expense, owner divorces identified as “legal fees,” etc.    One common area that is often overlooked is when the business owner also owns the facility out of which the business operates. Depending on the situation, they may be charging themselves fair market value (FVM) rent, or they may not.  If they are charging the business more than FMV, a positive add back would be appropriate.  If they are charging themselves less, a negative add back must be accounted for.

Warrillow: You use “social desirability” as one of the factors that can drive up, or down, the value of a business. What do you mean by “social desirability,” and can you give some examples of either desirable or undesirable businesses? How big an impact is social desirability on the value of a business, and can you give an example?

Bottoset: I can’t say I’ve come across a lot of businesses that will generate a significant premium, but I do know of a few that have been adversely affected by a lack of social desirability.  For instance, in our portfolio, we have a national trucking company that transports live animals for medical research.  We’ve had a number of qualified buyers (both from within the transportation industry and from outside) look at the business but they have shied away because of perceived issues with animal rights organizations like PETA.

Warrillow: What other factors drive up, or down, the value of a business? Can you give a real life example?

Bottoset: The basic value drivers are management depth, proprietary product, customer diversity, etc….  Unfortunately, many clients don’t fully understand some of these principles. A few months ago, we had a manufacturing client approach us to find a buyer for his business.  He was particularly proud of two aspects of his business:  firstly, that all decisions go through his office as he is the point of contact with the clients; and secondly, in preparing the business for sale, he had whittled down the client base from 20 to two clients.  In his eyes, the new buyer was going to have 18 less headaches and personalities to deal with.  Yikes on two counts!  Unfortunately, this is a true story!

Warrillow: Can you explain the difference between an asset sale and a share sale? Why does it matter to business owners?

Bottoset: In an asset sale, the buyer essentially acquires selected company assets, consisting of the company’s equipment, inventory and “goodwill.”  In a stock purchase, when purchasing the company’s stock, they are acquiring all of the company’s assets, including its cash and accounts receivable, and are assuming responsibility to pay off the company’s debts (i.e., accounts payable) while assuming all “off the book” liabilities (i.e., pending or future lawsuits).  Buyers typically prefer to buy the assets of a company for two reasons.  Firstly, they are able to re-depreciate the value of the fixed assets and therefore acquire a larger depreciation tax shelter.  Secondly, they are not responsible for any “off the book” liabilities (i.e., lawsuits). Most business transactions are completed as asset sales.

I’ve asked Brad Bottoset to spend an hour with the 20 people coming to my Built to Sell workshop on January 16 & 17, 2012. There are three spots available – grab one here.

(photo Eric Thayer  /  Reuters)

I didn’t like Basil Peters the first time I saw his name.

Basil’s book “Early Exits” had a huge display at the Books for Business store in downtown Toronto. I sheepishly asked the clerk if she had a copy of a book with a similar theme called “Built to Sell”. She looked puzzled and turned to her computer terminal to search the title.

“Sorry sir, we don’t seem to have that book”.

I left the store cursing this Basil Peters fellow.

Then, begrudgingly, I got to know Basil.

What I discovered was one of the smartest, most experienced entrepreneurs I have ever met. Starting in school, he scaled a business up to a couple of hundred employees. He sold it and took his cash and invested in some start-ups. He promptly lost a bunch of his winnings but learned a lot in the process. He went on to be involved in a hundred or so deals –as an entrepreneur, angel, investor and/or advisor.

I’ve asked Basil to come to Las Vegas and spend a half day working with the 20 entrepreneurs selected for the Creating a Sellable Service Business Workshop on January 16 &17, 2012 (there are still a couple of spots if you’re interested – you can register here).

To give you a quick peek inside Basil’s mind, here’s a recent exchange between the two of us:

What exactly do you mean by an early exit?

There isn’t a precise definition. “Early exits” refers to a strong trend in the 21^st century economy, driven by buyers who want to acquire companies in the $10 to 30 million range. With “internet acceleration,” entrepreneurs can often create values in that range just 2 or 3 years from startup. The combination of those values, and that timing, are what I think of as an early exit.

What are the telltale signs that a business (or entrepreneur) is ready for an early exit?

Exit timing is one of the things I wish I had done better in my first five or six exits.  Now having watched about 100 exits reasonably closely, I am convinced that in the very large majority of situations, entrepreneurs wait too long to start working on their exit. They end up ‘riding it over the top’ and selling for much less than they could have. Or even worse, missing the optimum time often means the company never exits.  This phenomenon has not been discussed very much and is something that I am working hard to illuminate for entrepreneurs and investors.

What are the signs that it is too early/soon to exit?

It’s actually relatively easy to tell if it’s too early. I think the best indicator is that the price isn’t high enough to satisfy the shareholders. And it’s reasonably easy to determine the price (within a reasonable range of certainty.)

A lot of business owners are planning to wait until the market for privately held businesses recovers, banks are willing to lend more aggressively, and multiples start going up again. Is it worth waiting?

In my opinion, that time is now. Interest rates are lower than they have been in our lifetime, the private equity funds are back, and the corporate acquirers are very receptive. With everything going on in Europe, I wouldn’t wait.

What if you have a really small business, maybe only $500,000 in revenue with some promising technology, should you still think about selling early?

I don’t think of it as a question of selling “early” or not. I believe it’s a matter of the best time to sell. Often the best time is well before the company is profitable or hits $1 million in revenue. Recently, Google said: “we prefer companies that are pre-revenue.” How’s that for early?

Can you explain the structure of the typical early exit? Are businesses owners walking away with a check or are they selling a part of their business to a private equity firm with hopes of taking a “second bite of the apple” in 3-5 years, or are you seeing a lot of earn-outs?

Most of the exits I see these days are all cash, or possibly cash with a portion of vendor financing. Buyers know that if they try to reduce risk with earn-out formulas or risky structures, the sellers will just go somewhere else. The problem for most buyers today is that they have too much cash. So if the transaction is fairly priced, the structures today tend to be cash, or ‘near cash.’

Once a business owner makes the decision to sell, what are some of the mistakes you see them make in approaching a transaction?

The most common mistakes I see are:

1.       CEOs trying to do it themselves, and

2.       Selecting the wrong M&A advisor (i-banker)

Do you believe in running an auction for a company, or do you try to negotiate with one strategic at a time?

I believe multiple bidders are always desirable. In some cases, that’s not possible or isn’t what the sellers want to do. But in my opinion, it’s almost always a good strategy.

What are the idiosyncrasies of selling a service business?

These days, in North America, almost every business is a service business, or has a large service component. Software as a service (SaaS), for example, is probably the hottest sector of the M&A market. Non-service businesses – in other words, manufacturing and asset businesses – are harder to sell today.

How does having money change your life?

I think it’s a little like having your first child. Everyone will tell you what it’s like, or what it was like for them. But until the reality is right there in front of you, it’s actually pretty hard to describe. For me, having money created a lot of freedom. I enjoyed it a lot and strongly recommend it to everyone.

What were the mistakes you made after your first exit that you would like to take back if you could?

That’s another easy one. I could tell a long story, but I think the most common mistake, and I certainly made it, is to go out and make two really bad investments. When I sold my first company, a couple of my friends in YPO warned me that was what most of us do. But like all good entrepreneurs, I ignored them. So I learned that lesson with an education that cost about 20 times more than my Ph.D.

Basil Peters will be leading a half-day session at my “Creating a Sellable Service Business” workshop on January 16&17, 2012 in Las Vegas. Register here.

Do any of these sound like you?

• You have a service business and want to know how to position it to be A) Sellable and B) Sellable for the maximum amount of money possible.
• You’ve learned a lot of valuable strategies for building your business to sell on this blog and/or in the book Built to Sell, but you’d like some extra help figuring out how to apply these strategies to your unique business so you can ensure a big pay out when you’re ready to sell.
• You want to give yourself every possible advantage in building your business to attract buyers who are willing to pay top dollar for your life’s work, including learning about high level business selling strategies not found in the book Built to Sell or the blog posts on this site.
• You would like to meet, learn from, and brainstorm with other service business owners who are designing their businesses to sell for large sums of money.

If you answered “Yes” to any or all of these things, I’d like to invite you to an intimate, hands on workshop on building a sellable business that I’ll be hosting in Las Vegas January 16^th and 17^th.

During this workshop, you’ll get the opportunity to put your business under the microscope with me and a small group of other successful business owners. Together, we’ll uncover the steps you can take to make your business more attractive to potential buyers – whether you’re looking to sell your business in the near future, or want to start ramping up the value of your business in order to sell it down the line.

This workshop is unique compared to any other training you’ll find on the topic of selling a business in several critical ways: you’ll be able to talk with me about your unique situation one-on-one in a small group format, you’ll be able to mastermind with other successful business owners who are also building their businesses to sell, and you’ll be able to expose yourself to high level strategies rarely discussed anywhere else (including my own book).

You’ll get the advanced coaching, tools, and strategies you need to…

Escape the trap almost all service firms fall into, that leaves the owner with nothing when they walk away from their business – instead of a sizeable nest egg they can use to retire comfortably, or fund their next big idea.

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 a 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 the techniques that I’ve chosen to teach at a workshop I’m hosting in Las Vegas this January.

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 groveling 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 one simple sentence that will allow you 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

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.

In addition to getting to pick my brain, I’ll also be bringing in a Mergers and Acquisitions professional to answer your questions and share some real life examples from “in the trenches” of buying and selling companies. This M&A expert will break down the anatomy of a deal so you know exactly what to expect through every step of the business selling process when you decide it’s time to sell. You’ll also get tips and strategies for getting the best price and deal terms, straight from the mouth of someone who’s spent an extensive amount of time working both ends of a deal.

What business owners who attended this workshop thought

In late September and early October I held two workshops, one in Toronto and one in Chicago. I had planned these workshops to be a one time thing. I’m currently working on a new software company, and between that and my writing my plate is pretty full. I have no desire to start hosting workshops all the time. However, the feedback I received from those workshops was so positive, I decided to do another one this January in Las Vegas while I’m in the country on business (I spend most of my time in France).

Here are a couple comments from attendees of the Toronto and Chicago workshops…

“Even after reading the book and following the blog, there was still a tremendous amount of insight gained from both the curriculum and from hearing the perspectives of the other participants. I thought the dinner the night before the event was great too for setting the tone and allowing the participants to get to know each other leading to more candid conversations about their businesses.”

“Learned a lot. Was great sitting around a table learning how other business owner manage their issues of building a sell-able business.”

“The material was excellent, the presentation was excellent, the interactive aspect, the ability to share with peers was extremely valuable, the guest panel was also excellent.”

The one suggestion I heard repeatedly from the attendees was they wanted more. More depth. More one on one time with me. More time to brainstorm with the other attendees. So I took the single day format of the original workshops and added an extra day, with new and expanded content and more opportunities for us to work together on developing the right strategy for your business.

Turn $2,000 into $100,000

Another question you might have is, “will it be worth the $2,000 plus travel and two days 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 groveling 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  “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”.

Bonus Opportunity

How do you imagine life after selling your business?

Are you travelling? Europe maybe? Patagonia, or somewhere nice and warm?

If you’re like most of the business owners I know, you imagine selling your business, having a going-away party, and riding off into the sunset.

Increasingly, it’s not working out that way.

In a shaky economy, with banks shy to lend, the proportion of cash that business owners get when they sell is sinking with the proportion of the sale price put “at risk” in some sort of “earn-out” or “vendor take back” loan is going up.

Recently, I hosted a workshop in Toronto and invited an M&A professional who spoke about the typical deals she is doing these days. She shared the story of one buyer who is acquiring marketing services businesses for as much as ten times earnings before tax. The fine print? They only pay three times earnings upfront and leave the possibility of the other seven in a five-year earn-out.

The seller sees the finish line; the buyer fires the starting gun

Buyers and sellers come at the M&A process from totally different points of view.

The seller is usually just willing their tired old body to the finish line. On the other, you have a buyer just about to fire the starting gun. But the buyer isn’t planning on doing any running; they expect you to hear the gun and run faster than you ever imagined possible.

Is it just me, or is there something wrong with this picture?

Note to buyers: we’re tired, not stupid

I think buyers need to stop being greedy. I saw a deal recently where a rental business had grown to twelve million dollars in sales and more than two million in EBITDA. They were being offered six million dollars upfront and another six million dollars available through a complicated, five year earn-out formula.

Are you kidding?

Do you know what it takes to build a business from scratch to a point where it is generating two million dollars of profit? Have you any idea how burned out and tired the business owner must feel? This owner has built the business to the equivalent of a Picasso and you want to steal it for three times earnings?

For a gem like this, you need to pay a decent multiple upfront and put a reasonable set of goals together for a one or two-year earn-out. I don’t care what your spreadsheet says; a victory lap is okay but indentured servitude is not.

Note to sellers: move up your “sell by” date

Sellers – I like you. A lot. I consider myself on your side, but you have to understand that the days of driving off into the sunset on closing day (unless maybe you own a technology business that runs itself) are over. As a seller, I would tell you to plan to sell WAY earlier than you think you want to, so that you still have the energy, ideas and passion for the business to get you through the earn-out.

Yes, if you do everything right (recurring revenue, management team, unique niche, double digit EBITDA growth etc.), you can increase the cash proportion of your take from a sale from maybe 40% cash upfront to something closer to 65 or 70%; but you’re still going to be leaving at least a third – if not much more – of your money on the table if you plan to take your foot off the gas after closing day.

If you think you want out in five years, my advice is to plan to sell in two, so you have some juice left to get you over the finish line, which is moving ever further away.

(photo courtesy of Flickr/Nordea Riga Marathon)

I had dinner last night with a guy who trains dogs. He used to train dogs for an hourly fee but decided to shift his model from selling time to selling a product. Now he markets a set of pre-recorded dog training videos through his web site and earns more than a million dollars a year selling something people buy while he sleeps.

Selling a product, rather than your time, offers a fantastic leap in lifestyle benefits and makes your company more sellable. When I recently surveyed merger and acquisition (M&A) professionals about what makes a business attractive to a strategic acquirer, virtually all of them agreed that a company’s potential growth is second only to profitability among the factors that make the company a must-buy in the eyes of an acquirer.

But the term “growth potential” is a little nebulous, so I asked the M&A guys to go a layer deeper and explain how buyers assess a company’s scalability. The most important question they ask themselves is: “Could your business be five times bigger without adding five times the cost or complexity?”

Customization is the five times killer

If you customize what you sell, it means people are involved, which makes it impossible to scale quickly.

In my research business, we started out offering to customize the reports we sold, but it robbed our business of its leverage. Once we standardized and stopped offering to tailor reports, we were able to scale up.

Yes, we lost a few customers who were used to the custom reports, but we added many more new subscribers because we weren’t wasting our time and money customizing and could invest those resources in hiring sales people.

Often the need to customize comes from ten percent of your pickiest clients. If it is time for you to say goodbye to the customers who want their Big Mac without the pickles, follow these three steps:

1. Narrow your target market. Part of the reason you have to customize may be that your audience is too wide. Decrease the diameter of your bull’s eye until you can identify a group of people who like what you sell off-the-shelf and develop a discrete offer for your ideal customer.

2. Productize. When customers buy services or time, they are accustomed to being able to provide input. At the same time, everyone is used to buying products off-the-shelf. The trick is to brand your stuff consistently so customers start to see it as a tangible product instead of a squishy service.

3. Say no. When customers ask for special tweaks, explain that your offering has been time-tested for X number of years to render the best results. Explain that you’ve honed your formula and – just like the twelve herbs and spices or the secret for getting the caramel inside the chocolaty pockets – you’re not willing to change something that has been proven to work. I have found that most people respect your intellectual integrity and go along with your standard offering. The one or two who insist on special favours are not worth the hit your valuation will take when you’re ready to sell.

PS. One available spot at my “Sellability” workshop

One of the 16 attendees at my upcoming Sellability Workshop in Chicago on September 28 & 29 just cancelled. This session is not for everyone (attendees must have between $500,000 — $7,000,000 in annual sales), but if you want his spot, this is your opportunity. First come, first serve, and I have no plans to repeat the session. What you’ll learn is the “inside baseball” on selling your company for a premium from people who have actually done it. Apply here.

(photo courtesy of Flickr/pamhule)