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

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

I’m starting a new business and have decided to build it from the start to be attractive to a strategic acquirer. My most important operating metrics will be Net Promoter Score, cost per account acquired and number of users, and my financial statement of choice will be a cash flow statement, not my P&L.

If I get it wrong, I’ll most likely walk away with nothing.

One of the most important decisions we all need to make is whether to position our business for a financial acquisition or a strategic one. It’s a high-stakes call that can end in disaster.

The safe route

The safer – but potentially less rewarding – route is to build your business for a financial acquisition. Financial buyers will base their offer on all of the core operating metrics taught in grade nine economics: How much profit do you make? How fast are you growing? How much recurring revenue do you have? How dependent is your business on you? The basics.

Swinging for the fences

A strategic acquirer will look past your financial metrics and dream about what your business could be worth in their hands. They’ll model the impact on their business if a small percentage of their customers buy your product – or if your customers buy their product. They might see your little business as a Trojan horse that will allow them to enter a brand-new world of buyers. That’s why, for example, Herman Miller announced plans to buy Hong Kong-based POSH Office Systems. It bought the company not for its $50 million in revenue but for POSH’s relationships with Chinese furniture dealers and the corresponding billion-dollar opportunity of selling office furniture to Chinese companies.

Because strategic acquirers have much more to gain, they also pay a higher price. Nowhere was that more evident than Microsoft’s recent acquisition of money-losing Skype for $8.5 billion. My guess is that Ballmer wants to convince more Windows users to upgrade to a new version (half are still running XP) – and a slick Skype integration could be the killer app. If Skype was valued by a financial buyer, it’d be worthless. But if Microsoft can use Skype to get a good chunk of a billion Windows users to upgrade, it might be well worth $8.5 billion to Microsoft shareholders.

The curse of the high school dropout

A strategic acquisition sounds great, right? So why wouldn’t everyone prepare their business to be attractive to a strategic?

For the same reason most right-thinking people don’t buy lottery tickets. If you pour all of your money into building a company for a strategic acquisition, you’re playing high-stakes poker. If it works, you get rich. If it doesn’t – and you end up with an unprofitable company – your business might just be worthless in the eyes of a financial buyer (fives times zero is still zero).

It’s like the promising high school athlete who forgoes education to focus on making the big leagues. If he is more talented and determined than a million other kids with the same dream, he is set for life. If he misses, he will probably end up pumping gas.

So why can’t you position yourself for both a strategic and a financial?

Well, you can, but you’ll probably end up with a business that is sucking and blowing at the same time. Just like Newton taught us, every action is accompanied by a reaction of equal magnitude but in the opposite direction.

When you’re optimizing for a financial, you’re not optimizing for a strategic and vice versa. For example, the company positioning itself for a strategic acquirer will pour all of its cash into product development. If the same company was positioning for a financial exit, it would limit its R&D spending to the bare minimum to protect its market position and maximize its EBITDA.

If POSH had been looking for a financial exit, it might have focused on directly serving a small number of very profitable Hong Kong-based investment banks instead of undertaking the cumbersome job of building a mainland dealer network that an acquirer like Herman Miller could leverage to enter China.

How to decide

Imagine who would want to buy your business and try to quantify the impact acquiring you would have on their business. If the financial upside for an acquirer is substantial (1,000% + return on their investment in the near term), then perhaps it makes sense to roll the dice and build for a strategic acquirer, assuming your lifestyle needs do not require you to draw much cash out of your business while you build it.

If, in your most sober analysis, a buyer’s upside will be more modest (less than 100% in the near term), it may be better to hedge your bets and build a good business with real profits any financial buyer would love to acquire. A profitable business will still be attractive to a strategic, but a financial will rarely be interested in an unprofitable business.

One final note on the subject of strategic acquisitions: I still have three spots left for The Sellability Workshop. I’m not planning to repeat it, so please fill out the application here if you want to join us.

You’ll get the most for your business if you sell it to a “strategic acquirer”.  A strategic may think it can sell your product to its customers, thereby tripling the size of your business in a few months. Or maybe it sees your company as the perfect complement to one of its existing business units. Or it wants to enter the city where you dominate, and acquiring you is easier than battling you for every new customer. Or perhaps you’re snapping up its customers, and rather than compete, it figures it’ll buy you.  Microsoft made a strategic acquisition when it paid $8.5 billion for Skype even though the free calling service was losing money.

16 people climb inside the black box of selling to a strategic

If you’d like to position your company to be acquired by a strategic, I’m hosting a 16-person workshop on September 28 and 29 at the Four Seasons Hotel in Chicago.

The Sellability Workshop is an intensive, two-day program designed for business owners running profitable companies with between $500,000 and $7 million in annual revenue who want to make their business attractive to a strategic acquirer. I’m accepting just 16 people into this workshop.

Selling your business to a strategic acquirer is hard work, and only a small fraction of business owners who want to be acquired ever get an offer from a big fish. But just because something is hard, doesn’t mean you shouldn’t try. Like climbing Everest, selling your business represents the top rung of your entrepreneurial adventure. There is no magic formula or recipe book on how to do it. But, based on my experience, there are some things you can do to improve your odds.

If you’re one of the 16, you’ll learn how to:

• Prepare your business to be an attractive acquisition candidate:
  • Create a recurring/subscription revenue model (how to implement, mistakes to avoid)
  • Increase your valuation multiple
  • Create a positive cash flow model
  • “Productize” a service
  • Tell your employees you’re selling and get them to help you in the process
• Negotiate a deal to sell your business:
  • Reduce or eliminate an earn-out
  • Get multiple, competitive offers for your business
  • Handle management presentations to potential buyers
  • Evaluate a letter of intent (things to look for, mistakes to avoid)
  • Shorten the due diligence period
  • Increase the likelihood that your offer will survive from letter of intent to closing day

Being part of a small group is a luxury. You’ll have the opportunity to address your specific situation, questions and challenges. I’ll lead the conversation in a workshop format, but there will be lots of Q&A, time to reflect on your own business, and plan your takeaways from the session.

Confidentiality

Your identity will be kept in strict confidence. The attendee list will not be published before or after the event, and attendees will be introduced by first name only in the session.  The decision to reveal your full name or your company name to your fellow attendees will be left at your discretion.

Who is the Sellability Workshop for?

The workshop is for business owners running profitable companies with between $500,000 and $7 million in gross annual revenue and interested in positioning themselves for a strategic acquisition in the next five years.

Who is the Sellability Workshop not intended for?

This is not an exit-planning event.

I assume you have evaluated your exit options and made the decision that you want to position your company to be acquired. Therefore, if you’re considering passing your business on to your kids, this session is not for you. If you’re considering selling your business to your managers, this session is not for you. If you’re hoping to attend to pitch your services to the business owners in the room, please do not apply.

Please note, I’m not a mergers and acquisitions professional, lawyer, exit planner or insurance salesman. There will be no sales pitch or veiled agenda. You won’t be asked to buy a time share, either. My only goal is that the 16 participants walk out with confidence, inside knowledge and an action plan to position their business for a strategic acquisition.

Grab one of the 16 spots now

To apply, scroll down to the bottom of this page and complete the application form.