I’m excited to have John Warrillow, the author of Built to Sell, and creator of The Sellability Score here today for an interview. If you’ve read his book you’ll know that he puts his ideas into a story-line and you learn through the experiences of a business owner what kinds of things can hurt your ability to sell your business someday.
I hope you enjoy these answers and take them in. If you’re like most entrepreneurs and small business owners then some of the concepts that are vitally important to selling your business can be like a foreign language. You may know you need some seed capital to get a project off the ground or you may know that an unsecured business line of credit could grow your revenues by $50,000 but do you realize how important it is that you’re not the guy closing all the sales?
I asked John 5 questions that I thought were relevant for SBO’s today so without further ado, let’s start.
Q: What are the 2 or 3 most common mistakes that Small Business owners make when building their business?
A: 1. Listening to customers. Customers can provide useful input at times but if you try to please all of your customers, you’ll end up customizing your offering for every customer in an effort to please everyone. At some point, you have to put a stake in the ground and say this is what we do, it’s great, and you should buy it.
2. Confusing profit and value. A lot of business owners use their P&L as their report card but a P&L on it’s own doesn’t say much about the value of your business. I think business owners need to make decisions by viewing their business through two lenses: what will make my business more profitableAND what will make it more valuable? For example, having the CEO do the selling is more profitable but will also make your business less valuable than if you hired a sales team.
Q: What is the most important variable if someone wants to sell their business at top dollar?
A: Recurring revenue. You need to be able to demonstrate that your business will continue to generate revenue when you’re gone.
Q: Are there any industries or professions where selling a business is especially difficult?
A: Professional service businesses are very tough to sell without at earn out which is an arrangement where the owner trades his/her equity for a job with a bonus for hitting targets in the future.
Q: How does a good brand, lots of good will, and great lines of credit favorably impact the value of the business?
A: A great brand is an asset if you can prove that people will be loyal to – and willing to pay a premium for — that brand in the future.
Q: What are other similar factors that add value to a business that people forget or don’t think about?
A: One of the eight key drivers of “Sellability” is something called “The Valuation Teeter Totter”. Imagine a children’s teeter-totter where one side goes up as the other goes down. The same is true of the value of your business as it relates to cash flow. The more cash your company generates, the more valuable it will be to an acquirer because they do not need to inject working capital on the day they take over your business. The inverse is also true: if your company is a cash suck, you’ll take a hair cut on the price because an acquirer will have to commit significant amount of their cash to fund your working capital requirements.