Built to Sell — Making Your Company Sellable

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Waterfall in Aix-en-Provence, France. (Photo: Mat3270)

“Didn’t you write that you believed BrainQUICKEN couldn’t be sold?”

The question — a common one — was from writer John Warrillow and for an article in Inc. Magazine.

The embarrassing answer was “yes.” In 2005, I had assumed it was impossible to sell my then start-up and, as with most assumptions, I was dead wrong. I sold BrainQUICKEN in 2009 and learned volumes in the process.

For example: counter to expectations, I ended up caring more about lack of strings than maximizing price…

Several chess moves into price negotiation, after the suitor and I had arrived within 10% of each other, I offered to reduce the asking price 20% in exchange for the elimination of most “reps and warranties.” This would give me a clean break, financially and emotionally, and it would dramatically speed up the sales process. I don’t regret that apparent “concession” and would make the same decision in a heartbeat. If I’d been tied to the business, I doubt The 4-Hour Body would have been written.

Lessons learned, part deux: branding and customer databases are sometimes worth as much as defensible “hard” intellectual property. This realization eluded me for years, and in retrospect, it was ridiculous self-denial. Trademarks and distribution relationships can be sold at a handsome profit, both of which I’d undervalued, blinded by my own hands-in-the-air resignation related to lack of patents.

Silly rabbit.

John, on the other hand, provides the contrast. He has dodged these bullets multiple times, and done so by design.

John, you see, does more than write. He has started and successfully exited four companies, most recently a subscription-based research business sold to a publicly traded company in 2008.

From the standpoint of lifestyle design, John lives in Aix-en-Provence where he’s struggling to master French, “despite listening to more Michel Thomas than any one man should have to endure.” He’s built a location-independent life full of adventure for his family, rather than signing on to miserable consulting gigs or “earn-outs” pegged to acquirers.

How does he do it?

Moreover, how do you ensure your start-up or muse is sellable from the outset? Is it possible to create something “built to sell”?

That’s what this post hopes to answer, and it will discuss the recipe John has used for himself.

Enter John Warrillow.

How to Turn Your Muse into a Sellable Company

When I first heard Tim had sold his muse, I was intrigued. Here was the swashbuckling lifestyle designer who has told us all to create a muse to finance our new lifestyle, and yet he was selling his.

I had to know more, so I interviewed Tim for a column I write for Inc. He explained: “Even though BrainQUICKEN was only taking a couple of hours a week to run, it felt like my brain was constantly running antivirus software, and I wanted to free up those cycles to think about other things.”

If creating a muse gets you into the Lifestyle Olympics, building a muse you can sell gets you a gold medal.  In this post, I’m going to talk about how you can turn your muse into a sellable company so that you have the world by the tail: you can sleep well at night knowing you’re sitting on a valuable asset, indulge in Ferriss-like “mini-retirements” while your business spits off cash and, when you’re ready, sell your muse to a third party—because, as Tim will tell you, the only thing better than a low-maintenance muse generating cash to fund your lifestyle is a no-maintenance bank account doing the same.

Turning your muse into a sellable company

I’m going to define a “sellable business” as one that is not dependent on you to thrive. For anyone to want to buy it, your business has to be valuable even after you’ve left. I’m also going to assume you have a muse up and running. If not, refer back to Tim’s advice for creating a muse in The 4-Hour Workweek.

The first step in turning your muse into a sellable business is to reengineer your offering to ensure it meets three criteria important to acquirers:

1. It’s teachable

You need to be able to teach employees or suppliers (or be able to program technology) to do most of the work. That means the delivery of your product or service can’t be dependent on you showing up. If you have developed a yoga DVD and teach yoga classes, you can probably teach others to fulfill DVD orders, but your yoga classes need you. To create a sellable muse, focus on the part of your muse that can run without you.

2. It’s valuable

To create a sellable company, you need to have something others couldn’t easily replicate, which means you need to find a quiet niche without a lot of competition. Recently Tim highlighted Guerrilla Drum Making as a muse that provides customers a video on how to make a drum kit out of everyday products available at Home Depot. While there are a ton of on- and offline music stores, Guerrilla Drum Making has carved out a unique spot in the musical instrument market by helping handy parents and aspiring musicians build a drum kit that is both professional-looking and unique. It’s a nice little niche, one that will allow the owner to control how he gets paid, which is critical to increasing the overall value of a business—more on that in a minute.

3. It’s repeatable

The hardest yet most important part of turning your muse into a sellable company is building a recurring revenue model. When potential acquirers look at your muse, they’re going to want to understand how revenue is going to come in after you are gone. There are six basic models of recurring revenue. In order of least to most valuable in the eyes of an acquirer, they are as follows:

- Consumables: Tim highlighted Hewley shampoo in a recent post. This is a classic “consumable” product since most people need to buy a new bottle of shampoo every month or so. Once customers become loyal to a brand, the company begins to enjoy some recurring revenue.

- “Sunk-Money” Consumables: When you buy a Gillette Sensor razor, you’re much more likely to buy a five-pack of Gillette Sensor blades every month than to buy another brand because you have “sunk money” into the razor and have become invested in a platform.

- Renewable Subscriptions: More valuable than simple consumables in the eyes of an acquirer are subscriptions. In this video of Tim highlighting successful muses, he mentions Everyday Genius, where customers pay first and then get the product over the life of the subscription. Acquirers prefer the predictable nature of subscription revenue over the consumable model of recurring revenue.

- “Sunk-Money” Renewable Subscriptions: A muse ascends to the next rung on the value ladder when customers make an investment to become subscribers. I recently bought an Apple TV box and a $9.99/month Netflix subscription. I’m more likely to renew my Netflix subscription because I have sunk money into the Apple decoder.

- Automatic-Renewal Subscriptions: As valuable as a subscription muse is, an auto-renewal subscription business that has the right to bill customers until they say stop is even better. Unlike a traditional magazine subscription, an auto-renewal subscription means subscribers don’t have to make a conscious re-up decision each year, so the business is more likely to keep them around longer. For example, when you store documents with Iron Mountain, it just keeps billing you until you say stop.

- Contracts: The most valuable form of revenue is guaranteed into the future in the form of a contract. If you are lucky enough to get long-term contracts from your customers, include a “survivor clause” in them to ensure that the customer’s obligations “survive” a change in ownership of your company.

Think of the recurring revenue model as a ladder you want to climb to get the highest possible price for your muse when you’re ready to sell.

Re-engineer Cash-Flow

Once you have developed a recurring revenue model for your niche product or service that can be delivered without your involvement, the next step in getting the highest price for your muse is to rework your cash flow model so that your business stops sucking cash and instead starts blowing it out.

Here’s why: When acquirers buy your business, they need to write two checks: one to you and a second to fund your muse’s “working capital,” the everyday cash your business needs to meet its immediate expenses. The smaller the check they need to write for working capital, the larger the check they’re willing to write you for the purchase.

You want to change a negative cash flow cycle into a positive cash flow cycle. If you’re paying for inventory before you sell it, your company has a negative cash flow cycle. Try to shift your model so you charge up front or on a subscription basis so that your business generates cash as it grows. This will make it more valuable when you sell it.

Track your statistics like Joe Mauer

In March 2010, Joe Mauer of the Minnesota Twins signed a contract that will pay him $184 million over the next eight years, making him one of the best-paid athletes of all time. One of the amazing things about Mauer is he combines two attributes rarely found in one player: a knack for both getting on base and hitting for power. The combination of these skills is expressed in a statistic called on-base plus slugging (OPS), which merges on-base percentage and slugging percentage—in Mauer’s case, an almost unheard-of 1.031 during contract negotiations. Mauer’s OPS—along with his three Gold Glove Awards and three batting titles—helped his agent Ron Shapiro sell Mauer’s value.

When you go to sell your business, like Mauer, you will need a set of statistics that will help make the case for how valuable your company is in the hands of someone else.  Tim has hammered us on this blog about the importance of metrics when growing your muse, so here are a couple of others to track as you shift your muse to the status of “sellable.”

- Addressable Market Size: How many people in your geographic market buy what you sell? For example, let’s say you have developed an English-language subscription for a yoga DVD series that is easy to ship within the United States. Your customers get four new instructional yoga DVDs per year, and you charge $99 annually. If three million Americans participate in yoga at least once per year, you could argue that your addressable market is three million people.

- Market Penetration Rate: What proportion of the target market have you sopped up, and how much is left for the potential acquirer to go after? Let’s say you have sold 3,000 subscriptions since you started your yoga DVD muse. Therefore, your market penetration rate is 0.1%, and an acquirer would realize there is still plenty of field left to plow.

- Cost per Customer Acquired: How much does it cost you to acquire a new customer? Cost per customer acquired further breaks down into cost per lead and your conversion rate. For example, let’s say it costs you $8 to get a lead from Google Adwords, and for every three leads you get, you close one subscription. In this example, your cost per lead is $8 and your conversion rate is 33%, so your cost per customer acquired is $24.

Think about what your business is worth in another’s hands

These statistics become the raw material you need to make the case of what your business will be worth in the hands of an acquirer. For example, let’s imagine a hypothetical magazine called Fit Girl has 800,000 subscribers. The publisher has heard about your yoga DVD subscription and is keen to diversify Fit Girl’s revenue away from the traditional magazine business. She calls you to see if you’re interested in selling your business.

Along with figuring out what she thinks your business is worth on the open market, she is also going to estimate what your business is worth to Fit Girl by making some assumption using the numbers you have been tracking:

- If 1% of the U.S. population likes yoga (your 3 million market size divided by the total U.S. population), then chances are at least 1% of Fit Girl subscribers—physically fit women—are into yoga. In fact, given the readership, Fit Girl might conservatively project its total immediate market for your DVD series to be more like 2% of 800,000, amounting to 16,000 subscribers.

- If you’re picking up subscribers through Adwords for $24 each without your brand being a household name, Fit Girl will reasonably assume it can do at least as well with the power of its name. So the publisher might conservatively use your $24 cost per customer acquired to model out what her cost will be to get the 16,000 subscribers: $24 x 16,000 = $384,000.

In this hypothetical example, Fit Girl would conservatively pick up $1,584,000 worth of subscription revenue at a minimum. And if the stock market is valuing magazine companies at two times their revenue, buying your DVD series would give Fit Girl an easy $3,168,000 ($1,584,000 x 2) bump in market capitalization, which might lead to how the publisher would think about what your business is worth in her hands.

Acquirers will, of course, want to use low-ball industry comparables to value your company. To get the highest price for your business, you’ll have to use your statistics to paint the picture of what the business is worth to them.

The last question you need to answer

With a recurring revenue model for your niche product, you’ll be in a position to sell your muse. The only question left to answer is: when?

That’s a toughie, and only you can answer.

Maybe you’ll run your muse for years, indulging in amazing travel knowing you could sell when you’re ready. That’s a powerful position to be in. Maybe you’ll decide that, even though your muse is profitable and low stress, it is worth more to someone else than it is to you—which is when you’ll get the highest price for your business and minimize a soul-crushing earn-out.

Having all the cards in your hands starts by transforming your muse into a sellable company.

Welcome to the Lifestyle Olympics. Who’s shooting for the podium?

###

John Warrillow is the author of Built To Sell: Creating A Business That Can Thrive Without You to be released by Portfolio/Penguin on April 28, 2011.

You can take his “Sellability Index Quiz” to find out how much your business is worth at www.BuiltToSell.com.

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105 comments on “Built to Sell — Making Your Company Sellable

  1. Having completed over $750+ million in Mergers and Acquisitions transactions successfully (and seen at least that much worth fall apart from a wide range of issues), this is a very interesting post for me. Exit strategies is something that many business owners, particularly small business owners, don’t think about until they are ready to exit the business, which can leave significant value on the table.

    It’s crticial to begin thinking about an exit many years before you actually plan to exit the business to get your “house” in order and to maximize value. One thing to think about as you expand your product and service offerings is “who is the likely buyer?”. If it’s a strategic buyer, you want to make sure that your services or products aren’t in too many different niches, verticals or distribution channels as only pieces may be attractive to certain buyers (e.g. a healthcare focused company may not want to acquire a consulting business that does healthcare, financial services and retail consulting). This can mean your business isn’t sellable at all, or that you have the difficult task of trying to piece out the business to more than one buyer.

    There are some compelling nuggets in this post and some sage advice. Do keep in mind that selling a business is an art, not a science and both parties (the buyer and seller) factor into the equation.

    I hope this is a topic that continues to have dialogue around it.

  2. Tim,

    Two important points in this post for me:

    1. Your customer database is an asset. Once I finally “got” this concept, I’ve been able to turn my list into a cash generating machine.

    2. Remove yourself as a bottleneck. Systems are more scalable and can stand the test of time better than any one “personality” or “business philosophy”.

    Keep rockin’,

    Chris Dunn

  3. Thanks for the post. Definitely a good tip in building something with exit in mind. (even if we don’t eventually, it is good to know that we can get out if we want to ). Like many people said, a book can be written on the subject. :)

  4. Hi Tim and John
    Thanks for the info on “making your company sellable”
    I’ve just taken the Sellability index quiz – scored 42 however I’m not ready to sell my business yet (still growing and refining systems).

    I would however like to submit a summary of my business for use as a potential case study (if you ever need any).
    Niche market: Downloadable freestyle snowboarding tutorials
    Recurring revenue model: Automatic-renewable subscriptions (yearly)

    Not sure of the correct emails to use so I’ve sent them to the following:
    Tim – amy (at) fourhourworkweek.com
    John – John (at) BuiltToSell.com

    I know both you guys and your assistants are busy so I’m not fussed if you don’t get the chance to reply. If there’s a better email address to send this to then please let me know.

    My girlfriend and I are off on June 1st for a 5 month mini-retirement to South East Asia – our first mini-retirement. Made possible through Tim’s book.
    Can’t wait!
    I have just pre-ordered the kindle version of Built To Sell to read while away.
    Thanks guys.
    Look forward to meeting you sometime in the near future.
    Nev

  5. Great Post!

    One of the muses that I am working on is going to need some angel capital to boost production capacity. Your input on market segments and size is very help.

  6. Tim:
    Speaking of “Guerrilla Drum Making”…

    I saw the case study posted here for about two hours then it was taken down… any chance that will be expanded on?

    It closely resembles what I am trying to do (a narrow niche DVD- nothing to do with drums) and would love to soak up any how-to advise to get it going.

    Thanks!

  7. That’s impressive Nev,

    Congrats…

    Scored a 34 here… though I’m not happy with where the business is right now, maybe by the end of 2011 I’ll have more inspring stuff to share

    So much to do …

  8. The part about how to value a company is invaluable. I’m terrible at math so if someone did write a book about this and teach simple ways to do the math, I’d buy it.

  9. Intergalactically awesome post!!! I’m still new to this game – in the process of finding my muse, but it sure helps to start with the end in mind!! Thanks again Tim and John…

  10. Thanks for the insight. The thought of selling your muse business for a large profit is very enticing. Keeping it as low maintenance and high return as possible does increase it’s value, especially if it cost very little money to run.

  11. Hi Tim and John, great post. It is true that you can teach people to do the work for you which you know can work without you being there. In that way, you can be efficient with your time. I also like how you say track your statistics, in that way you know who are you targeted locations and audience. And lastly, will the business work if your out of it.

  12. Great post…..

    I think if you are going to build it to sell, or even have the thought of it at some point, then every time you build a new system for your business, add a new product, sell in a different way, whatever the case may be, you need to see if the decision you are about to make will keep you on track for building a sellable business. If the new business rule doesnt fit the guidelines, then maybe you should figure out a different way to accomplish the milestone, keeping the end goal in mind.

  13. Tim just discovered you from NT Times article Wow! Can you do us all a favor and write about Soy how it is estrogenizing men and making women fat…it’s in everything now including a lot of normally good supplements who should know better..Soy, sunflower, chamomile and lavender (I love those last two very upset about this) and pomegranites are hormone disrupters and there are others but soy is in everything big business. They are asking why girls are going into puberty at 7 and why men are being wimped out and feminized..SOY. Soy is big business. Read the book “The Whole Soy Story” and get this doctor to explain..She is up against a huge corporate conglomerate and the word is slowly coming out… Silk Soy milk goes down so smooth..it packs big weight on women and God knows what it is doing to our men!! Please be vocal and get people to stop Soy consumption!

    Thank you,

    Lisa (Soy Protein, Hydrolyzed Soy Soy Lecithin, Lecithan, Phosphodtytal Serine, Vitamin E in most forms sneaky)

  14. Just finished doing my prelim layout of a projected muse when I read this. Having made many many products for others (three usa patents – should have been more) and deciding that I needed one or more for myself I found that I laid it out just as shown in this article. I am not a direct expert in this field but I have designed equipment for it and worked with the experts directly and at trade shows. My real expertise (other than creating fantastic products) is creating teams that work extremely well together and produce breakthru products on or under schedule and budget.

    the muse—–
    large highly active nitch market- def in the thousands
    -heavy online, social media, and print media coverage. thousands of sites, a hundred or more print resources
    -no competitor listed online or in print media classifieds or articles so currently virgin muse
    -subscription
    -custom software required -use is for entry user to pro. This will also give the pros their own nitch to create a remote biz since the physical equipment is huge and expensive
    -can be promoted synergisticly with existing companies at little or no cash out
    -can be 100% outsourced
    -no cultural bias in the product so foreign expansion is just translation
    -foreign market appox equal tho a little less then usa for proportional population
    -free and bonus features easy to develop as a draw to site and subscription
    -a physical product can also be offered

    The structure can then be used to create a second muse as a sister product. This one has all the same features as the original however the population is not as great and is more spread out in accessablilty. However that population covers a wider cultural dynamic then the original so has a wider base but more work to contact. It is just as outsource-able as the original and can be accessed anywhere there is internet for use and running the biz.

    After the bottom dropped out of engineering I was left with little more than survival funds so I will not be able to develop this on my own. There is a couple of angel clubs in the area so I am going to drop in on them.

  15. I’ve got a start-up company idea that im interested in persuing. Is there a market for start-up company ideas? can i get funding for the company through any means? Are there ways to get collaboration for the company?

    new to the lifestyle design concept. Still getting use to the temperature of the water..

    thanks

  16. I was wondering if Tim/ 4 hour body and or followers know about the health supplement product PAGG by New Health Solutions is the real deal?? I was about to go out and buy all the ingredients and then I found this product.

    Thanks
    Adam

  17. Tim, I was talking to a business owner about the benefits of having that mid-level of management to make himself less important to the business. His reply was, “You want me to teach them how to run my business? So they can leave me and start competing against me? No thanks.”

    I’m curious how you’d respond.

  18. Tim, I tried your 30 lbs of fat in 20 days for a week, and gained 9 lbs! What should I do? I weiged myself on Monday and weighed 132 and then today, (my cheat day) I weighed 141 lbs. Is this because of my cheat day? What should I do?!?!

  19. Nice. This was only a few hundred kilometers from where I cooked in France with a similar water feature—Le Source.

    So I’m not one to beat around the bush. I’m a gluten free baker and chef and have been for nearly a decade. Have you ever experimented with or integrated a gluten free diet into your training? I just discovered you in the July issue of Outside, so if you have and I don’t know, this is why. I am curious nonetheless. With so many professional athletes opting out of gluten, I wanted to hear your thoughts on the matter. Thanks!

  20. I like the line, “Think about what your business is worth in anothers hand.” I gather lots of significant learning here that I can add to in my real life. Very educational article! Two thumbs up! :)

  21. Hi Tim & John,

    great post! Always remember to focus on the main goal: Save time. Investing zero time for a muse is the best you can achieve, so sell your muse and let just your money work for you.

  22. John’s book was a great read and I think as an entrepreneur the hardest thing about building a company to sell is the letting go part of letting the others do their job. As I have built my personal training business it took me at least a year until I decided to let go but it was the greatest thing I did because it allows you to sit back and think about what the big picture is.

  23. This is such great advice. Years ago I mapped out a plan to sell our kitchen design business. Boy, was I naive. In that industry, you truly ARE the business. I should have gone into a different field years ago. Thanks for the article.

  24. Each criteria in turning the muse into a “sellable” business is very important but I think it needs a lot of time and effort before say that we completely applied this things in our product.Thanks for this informative article Tim!