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.

Posted on: April 18, 2011.

Watch The Tim Ferriss Experiment, the new #1-rated TV show with "the world's best human guinea pig" (Newsweek), Tim Ferriss. It's Mythbusters meets Jackass. Shot and edited by the Emmy-award winning team behind Anthony Bourdain's No Reservations and Parts Unknown. Here's the trailer.

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

  1. Great post Tim & John! And timely, as I am putting the final touches on an expansion program to my business which will remove me from the day-to-day operations and make it ‘repeatable’.

    I like the thought-provoking questions and statistic calculations examples.

    Like

  2. Another awesome post Tim! And it’s funny that I just finished “The Monk And The Riddle” after you recommended it in the 4HWW and here we’re talking about some of the same issues. One question: isn’t this a lot like what “Lenny” was trying to do in that book? If not, how is it different?

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  3. The teachable part is what I find hardest. What I find very easy, most other’s find very hard. This is good in a way because it discourages competition and may drive the selling price up.

    Like

  4. This just really goes to show how much more important execution is than the initial idea. A fantastic idea will get you some press, maybe some one-time paying customers, maybe a profit! But recurring business is what makes a valuable business.

    It’s so easy to get fired up by an idea and forget about the fact that you’ll actually need a way to make money for it to be valuable at all.

    Like

      • John, funny you say that! I recently found a blog all about the 99 percent perspiration. I have no affiliation with the blog or anything; I simply feel Tim’s readership would benefit from this information. All about taking ideas to reality.

        http://the99percent.com/

        As for recurring revenue, I am in the process of developing my first muse and I have the fantastic idea, like Drew mentions. However, I have not had the epiphany for how I will turn the business model into one with recurring revenues. I’m glad to have read this post. You reminded me how important it is not only to win customers but also keep them coming back.

        So the gears in my brain continue to turn…

        Like

  5. Making sure the muse doesn’t depend on one person is key. It’s a common mistake to see that a business is solely based on one person and his/her brand, which makes it very hard to sell the business.

    Also, from my own experience, most companies aren’t tracking their data properly. If they don’t know what the cost is per new customer, they are missing out on very important data.

    One thing that isn’t mentioned in this post is brand power. How does that affect the “sell-ability” of a company / muse? I know it’s a tough thing to quantify, but I would love to hear others opinion on this.

    Like

    • Brands are valuable if customers show an interest in purchasing things because of the brand. For example, Harley Davidson can plaster their logo on anything and someone will buy it makes the Harley logo — and company — valuable.

      Like

  6. Hi Tim,

    Great article, bookmarked for future reference.

    Another book that might interest you is Strategic Entrepreneurism, by Jon Fisher. It comes at this from a slightly different but complimentary angle: building a business with selling it as an up front exit strategy. How to build a business with a specific buyer / buyers in mind. How to craft a business from day 1, so that it is designed to be sold to another company.

    PS. While I have no vested interest in the book myself, in full disclosure, Jon Fisher is a friend of mine.

    Like

  7. Tim,

    Given to your experience with BRAINQUICKEN, were you ever tempted to just press rinse and repeat and create another muse like it? I’m guessing you could immediately due to non-competition regs in the contract you signed to the buyer and now you wouldn’t because of the book. But still, did the thought ever cross your mind?

    — Glenn

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  8. I think one thing that is missing is the legal aspect. I recently went to a lecture that discussed how many businesses in the beginning to not keep track of their paper work well. Also, sometimes the right documents are not filed which makes selling the company more difficult when that time comes several years later. Great post though!

    Like

  9. What an amazing layout of the formula. I wonder, as I develop my next muse, if I should start to lay these ideas out before I get any further with it. Maybe that’s an investment of time that tells me if I should invest further in developing it…

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  10. Hell Yeah!

    Awesome post buddy. Clarified so many questions that never would have occurred to me. You answered questions I wasn’t knowledgeable enough to ask yet.

    Like

  11. This is great! I’ve always wondered about this issue and worried that I might build some dumb issue in as I built a company. Thanks for another awesome article.

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  12. Great post that every small business owner should read. The “adventure” of starting your own business can often become the “trap” that never lets you out. John’s advice is excellent to remind us that we should build with the aim of selling. Even if you don’t sell you will have a business that is less demanding on your time and more lifestyle friendly.

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  13. Some valid points for the aspiring or even seasoned business owner. What springs to mind is how do you get into the groove of keeping your company profitable thus sell-able while exerting minimal effort? If this is not possible is it even feasible to sell? Also, since i’ve never sold a business, i wouldn’t know this, but that personally fulfilling concept of building something from scratch….and letting it go….beyond monetary value, won’t it eat at you?

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    • Regarding the personal fulfillment issue, i think of it like parenting: my goal as a dad is to create kids who can fend for themselves one day. When you sell a business, you get that satisfying feeling of knowing you have brought up something that can low be self sufficient.

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  14. Tim,

    Another great blog post! I love the idea of repeating the process once you find success vs. reinventing the wheel.

    Although I am still building up the branding for my books, I am expanding the offerings and looking to add to the sale after the purchase of the book(s). Your blogs have been a huge part of my success, and I can’t thank you enough for all the advice.

    I wish I had the means to attend the Open Kimono event coming up, but at the moment, I need to get a little closer to your sales rank on Amazon before I can take advantage of that. I hope you offer something similar in the future.

    I am waiting to hear if I manage to win another Independent Publisher Award this year. I guess I find small colsolation that I have this one over you. But trust me, I’d rather have a fat publisher contract than the medal hanging in my living room. :-)

    Thanks again,

    Darren Michaels
    Author
    Independent Publiher Award winner
    Huge fan

    Like

  15. Tim,

    I always appreciate the insight and the levelof expertise that you and your guest bloggers bring to the table. It is invaluable to have this insight as I continue to grow my own brand and business.

    I had hopes growing up on a combined on base percentage and slugging percentage that would command one of the largest contracts in sports, but alas the genetics were not there to support the dreams. So, I will have to do it the old fashioned way: hard work and a brilliant idea.

    Since my books are a new concept for their genre, and being a male author in a largely female genre, I think I have found a niche in which making a mark is possible. I appreciate the insight your books and blog have provided; I use your advice often.

    Thanks again,

    Darren Michaels
    2010 IPPY Award winning author
    Devoted fan

    Like