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Built to Sell Summary and Notes

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Noteworthy Thoughts

If you have a business and eventually want to sell it, you must read this book. If you want to build a business, you must read this book. It’s an insightful read into what a sellable business actually looks like. This was an excellent book that will definitely change how you think about building a business. Written in a story form, it breaks down the problems, obstacles, and temptations in a relatable way. It’s especially relevant for service businesses and the unique problems they face.

Built to Sell Summary in 2 Sentences

A sellable business has a sales team that sells scalable services or products on a recurring basis with a positive cash flow cycle, and a management team in place for the long haul. Oh, and it can run completely without you being involved.

Take 17 minutes to read this summary to learn everything you need to know from Built to Sell by John Warrillow.

Summary Notes

In the story Alex, an advertising agency owner, is mentored by Ted, someone who has sold 7 businesses. Each chapter has 1 or 2 tips from Ted. This tips summarize the entire book. The story is used to explain and support the tip.


TED’S TIP #1

Don’t generalize; specialize. If you focus on doing one thing well and hire specialists in that area, the quality of your work will improve and you will stand out among your competitors.

Be aware of earn-outs

“‘But designing logos is still a service.’ ‘Fair enough, but your product is your unique methodology for designing a logo. A service company is simply a collection of people with a specific expertise who offer their services to the marketplace. Good service companies have some unique approaches and talented people. But as long as they customize their approach to solving client problems, there is no scale to the business and its operations are contingent on people. When people are the main assets of the business-and they can come and go every night the business will not be worth very much.’

Alex pushed back. ‘But I’ve heard of a lot of service company founders who have sold their business.’

Ted, sounding more impassioned than at any other point in their meetings to date, stood his ground.

‘When a service company is sold, the owners typically get some money up front and the rest of their money is contingent on hitting performance goals in the years ahead. It’s called an earn-out, and often the owners need to stay on for three years or more to get their money. During those three years, a lot can happen that makes it difficult for the owners to meet the acquiring company’s performance goals.’

‘Why are you so against earn-outs?’

‘In an earn-out, you put a significant amount of what your company is worth at risk. The acquiring company is now in control.

An earn-out is almost always a disappointment for an entrepreneur.

You’ve assumed most of the risk and the acquiring company gets most of the reward if you’re successful. Acquiring companies use an earn-out formula to buy a business when they know the founders are the business. Your job is to build the Stapleton Agency up to point where the business is independent of Alex Stapleton. That’s the only way you can sell without putting a lot of your compensation at risk in an earn-out. Alex, you need to train people to handle each of the five steps of your process so you don’t have to be the guy piecing every project together from scratch.'”

TED’S TIP #2

Relying too heavily on one client is risky and will turn off potential buyers. Make sure that no one client makes up more than 15 percent of your revenue.


TED’S TIP #3

Owning a process makes it easier to pitch and puts you in control. Be clear about what you’re selling, and potential customers will be more likely to buy your product.


TED’S TIP #4

Don’t become synonymous with your company. If buyers aren’t confident that your business can run without you in charge, they won’t make their best offer.


TED’S TIP #5

Avoid the cash suck. Once you’ve standardized your service, charge up front or use progress billing to create a positive cash flow cycle


TED’S TIP #6

Don’t be afraid to say no to projects. Prove that you’re serious about specialization by turning down work that falls outside your area of expertise. The more people you say no to, the more referrals you’ll get to people who need your product or service.


TED’S TIP #7

Take some time to figure out how many pipeline prospects will likely lead to sales. This number will become essential when you go to sell because it allows the buyer to estimate the size of the market opportunity.


TED’S TIP #8

Two sales reps are always better than one. Usually naturally competitive types, sales reps will try to outdo each other. And having two on staff will prove to a buyer that you have a scalable sales model, not just one good sales rep.

Sales Engine

“‘An acquiring company will want to see the model for your sales engine, including how many opportunities you have and your historical close rate, to estimate the market potential. You need to demonstrate you know your sales engine and that you can predict, with a fair degree of accuracy, how your sales engine will perform under their roof. Most importantly, you need to demonstrate that you’re not the only one who can sell logos.’

‘But I don’t have any sales reps,’ Alex reminded Ted. ‘I know. You need to hire at least two.'”

TED’S TIP #9

Hire people who are good at selling products, not services. These people will be better able to figure out how your product can meet a client’s needs rather than agreeing to customize your offering to fit what the client wants.

TED’S TIP #10

Ignore your profit-and-loss statement in the year you make the switch to a standardized offering even if it means you and your employees will have to forgo a bonus that year. As long as your cash flow remains consistent and strong, you’ll be back in the black in no time.

TED’S TIP #11

You need at least two years of financial statements reflecting your use of the standardized offering model before you sell your company.

TED’S TIP #12

Build a management team and offer them a long-term incentive plan that rewards their personal performance and loyalty.

On Rewarding Employees

‘So if not with equity, how else can I let them participate in our growth?’

‘There are a lot of options,’ Ted explained. ‘You have to decide if you want to reward loyalty, in which case you might create a stay bonus tied to them being employed at some date in the future.

Alternatively, you could create a performance bonus for achieving certain targets.’

‘What did you use in the businesses that you sold?’ ‘I used a long-term incentive plan designed to reward my managers’ performance and their loyalty to the company.’

‘How did that work?’ Alex asked.

“I gave managers targets and a corresponding bonus for achieving their personal targets. I paid them their bonus at the end of each year and put aside the exact same amount into a special pool of funds earmarked for them. Three years after launching the plan, and each year thereafter, they were allowed to withdraw one-third of the pool. That way, their pool grew in value each year corresponding with their personal achievements, but they could not access the extra money until three years after earning it. If they ever decided to leave, they would be walking away from three years worth of bonuses sitting in the pool.”


TED’S TIP #13

Find an adviser for whom you will be neither their largest nor their smallest client. Make sure they know your industry.

On Finding a Suitable Broker

“‘Brokers come in all shapes and sizes. The ideal is to find a broker for whom you will be a meaningful account. The term business broker is usually used for individuals who do smaller deals where the total value of the transaction is well under $5 million.

You’re really looking for a boutique mergers and acquisitions firm.

The firm you select needs to be large enough to be respected by a potential buyer, yet small enough that your deal will be important to them. Ideally they will have also done some deals in your industry.'”

How to Answer Buyers When They Ask Why You Want to Sell

“‘No, I don’t want you to lie, but there is a right and a wrong way to answer that question. A buyer wants to hear that you see a future for your business and you want their help to get you to the next level. They want to hear that you personally are going to stay on after the sale.’

‘But Peggy, I thought I was clear that I didn’t want a deal with a three- to five-year earn-out. I’m willing to stay on for a while, but I want to go do something else.’

‘I understand, but there is a right way and a wrong way to say that.’

‘What do you suggest?’

‘Tell them you’re proud of the growth you’ve achieved and that you’re at a point in your life where you’d like to create some liquidity for the value you’ve created so far and have an opportunity to participate in some of the future upside of the business.’

Peggy added, ‘Alex, buyers understand that entrepreneurs want to put some cash in their jeans, but nobody wants to buy a sinking ship where the captain is about to jump. They need to feel like you see a future for the business and that you’re excited about exploiting the assets they have. They need to feel like you’re willing to stay on for a period of time to help them tap into some of the synergies of the two businesses.’

‘How long are you suggesting?’

‘We don’t have to pinpoint a time frame now, but to give the buyer the sense that you’re willing to stay on for a transition period. Leaving it vague would be best at this point. Once you have been acquired, you’ll become an employee of the acquirer and, just like any employee, it will be up to them to find a way to keep you engaged. For me to get you the best deal possible, with the most cash up front, they need to hear the things I just mentioned.'”


TED’S TIP #14

Avoid an adviser who offers to broker a discussion with a single client. You want to ensure there is competition for your business and avoid being used as a pawn for your adviser to curry favor with his or her best client.


TED’S TIP #15

Think big. Write a three-year business plan that paints a picture of what is possible for your business. Remember, the company that acquires you will have more resources for you to accelerate your growth.

Building an exciting vision/ plan for acquiring company to get them excited

“‘When a company looks for an acquisition, it’s usually because they want to grow. Often, they are not able to grow as fast as they want organically, so they acquire companies to bolster their topline revenue. For you to get the highest valuation for the Stapleton Agency, you need to show how you can be an engine of growth for an acquirer.’

‘What does that have to do with Starbucks?’ Alex asked.

‘When you write your next draft, think about how aggressively Starbucks has grown. Imagine that you have a blank check to grow the Stapleton Agency as large and as fast as you possibly could given unlimited resources. You need to paint the picture for an acquirer of what is possible for the business of creating logos.’

‘How do I write the plan without knowing who the acquirer will be and exactly what resources they have?’

‘The best way to do it at this point is to imagine you have a blank check and unlimited resources. There will be plenty of time for an acquiring company to scrutinize your plan and discount your projections based on what they think is reasonable. I want you to take off your conservative business owner hat and imagine what is possible. Could you start a satellite office in every major city in the country? Could you double your sales force? Could you make better use of the Internet to sell logos? Think like Starbucks.'”


TED’S TIP #16

If you want to be a sellable, product-oriented business, you need to use the language of one. Change words like “clients” to “customers” and “firm” to “business.” Rid your Web site and customerIf facing communications of any references that reveal you used to be a generic service business.

Change Your Language

“‘So I need to start referring to clients as customers.’

‘Yes. And think about the other words you use that are the typical lingo of a service business. I’d stop calling the Stapleton Agency a ‘firm’ and start referring to it as a ‘business’ instead. Replace the word ‘engagement’ with the word ‘contract.’ You want to do whatever you can to communicate to a buyer that you’re a real business, not just a flighty collection of temperamental professional service providers.’


TED’S TIP #17

Don’t issue stock options to retain key employees after an acquisition. Instead, use a simple stay bonus that offers the members of your management team a cash reward if you sell your company. Pay the reward in two or more installments only to those who stay so that you ensure your key staff stays on through the transition.

On Telling Your Employees You’re Selling

‘Alex, I understand the way you’re feeling. I felt the same way when I sold my first business.’

‘And how did your employees take it?’

‘At first they were a little surprised, but after they had time to process the news, they started to warm to the idea.’

‘They actually liked the idea?’

‘Yes. Working for a small business can have advantages, but the possibilities for career advancement are limited. They look at the highest rung of the ladder every time you walk into the office and know that as long as you own the business, they can only ascend so high.’

After the story has concluded, the book summarizes all of the main points in an implementation guide.

On Taxes for Selling Business

“Before you start this process, engage a good accountant experienced in helping business owners with succession planning. Depending on your tax jurisdiction, there will be tax-planning strategies your accountant can put into place now that will minimize your tax bill when you sell your business. Do not wait until you have an offer to see an accountant. Timing is critical.”

Scalable Criteria

“The first step in building a company that can thrive without you is to find a service or product that has the potential to scale. Scalable things meet three criteria: (1) They are “teachable” to employees or can be delivered through technology; (2) they are “valuable” to your customers, which allows you to avoid commoditization; (3) they are “repeatable,” meaning customers need to return again and again to buy (e.g., think razor blades, not razors).”

Recurring Revenue

“Of the three criteria for a scalable product or service- teachable, valuable, and repeatable – I found the single most important factor in driving up the value of my companies was ensuring my revenue was repeatable, meaning customers had to repurchase somewhat regularly.”

“Once you’ve isolated what is teachable, what your customers value, and what they need most often, document your process for delivering this type of product or service. This will form the basis of your instruction manual for delivering that product or service. Use examples and fill-in-the blank templates where possible to help ensure that your instructions are specific enough for someone to follow independently. Test your instructions by asking a team or team member to deliver the service or product without your involvement. Getting the instruction manual right will require time and patience. Expect to develop many drafts.

Next, name your scalable product or service. Naming your offering gives you ownership of it and helps you differentiate it from those of potential competitors. Once you own something unique, you move from providing a commoditized service or product to providing one whose terms of use you decide. If your product or service isn’t generic, customers won’t be able to compare your price to others’. Instead, name your offering, along with each the steps you take to deliver it, to differentiate your offer so that you can set its price and payment terms.”

“After you come up with a great name, write a short description of the features and corresponding benefits of each step in the production of your offering. Revamp all of your customer communications (e.g., Web site, brochure) to describe your process in a uniform way.”

Enough with RFPs

“If you want your business to be profitable, enjoy fat margins, and thrive without you, you need to stop responding to RFPS and start carving out your own one-of-a-kind product or service. RFPs commoditize a category down to the point where the only way for a business to win a contract is to be the lowest-cost provider.”

Charge upfront and get paid right away

“Charging up front for your product or service will be possible have documented and differentiated your unique offering properly (step 1). Depending on your service or product, you may not be able to charge the entire amount in advance, but try to get at least some portion of your money before delivery.

A positive cash flow cycle will also increase the value of your company. When an acquirer buys your company, he or she needs to write two checks. One, obviously, is to you, the owner(s); the second check is to your company to fund its working capital the money required for your business to pay its day-to-day bills. If your business needs lots of cash, the acquirer will have to set aside money for working capital, lessening his or her appetite to write you a fat check. The inverse is also true: If your company generates excess cash, an acquirer will usually pay more for your business because he or she doesn’t have to commit funds to working capital.”

Hire a Sales Team 

“Once you have created and packaged your offering and started to charge up front, you need to remove yourself from selling it. If you have others delivering the product or service but you’re still the Rainmaker, you will not be able to sell your business without a long and risky earn-out.”

“Your job as an entrepreneur is to hire salespeople to sell your products and services so you can spend your time selling your company. You make a few hundred or thousand dollars when sell your product, but if you turned those you same skills to selling your company, you can make exponentially more. You have the right skills, but you’re selling the wrong product.”

Stop Selling Everything Else 

“Once you’ve assembled a great sales team, stop taking on projects that fall outside of the standard offering you identified in step 1. It’s tempting to accept these sales because they bolster your revenue and cash flow. If you’re charging up front for your service or product and your salespeople are selling it, then you shouldn’t have to worry about cash flow. That leaves added revenue as the reason to accept projects that fall outside of your process. The revenue may feel good at first, but it comes at an unacceptable cost: Your team will lose focus; customers, realizing that you’re not serious about your standard process, will see a chink in your armor and start asking for customization of their projects; and to meet this demand, you will need to hire other people to deliver.

Many clients actually buy more once the service or product is standardized. Customers are smart; they often know you’re overreaching your capabilities in accepting assignments that fall outside of your sweet spot.

Stopping yourself from accepting projects outside of your scalable product or service is the toughest part of creating a business that can thrive without you. You will have employees testing your resolve and customers asking for exceptions, and you guess yourself on more than one occasion. This is normal; you have to be strong on this and resist the temptation. There is a point where the wind will start blowing the other way and your customers, employees, and stakeholders will finally realize that you’re serious about focusing on one thing. It takes time. It will happen, and when it does and you feel as if the boat has actually shifted, you will have sailed a long way toward creating a sellable company.

Once you have weaned yourself off other projects, you need to operate your newly focused business for at least two years in order to prove to a buyer that your new model works.”

Grow business for 2 years 

“Over the course of these two years, drive the model as far and fast as you can. Avoid the temptation to get personally involved in selling or delivering your standard offering. Instead, when you get asked for help, diagnose the problem and fix your system so the problem doesn’t recur.”

“Many business owners realize a tremendous uptick in their quality of life in these two years. Business improves, cash flows, and customer headaches decrease. In fact, many owners like this stage so much, they shelve their plans to sell their company and decide to run it in perpetuity. If this happens to you, congratulations. If you still want to sell your business, continue on to the next step.”

Launch a long-term incentive plan for managers 

“If you’d like to have a business you could sell, you need to prove to a buyer that you have a management team who can run the business after you’re gone. What’s more, you need to show that the management team is locked into staying with your company after acquisition.

Avoid using equity to retain key management through an acquisition, as it will unnecessarily complicate the sale process and dilute your holdings. Instead, create a long-term incentive plan for your key managers. Each year, take an amount equivalent to their annual bonus and put it aside in a long-term incentive account earmarked for each manager you want to retain. Allow the manager to withdraw one-third of the account’s balance each after year a three-year period. That way, a good manager must always walk away from a significant amount of money should he or she decide to leave your company.”

Find a Broker

“The next step in the process is to find representation. If your company has less than $2 million in sales, a business broker will best serve you. If it has more than $2 million in sales, a boutique mergers and acquisitions firm is probably your best bet. Look for a firm with experience in your industry, as it will already know many of the potential buyers for your business. To find an M&A firm or business broker, ask for recommendations from other entrepreneurs you know who have sold their companies.”

Tell Your Management Team

“Once your broker has found a prospective buyer, he or she will set up management presentations for you and your team. At this point you will need to confide to your key managers that you are considering selling your business.”

“Telling your management team can be a daunting task. Think about it from their perspective and make sure there is something in it for them if the deal goes through. An acquisition can often mean significant career opportunities for your managers, and that may be enough.”

Useful Info When Being Acquired

“The due diligence period, spelled out in the LOI, usually lasts from sixty to ninety days. A veteran entrepreneur I know likes to refer to it as the entrepreneur’s “proctology exam.” It isn’t fun, and the best strategy is often just to survive it. Due diligence can make you feel vulnerable and exposed. A professional buyer will dispatch a team of MBA-types to your office who will quickly identify the weak spots in your model. That’s their job. Try to keep your cool during this period, and try to present things in the best possible light, but do not lie or hide the facts.”

“In addition to these objective questions, they’ll try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business and if it is possible for your business to grow without you. Subjectively assessing how dependent the business is on you requires the buyer to do some investigative work. It’s more art than science and often requires a potential buyer to use a number of tricks of the trade:

Trick #1: Juggling calendars. By asking to make a last minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers. If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of your business is so dependent on you that you have to be there.

Trick #2: Checking to see if your business is vision impaired. An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business lives only in your head.

Trick #3: Asking your customers why they do business with you. A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and therefore will expect to hear good things. However, the customers may be asked a question like, “Why do do you business with these guys?” The acquirer is trying to figure out where your customers’ loyalties lie. If your customers answer by describing the benefits of your product, service, or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.

Trick #4: Mystery shopping. Acquirers often conduct their first bit of research behind your back, before you even know they are interested in buying your business.

They may pose as a customer, visit your Web site, or come into your company to understand what it feels like to be one of your customers. Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they’ll be concerned that business will dry up when you leave.”

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