33 Secrets to Selling Your Business
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33 Secrets to Selling Your Business

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33 Tips, Secrets and idea's to help you create value for your business. Ultimately they will help you sell your business for the highest value possible.

33 Tips, Secrets and idea's to help you create value for your business. Ultimately they will help you sell your business for the highest value possible.

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33 Secrets to Selling Your Business 33 Secrets to Selling Your Business Document Transcript

  • 1                                              33  SECRETS:  AN  OWNER’S  GUIDE  TO  BUILDING  A  SELLABLE  BUSINESS   John  Warrillow     Fall,  2012      
  • 2         Introduction         Whether  you're  growing  your  business  or  actively  planning  to  sell  it,  these  33  “secrets”  will  help  you  to:     • Build  a  successful  business  that  continues  to  grow;     • Increase  the  sellability  of  your  business  so  it’s  attractive  to  future  buyers;  and     • Negotiate  the  best  possible  deal  when  it’s  time  to  sell.       The  “secrets”  combine  the  most  important  lessons  I’ve  learned  over  the  last  18  years  as  I’ve  started  and   exited  four  businesses  and  interviewed  hundreds  of  business  owners  and  acquirers  for  the  articles  and   books  that  I’ve  written.    I’m  now  running  a  fifth  start-­‐up  dedicated  to  helping  entrepreneurs  understand   how  to  maximize  the  value  of  their  business.     Even  if  you  have  no  intention  of  selling  your  business  anytime  soon,  the  best  businesses  are  sellable;   smart  businesspeople  build  a  company  that  will  be  ready  to  go  on  the  market  when  it’s  time  for  them  to   exit.     This  e-­‐book  is  designed  to  be  read  like  an  à  la  carte  menu;  you  can  skim  to  find  the  sections  that  are   appropriate  for  whatever  you  or  your  business  need  at  a  particular  time.  Or,  if  you  like,  you  can  read  “a   tip  a  day,”  or  read  it  from  start  to  finish  as  an  overview  of  what  you  need  to  do  to  work  toward  having  a   business  that  will  attract  buyers.            
  • 3         Table  of  Contents         Part  I:    Build  a  Successful  Business     1. Defending  Your  Turf   2. Are  You  a  Schmoozer  or  a  Closer?   3. Sell  Your  Company,  Not  Your  Product   4. Avoid  the  C-­‐Word   5. The  Ansoff  Matrix,  Part  I:  Where  to  Start  When  Your  Growth  Stops   6. The  Ansoff  Matrix,  Part  II:  Make  More  Sales  to  Your  Existing  Customers   7. Have  You  Considered  Recurring  Billing?   8. The  Hierarchy  of  Recurring  Revenue   9. The  Hidden    Benefit  of  Systematizing  Your  Business   10. Four  Ways  to  Foster  Innovation  in  Your  Company   11. Can  You  “Productize”  Your  Service  Business?   12. Four  Steps  to  Turn  a  Service  Business  into  a  Product  Business     Part  II:    Increase  the  Sellability  of  Your  Business     13. Write  Down  Your  Number     14. Get  a  Divorce   15. Three  Steps  to  Letting  Go   16. More  Steps  to  Letting  Go   17. The  Eight  Factors  that  Drive  Up  Sellability   18. The  Switzerland  Structure:    Minimize  Your  Dependence   19. Do  You  Have  a  Transferable  Culture?   20. Create  a  Positive  Cash  Flow  Cycle     21. Measure  Customer  Satisfaction   22. Your  Growth  Potential   23. Employee  Loyalty:    Carrots  and  Sticks     24. Re-­‐energize  Your  Business     Part  III:    Negotiate  the  Best  Possible  Deal     25. The  False  Finish  Line   26. Managing  the  Long  Goodbye   27. Three  Things  I  Wish  I’d  Known  about  Selling  a    Business   28. Questions  You’ll  Be  Asked  When  Selling  Your  Business     29. The  Math  Behind  Your  Multiple   30. The  Relationship  Between  Return  and  Risk   31. Four  Reasons  Big  Companies  Buy  Little  Ones   32. Avoid  Deal-­‐Killing  Mistakes,  Part  1:  The  Objective  Questions   33. Avoid  Deal-­‐Killing  Mistakes,  Part  2:  The  Subjective  Questions  
  • 4         Part  I:    Build  a  Successful  Business         Contents:   1. Defending  Your  Turf   2. Are  You  a  Schmoozer  or  a  Closer?   3. Sell  Your  Company,  Not  Your  Product   4. Avoid  the  C-­‐Word   5. The  Ansoff  Matrix,  Part  I:  Where  to  Start  When  Your  Growth  Stops   6. The  Ansoff  Matrix,  Part  II:  Make  More  Sales  to  Your  Existing  Customers   7. Have  You  Considered  Recurring  Billing?   8. The  Hierarchy  of  Recurring  Revenue   9. The  Hidden    Benefit  of  Systematizing  Your  Business   10. Four  Ways  to  Foster  Innovation  in  Your  Company   11. Can  You  “Productize”  Your  Service  Business?   12. Four  Steps  to  Turn  a  Service  Business  into  a  Product  Business     Building  a  successful  business  requires  keeping  in  touch  not  only  with  the  ever-­‐changing  marketplace   but  also  with  the  requirements  of  business  acquirers,  because  either  sooner  or  later  you  will  want  to  sell   your  business.    This  section  has  tips  that  will  help  you  to:    1)  get  your  business  running  smoothly  and   compete  more  successfully  in  the  marketplace;  2)  examine  your  role  as  business  owner  /CEO  and  keep   your  long-­‐term  goals.           1.  Defending  Your  Turf     How  can  you  widen  the  protective  moat  around  your  business?     Warren  Buffett  famously  invests  in  businesses  that  have  what  he  calls  a  protective  “moat”  around  them   –  one  that  keeps  the  competition  away  and  allows  them  to  control  their  pricing.   Big  companies  lock  out  their  competitors  by  out-­‐slugging  them  in  capital  infrastructure  investments,  but   smaller  businesses  have  to  be  to  be  more  creative.    Here  are  four  suggestions:      Create  an  army  of  defenders   Ecstatic  customers  act  as  defenders  against  other  competitors  entering  your  market.  An  example  is   Trader  Joe’s  successfully  defending  their  market  share  in  the  bourgeois  bohemian  (bobo)  market  despite   heavy  competition.       Get  certified   Is  there  a  certification  program  that  you  could  take  to  differentiate  your  business  from  the  competition?   A  Canadian  company  that  disposes  of  radioactive  waste  decided  to  get  licensed  by  the  Canadian  Nuclear  
  • 5     Safety  Commission.    It  was  a  lot  of  paperwork  and  training,  but  the  certification  acts  as  a  barrier  against   other  companies  jumping  into  the  market  and  competing.       Get  your  customers  to  integrate   The  basic  switching  costs  of  Customer  Relationship  Management  (CRM)  software  are  virtually  nil.     Everyone  from  37signals  to  Salesforce.com  will  give  you  a  free  trial.  Is  there  a  way  you  can  get  your   customers  to  integrate  your  product  or  service  into  their  operations?  Can  you  offer  your  customers   training  in  how  to  use  what  you  sell  to  make  your  company  stickier?     Become  a  verb   When  you  look  for  a  recipe,  you  probably  “google”  it.    Part  of  Google’s  competitive  shield  is  that  the   company  name  has  become  a  verb.  Is  there  a  way  you  could  control  the  vocabulary  people  use  to  refer   to  your  category  or  specialty?     Widening  your  protective  moat  triggers  a  virtuous  cycle:  differentiation  leads  to  having  control  over   your  pricing,  which  allows  for  healthier  margins,  which  leads  to  greater  profitability  and  the  cash  to   further  differentiate  your  offering.         2.    Are  You  a  Schmoozer  or  a  Closer?   Have  you  ever  stopped  to  think  about  your  selling  style?       To  bring  in  big  business,  you  need  two  distinct  types  of  personalities:    the  schmoozer  and  the  closer.   Have  you  ever  stopped  to  think  about  your  selling  style?       The  schmoozer   A  schmoozer  is  a  front  person  for  a  company—good  at  glad-­‐handing  customers  and  making  people  feel   loved.  They  remember  customers  by  name  and  ask  them  about  their  lives.  They  are  both  door  openers   and  door  warmers.     The  closer   To  be  effective,  a  schmoozer  needs  to  hand  opportunities  to  a  closer.  The  closer,  understanding  a   customer's  needs  in  detail,  exposes  a  problem—often  to  the  point  of  discomfort  for  the  prospect—and   proposes  a  solution.  Closers  may  be  friendly  but  rarely  become  friends  with  customers,  keeping  their   distance  to  retain  their  bargaining  position  in  a  negotiation.     Which  one  are  you?   I  don't  think  a  founder  can  be—or  should  be—both  a  schmoozer  and  a  closer.  You  have  to  decide  your   role  and  hire  for  the  other.       A  good  schmoozer  needs  to  remain  everybody's  friend—keeping  things  light  and  informal,  smoothing   over  the  rough  edges  of  a  commercial  relationship.  A  good  closer,  on  the  other  hand,  needs  to  know  
  • 6     how  to  ratchet  up  the  pressure  in  a  negotiation,  applying  just  the  right  amount  of  leverage  to  get  a   customer  to  decide  without  turning  them  off.  If  a  schmoozer  is  the  grease,  the  closer  is  the  crowbar.   For  example,  Don  Tapscott,  co-­‐author  of  Paradigm  Shift,  Wikinomics  and  the  2010  bestseller   Macrowikinomics,  built  his  former  company,  New  Paradigm,  with  the  help  of  Joan  Bigham,  his  second-­‐ in-­‐command,  who  is  a  great  example  of  a  closer.       “[A  salesperson]  is  an  amazing  kind  of  person,”  says  Tapscott.  “They  view  ‘no'  as  information,  and  they   never  take  it  personally.    A  consummate  salesperson  thinks  dispassionately  and  strategically  about  the   selling  process.”       3.  Sell  Your  Company,  Not  Your  Product   As  an  entrepreneur,  it’s  not  your  job  to  sell  products  and  services     In  2002,  I  and  61  other  entrepreneurs  had  been  going  to  MIT  for  three  years  to  learn  how  to  be  better   company  builders.    In  the  final  year,  Stephen  Watkins,  an  entrepreneur  who  had  recently  sold  his   business,  spoke  to  us,  and  he  forever  changed  the  way  I  think  about  entrepreneurship.     He  began  by  canvassing  the  room  to  see  how  many  of  us  were  involved  in  selling  our  product  or  service   to  our  customers.  Almost  everyone  put  up  their  hand,  and  Stephen  proceeded  to  scold  us.    Basically,   what  he  said  was:  “You’re  selling  the  wrong  product;  your  job  as  an  entrepreneur  is  to  hire  salespeople   to  sell  your  products  and  services  so  you  can  spend  your  time  selling  your  company.”       He  explained  that  entrepreneurs  add  the  most  value  when  they  design  and  start  their  business.  After   that,  the  return  on  their  time  starts  to  go  down  rapidly  as  the  business  gets  going.  The  entrepreneurs   who  earn  the  best  return  on  their  investment  of  money,  time  and  energy  are  the  ones  who  get  in  and   out  quickly.     His  message  was  like  a  whack  on  the  head.  I  felt  like  an  amateur  who  had  gotten  a  glimpse  of  a   professional  game  and  realized  that  the  pros  were  playing  with  an  entirely  different  set  of  rules.  Here  I   was  spinning  my  wheels  selling  our  services  when  I  should  have  been  marketing  my  company.     From  that  day  forward,  I  changed  my  role.  I  hired  salespeople  to  call  on  customers.    I  still  went  on  sales   calls,  but  they  were  to  people  I  thought  might  one  day  buy  my  company.             4.  Avoid  the  C-­‐Word     …and  stop  using  consultant  lingo      A  lot  of  businesses  start  off  providing  a  service  and  then  fall  into  the  trap  of  using  the  buzzwords  of  the   consulting  world.  The  problem  is:  consultancies  are  typically  not  valuable  businesses  because  acquirers   generally  view  them  as  a  collection  of  people  who  peddle  their  time  on  a  hamster  wheel.    
  • 7       If  you  want  to  build  a  valuable  company–one  someone  will  buy  down  the  road–consider  re-­‐positioning   your  company  out  of  the  "consultancy"  box.    You  can  start  by  eliminating  consulting  company   terminology  and  replacing  it  with  the  terminology  of  a  valuable  business.     Consultancy    "Consultancies"  rarely  get  acquired,  and  when  they  do,  it  is  usually  with  an  earn-­‐out.  Replace   "consultancy"  with  "business"  or  "company."     Engagement   An  engagement  is  something  that  happens  before  two  people  get  married;  therefore,  using  the  word  in   a  business  context  reinforces  the  people-­‐dependent  nature  of  your  company.  Use  “contract”  instead.         Deck   A  deck  is  something  you  drink  beer  on.  It's  not  a  word  to  describe  a  PowerPoint  presentation  unless  you   want  to  look  like  a  "consultancy."     Consultant   Instead  of  describing  yourself  as  a  "consultant,"  describe  what  you  consult  on.  If  you  are  a  search  engine   optimization  expert  who  has  developed  a  methodology  for  improving  a  website's  natural  search   performance,  say  you  "run  an  SEO  company."       Deliverables   Consultants  promise  "deliverables."  The  rest  of  the  world  guarantees  the  features  and  benefits  of  their   product  or  service.     Associate,  engagement  manager,  partner   If  you  refer  to  your  employees  with  these  telltale  labels  of  a  consultancy,  consider  changing  to  titles  like   "manager,"  "director"  and  "vice-­‐president."       Clients   Companies  with  "clients"  are  usually  prepared  to  do  just  about  anything  to  serve  their  needs,  which   sounds  great  to  clients  but  telegraphs  to  outsiders  that  you  customize  your  work  to  a  point  where  you   have  no  leverage  or  scalability  in  your  business  model.  Use  "customers"  instead.         5.  The  Ansoff  Matrix,  Part  I      Where  to  start  when  your  growth  stops     Why  would  two  companies  in  the  same  industry,  with  the  same  financial  performance,  command  vastly   different  valuations?  The  answer  often  comes  down  to  how  much  each  business  is  likely  to  grow  in  the   future.  
  • 8       The  problem  is  that  a  lot  of  successful  businesses  reach  a  point  where  their  growth  starts  to  slow  as  the   company  matures.  In  fact,  the  price  of  doing  a  great  job  carving  out  a  unique  niche  is  that  the  specialty   that  made  you  successful  can  start  to  hold  you  back.     If  you  make  the  world’s  greatest  $5,000  wine  fridge,  you  may  have  a  successful,  profitable  business  until   you  run  out  of  people  willing  to  spend  $5,000  to  keep  their  wine  cool.         Demonstrating  how  your  business  is  likely  to  grow  in  the  future  is  one  of  the  keys  to  securing  a  premium   price  for  your  company  when  it  comes  time  to  sell.  To  brainstorm  how  to  grow  beyond  the  niche  that   got  you  started,  consider  the  Ansoff  Matrix,  first  published  in  the  Harvard  Business  Review  in  1957  but   still  a  helpful  framework  for  business  owners  today.     Sometimes  called  the  Product/Market  Expansion  Grid,  the  Ansoff  Matrix  shows  four  ways  that   businesses  can  grow,  and  it  can  help  you  think  through  the  risks  associated  with  each  option.   Imagine  a  square  divided  into  four  quadrants  representing  your  four  growth  choices.  The  choices  are:       1. Selling  existing  products  to  existing  customers;   2. Selling  new  products  to  existing  customers;   3. Selling  existing  products  to  new  markets;  and   4. Selling  new  products  to  new  markets.     The  choices  above  are  presented  from  least  to  most  risky.    In  a  smaller  business,  with  few  dollars  to   gamble,  focusing  your  attention  on  the  first  two  options  will  give  you  the  lowest  risk  options  for  growth.       6.  The  Ansoff  Matrix,  Part  II   Grow  your  business  by  making  more  sales  to  your  existing  customers     You  may  think  that  you’ve  got  all  your  bases  covered  when  it  comes  to  your  existing  customers,  but   think  again.    With  a  little  creativity,  you  may  be  able  to  come  up  with  some  new  ideas.     Sell  more  of  your  existing  products       It’s  natural  to  feel  like  you’re  being  greedy  when  you  go  back  to  the  same  customers  for  more  of  their   dollars,  but  the  opposite  can  often  be  true.  Your  best  customers  will  likely  be  pleased  to  find  out  that   you  –  someone  they  trust  –  are  offering  something  they  need.         Greg  was  a  hardware  store  owner  who  earned  a  150%  mark-­‐up  on  cutting  keys,  but  his  cutter  was   hidden  in  a  corner  of  the  store.    When  he  moved  the  key  cutter  directly  behind  the  cash  register,  Greg   started  selling  a  lot  more  keys  to  his  loyal  customers,  increasing  his  overall  revenue  per  customer.    
  • 9     Consider  drawing  up  a  simple  chart  of  your  products  and  services.  List  your  best  customers’  names   down  one  side  of  the  paper  and  your  products  across  the  top.  Then  cross-­‐reference  to  identify   opportunities  to  sell  your  best  customers  more  of  your  existing  products.     Sell  new  products     Another  approach  is  to  sell  new  products  to  existing  customers.  For  example,  there  is  a  BMW  dealership   owner  in  the  Midwest  whose  typical  customer  is  a  family  patriarch  in  his  forties.  When  he  felt  he  had   saturated  the  market  for  well-­‐heeled  forty-­‐something  men,  he  considered  what  other  products  he  could   sell,  but  instead  of  defining  his  customer  as  the  forty-­‐something  man,  he  decided  to  think  of  his   customer  as  the  financially  successful  family.       He  bought  a  Chrysler  dealership  so  he  could  sell  minivans  to  the  spouses  of  his  BMW  buyers  and  then   bought  a  Kia  dealership  to  sell  the  family  a  third,  inexpensive  car  for  their  driving-­‐age  teens.     To  increase  the  value  of  your  business,  you  need  to  be  able  to  grow,  and  the  least  risky  strategy  will  be   to  determine  what  else  you  could  sell  to  your  existing  customers.         7.    Have  You  Considered  Recurring  Billing?   A  win-­‐win  for  you  and  your  customer       Instead  of  trying  to  fight  for  retail  space,  GreenTeaDaily  decided  go  directly  to  customers  and  ask  them   to  pay  for  their  tea  like  a  cable  bill:  on  a  monthly  subscription.       For  $49.99  a  month,  GreenTeaDaily  will  auto-­‐ship  you  a  box  of  their  green  tea  every  month.  That  way,   you  don’t  need  to  remember  to  stock  up  and  they  don’t  need  to  pour  money  into  advertising.     If  you’re  thinking  of  evolving  your  business  model  into  a  recurring  billing  arrangement,  consider  these   four  ways  to  get  your  customers  to  switch:       Set  it  and  forget  it   Some  basic  services  (alarm,  spring  water)  are  no  fun  to  shop  for  and  customers  may  be  happy  to  be   billed  monthly.       Be  pre-­‐emptive     Promise  to  proactively  manage  the  relationship.  Instead  of  waiting  for  customers  to  call,  home   maintenance  firm  Hassle  Free  Homes  provides  an  annual  home  management  contract.    In  the  fall,   Hassle  Free  Homes  shows  up  to  clear  the  leaves  from  their  customer’s  gutters,  and  in  the  winter  they   swap  the  furnace  filters.         Offer  911  service  
  • 10     Salesforce.com  sells  its  customers  service  packages  like  the  “Premier  Success  Plan.”  Instead  of  having  to   report  an  issue  or  ask  a  question  online,  subscribers  get  a  special  phone  number  to  call,  promising  a   response  within  two  hours.      Bribe  them       You  can  simply  offer  customers  a  discount.    GreenTeaDaily  customers  save  $10  per  box  of  tea.   Recurring  billing  companies  are  often  the  most  valuable  and  profitable  businesses  in  their  category.   What  you  have  to  do  is  figure  out  what’s  in  it  for  your  customer  so  you  can  get  a.       8.    The  Hierarchy  of  Recurring  Revenue   What  is  more  valuable  in  the  eyes  of  the  acquirer?     One  of  the  biggest  factors  in  determining  the  value  of  your  company  is  the  extent  to  which  an  acquirer   can  see  where  your  sales  will  come  from  in  the  future.  If  you’re  in  a  business  that  starts  from  scratch   each  month,  the  value  of  your  company  will  be  lower  than  if  you  can  pinpoint  the  source  of  your  future   revenue.    A  recurring  revenue  stream  acts  like  a  powerful  pair  of  binoculars  for  you  to  see  months  or   years    into  the  future,  so  creating  an  annuity  stream  is  the  best  way  to  increase  the  value  of  your   business.     The  surer  your  future  revenue  is,  the  higher  the  value  the  market  will  place  on  your  business.  Here  are   six  forms  of  recurring  revenue  presented  from  least  to  most  valuable  in  the  eyes  of  an  acquirer.     No.  6:  Consumables  (e.g.,  shampoo,  toothpaste)   These  are  disposable  items  that  customers  purchase  regularly,  but  they  have  no  solid  motivation  to   repurchase  from  you  or  to  be  brand  loyal.     No.  5:  Sunk-­‐money  consumables  (e.g.,  razor  blades)     This  is  where  the  customer  first  makes  an  investment  in  a  platform.  For  example,  once  you  buy  a   razor  you  have  a  vested  interest  in  buying  compatible  blades.     No.  4:  Renewable  subscriptions  (e.g.,  magazines)   Typically  subscriptions  are  paid  for  in  advance,  creating  a  positive  cash-­‐flow  cycle.     No.  3:  Sunk-­‐money  renewable  subscriptions  (e.g.,  the  Bloomberg  Terminal)   Traders  and  money  managers  swear  by  their  Bloomberg  Terminal;  they  have  to  first  buy  or  lease  the   terminal  on  order  subscribe  to  Bloomberg’s  financial  information.     No.  2:  Automatic-­‐renewal  subscriptions  (e.g.,  document  storage)   When  you  store  documents  with  Iron  Mountain,  you  are  automatically  charged  a  fee  each  month   unless  you  tell  them  to  stop.      
  • 11     No.  1:  Contracts  (e.g.,  wireless  phones)   As  much  as  we  may  despise  being  tied  to  them,  wireless  companies  have  mastered  the  art  of   recurring  revenue.  Many  give  customers  free  phones  as  long  as  they  lock  into  a  two  or  three-­‐year  full   service  contract.         9.  The  Hidden  Benefit  of  Systematizing  Your  Business   Beyond  growing  your  clientele,  you’re  preparing  for  the  future     If  you’ve  read  The  E-­‐Myth,  you  know  the  importance  of  building  systems  in  your  business  so  it  can  run   without  you.  But  there  is  another  benefit  to  standardizing  your  business  and  documenting  your   processes:  it  will  help  you  get  paid  more  money  when  you’re  ready  to  cash  out,  as  opposed  to  settling   for  a  large  “earn  out”  –  where  the  seller(s)  having  to  hit  set  targets  in  the  future  in  order  to  get  their   money  out.       Take,  for  example,  Computerized  Facility  Integration,  LLC  (CFI),  founded  by  Robert  Verdun.  Verdun  and   his  team  have  built  an  $18-­‐million-­‐dollar–a-­‐year  business  that  helps  big  companies  manage  their   investments  in  real  estate.  When  companies  like  Dow  Chemical  or  Pfizer  want  to  plan  new  facilities   anywhere  in  the  world,  they  call  CFI.       Verdun  has  deeply  standardized  the  squishy  business  of  moving  offices.    “There  are  many  people   involved,”  says  Verdun.  “We  have  to  take  into  consideration  movers,  construction,  permits,  art  work,  IT,   security,  capital  planning,  etc.”         Not  only  does  Verdun  have  systems  in  place  for  his  employees  to  follow;  he  has  also  cross-­‐trained  his   staff  so  that  most  of  them  can  do  more  than  one  job.    In  the  event  of  an  employee  departure,  a  cross-­‐ trained  staffer  can  slip  into  the  open  spot.     Not  only  has  this  helped  Verdun  scale  up  his  CFI  –  to  number  3,052  on  the  2011  Inc.  5000  list  –  it  will   also  help  him  get  out  cleanly  when  he’s  ready  to  sell.  Most  service  businesses  are  overly  reliant  on  a   couple  of  key  personnel,  which  is  risky  for  a  buyer.        “Assuming  CFI’s  business  systems,  processes  and  key  employees  stand  up  to  buyer  due  diligence,”  says   M&A  Professional  John  Duguid,  “the  necessity  of  having  Robert  stay  on  is  significantly  reduced,  and  his   M&A  advisor  would  resist  an  earn-­‐out.”  
  • 12     10.    Four  Ways  to  Foster  Innovation  in  Your  Company     Yes,  you  have  to  be  predictable,  but  make  room  for  new  ideas     You  want  your  business  to  grow,  as  do  investors  and  acquirers,  and  growth  comes  from  new  products,   new  services  and/or  new  customers.    Can  you  be  predictable  and  innovative  at  the  same  time?    I  put  the   question  to  Jeremy  Gutsche,  author  of  Exploiting  Chaos  and  founder  of  TrendHunter.com,  a  business   that  tracks  emerging  trends  for  customers  like  Google,  Pepsi  and  Cadbury.    Here  are  some  of  his   suggestions.       Set  up  a  gambling  fund   Put  aside  some  money  to  gamble  on  new  ideas.  When  the  BBC,  the  U.K.’s  national  broadcaster,  was   stuck  in  a  programming  rut,  it  set  up  a  gambling  fund  for  ideas  that  failed  the  usual  new-­‐program   screening  process.    Producers  could  apply  for  gambling  funds  if  their  idea  was  cut,  which  is  how  The   Office,  one  of  the  BBC’s  most  successful  programs  of  all  times,  was  funded.      Think  like  a  portfolio  manager   Like  a  manager,  envision  your  business  as  a  portfolio  of  investments.  Gutsche  recommends  having  some   areas  of  your  business  that  are  reliable  and  predictable  while  reserving  part  of  your  portfolio  for  trying   new  things.      Reward  sound  decisions   Most  companies  pay  their  employees  based  on  results  and  outcomes;  which  means  the  best  employees   want  to  work  where  they  are  most  likely  to  generate  good  results  in  a  predictable  way.  It  also  means   your  best  employees  stop  taking  risks.  Gutsche  recommends  you  reward  good  decisions  rather  than   outcomes  so  you  can  incent  your  employees  to  try  things  that  may  be  risky.     Give  your  employees  playtime   Set  aside  some  company  time  each  week  or  month  for  employees  to  use  to  work  on  pet  projects.  3M,  of   Post-­‐It  note  fame,  popularized  this  technique,  which  has  since  been  adopted  by  companies  like  Google   and  Amazon,  who  give  their  engineers  time  for  to  tinker.       11.    Can  You  “Productize”  Your  Service  Business?   Switching  from  a  service  model  to  a  product  model     Jason  Fried  and  David  Heinemeier  Hansson  co-­‐founded  37signals  in  Chicago  as  a  three-­‐person  web   design  shop.  As  their  products  grew  larger  and  more  complex,  they  found  themselves  looking  for   software  that  could  help  them  better  manage  jobs  among  a  growing  network  of  staff  and  contract  help   operating  from  different  locations.    In  the  end,  they  built  a  piece  of  project  management  software   themselves  for  their  own  internal  use.    
  • 13     Then  a  funny  thing  happened:  37signals’  clients  saw  the  simplicity  of  the  software  and  started  asking   where  they  could  buy  it.  It  wasn’t  long  before  Fried  and  his  partner  realized  they  had  built  a  product  that   might  have  mass  appeal.  They  polished  it  up,  gave  it  the  name  Basecamp  and,  through  their  blog,   announced  its  availability.  A  year  later,  Basecamp  was  more  profitable  than  the  web  design  business,  and   37signals  stopped  being  a  service  business  and  started  being  a  product  business.     Today,  tens  of  thousands  of  small  businesses  use  37signals  software;  and  the  company  hasn’t  built  a   website—other  than  its  own—since  2006.     In  my  former  research  company,  Warrillow  &  Co.,  we  spent  seven  years  as  a  project-­‐based  service   business  before  we  redesigned  our  model  into  a  subscription-­‐based  product  company.       Changing  to  a  product  business  made  it  more  predictable,  enjoyable,  and  ultimately  sellable.       12.    Four  Steps  for  Turning  a  Service  Business  into  a  Product  Business   Make  your  service  business  more  valuable       Step  1:    Develop  a  subscription  offering   In  the  case  of  37signals,  customers  buy  software  on  a  subscription  model.    They  pay  a  small  amount   each  month,  so  Fried  and  Hansson  can  predict  their  revenue  well  into  the  future.  Predictable  future   revenue  diversified  among  many  customers  gave  37signals  the  courage  and  resources  to  eventually  turn   off  its  service  business.  At  Warrillow  &  Co.,  we  went  from  project-­‐based  consulting  to  offering  a  single   annual  subscription  to  our  research.     Step  2:    Build  an  audience   37signals  had  authored  a  popular  blog  for  seven  years  before  it  announced  Basecamp  to  its  readers.     With  a  direct  line  to  thousands  of  daily  readers,  37signals  was  able  to  use  the  blog  as  its  primary   marketing  vehicle  to  sell  subscriptions.  At  Warrillow  &  Co.,  we  had  been  running  a  conference  since   1999,  so  when  we  switched  to  the  subscription  model  in  2005,  past  attendees  were  a  natural  audience.     Step  3:    Don’t  give  yourself  an  out   In  a  service  business,  clients  always  take  priority,  so  it’s  hard  to  fine  the  time  to  work  on  your  product   offering.  In  the  case  of  37signals,  it  needed  project  management  software  to  better  serve  its  clients,  so  it   had  a  natural  motivator  to  develop  the  precut  quickly.     At  Warrillow  &  Co.,  we  quit  accepting  consulting  projects  cold  turkey,  which  was  made  possible  because   we  charged  tens  of  thousands  of  dollars  upfront  for  an  annual  research  subscription.     Step  4:    Start  saying  no   It  took  a  year  for  37signals  to  build  up  enough  subscribers  to  start  turning  away  projects.    For  me,  it  was   tempting  to  accept  consulting  projects,  but  saying  no  triggered  the  opportunity  for  us  to  talk  about  our   subscription  offering  and  how  it  could  help  solve  the  client’s  problem.  
  • 14         Part  II:    Ensure  the  Sellability  of  Your  Business           Contents:   13. Write  Down  Your  Number   14. Get  a  Divorce   15. Three  Steps  to  Letting  Go   16. More  Steps  to  Letting  Go   17. The  Eight  Factors  that  Drive  Up  Sellability   18. The  Switzerland  Structure:    Minimize  Your  Dependence   19. Do  You  Have  a  Transferable  Culture?   20. Create  a  Positive  Cash  Flow  Cycle     21. Measure  Customer  Satisfaction   22. Your  Growth  Potential   23. Employee  Loyalty:    Carrots  and  Sticks     24. Re-­‐energize  Your  Business     This  section  looks  at  the  elements  that  make  your  business  more  sellable;  so  when  it’s  time  for  you  to   sell,  your  company  will  be  shipshape  and  ready  to  be  shown  off  to  serious  buyers.    It  discusses  eight   factors  that  drive  up  sellability  and  how  to  begin  implementing  some  of  the  changes  you  need  to  make.   It  also  asks  you  to  examine  more  closely  your  long-­‐term  goals  for  selling  your  business  and  how  to   evolve  your  position  and  your  company  in  terms  of  those  goals.  Ultimately,  your  business  has  to  thrive   without  you.         13. Write  Down  Your  Number     Picking  a  number  will  remind  you  that  your  goal  is  to  build  your  business  and  sell  it       Most  business  owners  have  a  number,  even  if  they  don’t  talk  about  it.    My  advice  is  to  write  your   number  down.     Most  of  us  start  companies  because  we  want  to  achieve  something  remarkable  or  because  we  have  a   deeply  rooted  need  for  independence.  In  the  absence  of  an  objective  measurement  for  “remarkable”  or   “independence,”  your  number  can  act  as  the  marker  to  let  you  know  when  you’ve  crossed  your  finish   line.     I  used  to  meet  with  a  group  of  entrepreneurs  once  a  quarter  and  we  would  do  a  formal  review  of  our   goals.    I  would  look  at  my  number  and  ask  myself  three  questions:    
  • 15     1.  Where  do  you  stand  right  now?   Is  your  business  more  valuable  than  it  was  last  quarter  or  last  year?  To  value  your  business,  you   can  estimate  your  earnings  before  interest,  taxes,  depreciation  and  amortization  (EBITDA),  and   use  the  multiple  that  businesses  like  you  are  selling  for.  The  multiple  can  be  a  guesstimate;  what’s   more  important  is  the  process  of  thinking  through  what  your  business  is  worth  and  being  clear   about  the  progress  you’re  making.     2.  What  do  you  have  to  do  in  the  next  90  days,  and  over  the  next  year,  to  make  your  business  more   valuable?     This  question  is  not  about  selling  more  or  making  more  profit,  but  about  making  your  business   more  sellable.         3.  What  experiences  do  you  want  to  enjoy  after  you  sell?   I  found  it  motivating  to  write  down  experiences  I’d  like  to  have  (rather  than  things  I’d  like  to  buy).   My  list  included  living  in  another  country,  taking  my  kids  to  every  continent,  qualifying  for  the   Hawaii  Ironman,  and  starting  a  foundation  to  lend  money  to  entrepreneurs  in  the  developing   world.     Each  quarter  I  would  imagine  these  experiences.  It  helped  me  to  remember  why  I  was  in  the  business  in   the  first  place,  and  that  yes,  I  did  want  to  sell  it.       14.    Get  a  Divorce   Your  business  isn’t  you;  it’s  an  inanimate  economic  engine  that  you  will  at  some  point  sell     When  I  started  Warrillow  &  Co.,  my  name  was  literally  on  the  door,  and  I  poured  all  my  waking  hours   into  the  business.  My  hobbies  and  relationships  started  to  wither  from  lack  of  attention  and  I   rationalized  that  I  could  get  back  to  “my  life”  once  I  got  the  business  going.  After  a  while  the  business   did  get  off  the  ground,  but  I  didn’t  change  my  work  schedule;  it  was  an  adrenaline  rush  to  be  building  a   successful  company.     It  all  started  to  come  undone  when  a  key  employee  on  our  team  got  hired  away  by  a  big  multinational   firm.    I  was  left  with  a  skeleton  staff  and  a  bruised  ego,  but  the  experience  made  me  realize  just  how   much  my  business  had  become  part  of  me;  in  fact,  I  had  let  it  define  me.     After  that,  I  started  to  look  at  my  business  more  realistically;  it  wasn’t  a  part  of  me;  it  was  an  inanimate   economic  engine.  In  short,  I  got  divorced  from  my  business,  and  I  vowed  to  get  in  touch  with  the  people   and  things  that  were  important  to  me.     When  I  look  back,  I’m  glad  I  had  a  near-­‐death  experience  in  my  business  as  it  forced  me  to  nurture   outside  interests  and  investments  in  my  life  before  I  actually  attempted  to  sell.      
  • 16       15.  Three  Steps  to  Letting  Go   Ultimately,  your  business  has  to  thrive  without  you     Can  your  business  thrive  without  you?  To  be  valuable  to  an  acquirer,  your  business  must  be  able  to   succeed  and  grow  without  you.    The  more  your  customers  need  you,  or  ask  for  you  personally,  the   harder  it  is  to  grow  your  business  and  the  less  valuable  your  company  will  be.    To  start  letting  go,   consider  these  four  steps:     1. Get  out  of  the  “break/fix”  business   It’s  a  lot  easier  to  train  people  how  to  prevent  a  problem  than  it  is  to  show  them  how  to  fix   something  once  it’s  broken.    For  example,  a  swimming  pool  company  can  teach  a  summer   employee  to  scoop  debris  out  of  a  pool  each  week,  but  it  needs  an  expert  –  often  the  company   owner  –  to  replace  a  pump  that  has  overheated  due  to  a  clogged  drain.     2. Go  on  vacation   Start  slowly  by  taking  evenings  and  weekends  off  completely  and  leaving  your  cell  phone  at  the   office.    Then  take  a  day  off  midweek  and  do  the  same.    Build  up  to  where  you  can  take  a  week  off   without  checking  in.    Once  your  employees  realize  they’re  on  their  own,  the  best  ones  will  start  to   make  more  decisions  independently.     3. Ask  employees  what  they  would  do  in  your  shoes   To  get  employees  to  start  thinking  like  an  owner,  encourage  them  to  solve  their  own  problems.     When  an  employee  comes  to  you  with  a  problem,  ask,  “If  it  were  your  business,  what  would  you   do?”    This  simple  question  gives  your  employees  the  opportunity  to  start  developing  a  decision-­‐ making  perspective.       16.  More  Steps  to  Letting  Go   Give  your  employees  the  opportunity  to  step  up  to  the  plate     As  you  go  through  the  process  of  making  your  business  less  dependent  on  your  skills  and  management,   and  more  dependent  on  your  employees,  consider  the  following  steps  with  your  advisor:     • How  do  you  currently  spend  your  business  day?  Create  a  pie  chart  representing  the  time  you   spend  at  work  and  assign  a  slice  for  each  of  the  activities  you  do.  What  observations  can  you   make  about  how  you  spend  your  time?  What  can  you  start  to  let  go  of?       • Is  there  a  current  employee  who  could  be  promoted  to  head  up  either  your  sales  and  marketing   or  your  product/service  quality  and  innovation?     • Are  you  under-­‐utilizing  your  employees’  skills  and  abilities?  
  • 17       • What  sort  of  long-­‐term  incentive  plan  do  you  have  in  place  to  keep  key  managers  from  leaving?       • How  does  your  long-­‐term  incentive  plan  need  to  evolve  to  be  an  asset  when  you  are  ready  to  sell   your  company?     • What  recurring  problems  in  your  company  could  be  fixed  by  having  a  formal  process  or  instruction   manual?    The  documentation  of  processes  is  also  an  important  step  in  ensuring  the  company  can   run  smoothly  without  you.     • Why  do  customers  request  that  you  serve  them?  If  you’re  not  sure  of  the  answer,  ask  your  best   customers.       17.  The  Eight  Factors  that  Drive  Up  Sellability   How  sellable  is  your  company  right  now?     From  many  years  of  researching  businesses,  I  have  determined  there  are  eight  factors  that  drive  up  the   sellability  of  a  business.    Using  these  factors,  I  developed  The  Sellability  Score,  a  tool  business  owners   can  use  to  assess  the  sellablility  of  their  business  according  to  a  score  out  of  100.  The  eight  key  factors   are:     1. Financial  Performance   To  be  sellable,  a  business  needs  to  show  consistent  revenue  and  earnings  growth.   2. Growth  Potential   In  addition  to  strong  historical  financial  performance,  the  business  needs  to  have  growth   potential  in  the  future.     3. Neutrality   A  business  must  not  be  overly  reliant  on  any  one  customer,  employee  or  supplier.   4. Positive  Cash  Flow    Not  only  does  the  business  need  to  be  profitable  on  paper;  it  needs  to  generate  cash  flow  in   real  life.   5. Recurring  Revenue   The  biggest  fear  of  a  potential  buyer  is  that  sales  will  dry  up  after  the  founder  exits.  In  order  to   mitigate  this  concern,  a  business  must  have  a  recurring  revenue  stream  that  gives  the  buyer   confidence  customers  will  continue  to  re-­‐purchase  in  the  future.   6. Protected  Competitive  Position   Warren  Buffett  is  famous  for  investing  in  companies  with  a  protective  “moat”  around  them  –  in   other  words,  an  enduring  competitive  advantage.  The  deeper  and  wider  the  moat,  the  harder  it   is  for  competitors  to  compete.  This  also  gives  an  owner  more  control  over  pricing,  which   increases  both  profitability  and  cash  flow.   7. Satisfied  Customers  
  • 18     Acquirers  look  for  companies  that  have  satisfied  customers  and  often  require  that  a  customer   satisfaction  survey  be  completed  before  buying  a  business.     8. Independence  from  the  Owner   Sellable  businesses  must  be  able  to  succeed  and  grow  without  their  owner.       18.  The  Switzerland  Structure   Minimize  your  dependence  on  any  one  company  or  individual     The  Swiss  obsession  with  neutrality  inspired  the  name  of  one  of  my  core  ideas  for  creating  a  valuable   company.  "The  Switzerland  Structure"  is  a  way  of  evaluating  your  business  to  ensure  that  neutrality   allows  you  to  minimize  your  dependence  on  any  one  company  or  individual.  I'd  recommend  you   consider  the  Switzerland  Structure  in  all  areas  of  your  business:     Employees   If  you're  too  reliant  on  any  one  employee,  you  are  at  a  significant  risk  if  that  employee  chooses  to  leave   and  at  a  disadvantage  when  it  comes  to  negotiating  his  or  her  salary.  To  avoid  this  situation,  nurture  a   pool  of  people  you  want  to  hire.  Toronto-­‐based  executive  search  firm  IQ  Partners  offers  a  bench-­‐ building  service:  it  proactively  recruits  a  short  list  of  candidates  who  could  fill  your  key  roles  so  that  you   have  a  bench  of  people  to  go  to  in  the  event  of  an  employee  defection.     Suppliers   If  your  business  is  dependent  on  one  or  two  key  suppliers  (companies  or  independent  consultants),  you   are  at  their  mercy.  Cultivating  a  bench  of  suppliers,  on  the  other  hand,  means  you  will  never  feel   beholden  to  anyone.  Spread  your  business  around  –  even  if  you  lose  some  special  pricing  discounts.   Neutrality  is  worth  more  than  a  few  dollars  in  savings.     Customers   If  you're  too  dependent  on  any  one  customer,  your  business  will  be  highly  unstable.  It  will  be  stressful  to   run  in  the  short  term  and  virtually  worthless  if  you  ever  want  to  sell  it.  Try  to  work  your  customer   concentration  down  to  a  point  where  your  largest  customer  represents  no  more  than  15  percent  of  your   revenue.  You'll  sleep  better  at  night  and  have  a  more  valuable  company  when  it  comes  time  to  sell.       19.    Do  You  Have  a  Transferable  Culture?    Ensure  your  culture  is  durable  and  can  survive  your  departure       Pat  Lencioni’s  latest  book,  Getting  Naked,  is  a  fable  about  a  business  owner  who  has  to  abruptly  sell  his   company.    The  acquirer  discovers  that  the  company  is  successful  not  because  of  its  superstar  sales  team   or  proprietary  methodology  but  because  of  its  unique  culture.    
  • 19     I  asked  Lencioni  how  business  owners  can  develop  their  culture  and  ensure  it  will  survive  after  they’re   gone.  Based  on  our  conversation,  here  are  three  steps  for  creating  a  durable  company  culture:     1. Figure  out  who  you  are,  not  who  you  want  to  be.   Stay  away  from  aspirational  clichés  like  “integrity,  teamwork,  respect,”  advises  Lencioni,  and  pick   one  or  two  company  values  that  truly  represent  who  you  are.  For  example,  for  Southwest  Airlines,   humor  is  a  core  value  and  an  essential  part  of  everything  the  company  does.       2. Be  picky  when  hiring  and  promoting.   Once  you  know  who  you  are  as  a  company,  the  second  step  is  to  ensure  your  entire  company   embodies  these  values.  Jim  Collins,  the  author  of  Good  to  Great  and  Built  to  Last,  talks  about   “getting  the  right  people  on  the  bus  and  in  the  right  seats.”    Says  Lencioni:  “At  Southwest  Airlines,   they  will  not  hire  anyone—even  for  the  most  technical  jobs—without  a  sense  of  humor.”         3. Stay  involved  in  hiring.   “The  very  last  thing  the  owner  should  delegate  is  hiring,”  states  Lencioni.  He  believes  it  is  the   company  founder’s  most  important  tool  to  ensure  new  hires  embody  the  company’s  culture.  He   advises  business  owners  to  use  their  values  as  hiring,  promoting  and  firing  criteria.     These  three  steps  will  enable  you  to  turn  your  company  culture  into  one  that  is  self-­‐adjusting,  that  will   pass  muster  with  a  potential  acquirer,  and  that  will  endure  long  after  you’re  gone.       20.  Create  a  Positive  Cash  Flow  Cycle   Accumulate  cash  as  you  grow     In  order  to  be  a  sellable  company,  one  of  your  goals  is  to  create  a  business  that  accumulates  cash  as  it   grows.  The  more  cash  an  acquirer  must  inject  into  your  company  when  taking  it  over,  the  less  he  will  pay   for  your  company.  The  inverse  is  also  true:  the  less  cash  your  acquirer  must  deposit  into  your  business,   the  higher  the  price  her  or  she  will  pay.     One  way  to  create  a  positive  cash-­‐flow  cycle  is  by  getting  customers  to  pay  you  sooner  while  you   lengthen  the  time  it  takes  you  to  pay  your  expenses.  In  addition  to  maximizing  your  overall  profitability,   having  money  in  the  bank  makes  running  your  business  that  much  more  enjoyable  before  you  sell.      Consider  the  following  questions:   • If  you  bill  your  customers  in  installments,  could  you  charge  them  a  greater  percentage  of  the   overall  price  up  front?   • Could  you  evolve  your  business  into  a  membership  or  subscription  model  in  which  you  bill   customers  before  they  receive  the  benefits  of  their  membership  or  subscription?   • If  you  sell  a  service,  could  you  do  more  to  “productize”  your  offer  and  thereby  make  it  easier  to   charge  up  front?  
  • 20     • Could  you  reduce  the  amount  of  inventory  you  pay  for  in  advance  of  needing  it?   • Could  you  lengthen  the  time  it  takes  to  pay  some  vendors?       21.    Measure  Customer  Satisfaction   How  to  measure  the  one  number  investors/buyers  want  you  to  track     Fred  Reichheld,  author  of  The  Ultimate  Question,  found  that  most  traditional  customer  satisfaction   surveys  do  a  poor  job  of  predicting  the  likelihood  of  a  customer  repurchasing  from  you  or  referring  your   company  to  a  friend.  So  he  and  his  colleagues  developed  the  Net  Promoter  Score  methodology,  based   on  asking  customers  a  single  question:  "On  a  scale  of  0  to  10,  how  likely  are  you  to  refer  <company   name  to  a  friend  or  colleague?"     Reichheld  discovered  that  when  customers  answered  this  question  with  a  9  or  10,  they  were  statistically   more  likely  to  repurchase  from  the  company,  refer  it  to  others,  or  do  both  –  and  companies  that  scored   well  on  this  measure  were  more  likely  to  grow  than  lower-­‐scoring  companies.     The  news  that  there  was  a  way  to  predict  growth  triggered  Fortune  500  companies  to  latch  on  to  the   methodology.  But  it’s  also  well  suited  for  use  in  smaller  companies:    you  can  deploy  the  questionnaire  in   five  minutes  using  a  survey  tool  like  Survey  Monkey  and  enjoy  a  high  response  rate  because  answering  is   easy.         To  see  how  your  company  measures  up,  survey  a  group  of  your  customers  by  asking  Reichheld's   question.    Those  who  give  you  9  or  10  are  your  "Promoters,"  in  Reichheld's  lingo.  "Passives"  are  those   who  give  you  7  or  8  –  satisfied  but  not  likely  to  repurchase  or  to  refer  your  company.    "Detractors"  are   customers  who  score  you  between  0  and  6.       To  calculate  your  Net  Promoter  Score,  take  the  percentage  of  Promoters  and  subtract  the  percentage  of   Detractors.  Reichheld  found  the  average  score  was  10  to  15  percent.    If  your  score  is  north  of  15   percent,  you're  above  average  and  can  expect  your  company  to  grow  at  a  rate  faster  than  the  economy.     An  investor  or  acquirer  checking  out  your  company  will  be  more  interested  if  you  have  an  above  average   Net  Promoter  Score.       22.  Your  Growth  Potential   Four  ways  to  scale  up  your  business     Acquirers  typically  pay  the  most  for  businesses  with  the  potential  to  grow.    As  you  contemplate  what  it   would  take  to  scale  up  your  business,  consider  these  four  basic  ways  to  grow:     Geographic  Scalability  
  • 21     Will  your  business  concept  work  in  another  city?  Mia  and  Jason  Bauer  started  selling  their  $4  cupcakes   on  Manhattan’s  Upper  West  Side  in  2003.  Realizing  there  were  other  well-­‐to-­‐do  communities  of  people   who  would  like  to  splurge  on  a  Pink  Lemonade  or  Chocolate  Sundae  cupcake,  they  expanded   geographically  and  now  have  30  stores.     Horizontal  Scalability   Do  you  have  a  brand  that  resonates  with  a  specific  audience?    If  so,  you  may  have  the  raw  material  to   scale  up  your  business  by  selling  more  things  to  your  existing  customers.  For  example,  Richard  Branson’s   Virgin  brand  resonates  with  a  certain  psychographic.  He  began  with  an  airline  and  then  scaled  up  his   concept  to  offer  his  target  market  everything  from  train  travel  to  mobile  phones  to  credit  cards.  He  now   owns  over  400  companies.     Vertical  Scalability   If  your  existing  infrastructure  (office  space,  machinery,  staff)  could  handle  more  customers  without   adding  much  to  your  variable  costs,  you  have  the  ability  to  scale  vertically.  For  example,  a  200-­‐room   hotel  that  averages  75  guests  per  night  has  the  potential  to  be  scaled  up  more  than  two  times  before  its   owners  would  have  to  make  any  significant  infrastructure  investments.     Cultural  Scalability    If  your  success  works  in  one  culture,  could  it  achieve  the  same  success  in  other  cultures?  Paul  Bakery,   founded  in  Croix,  Franc  in  1889,  is  now  ubiquitous  in  France  and  has  spread  to  19  other  countries.       23.  Employee  Loyalty:  Carrots  and  Sticks     You  need  both  employee  rewards  and  employee  agreements     In  order  to  achieve  employee  loyalty,  business  owners  typically  use  both  “carrots”  and  “sticks.”  As  an   example,  let’s  look  at  e2b  teknologies,  a  five-­‐million-­‐dollar-­‐per-­‐year  technology  reseller  based  in   Chardon  Ohio  that  my  colleague  Emmet  Apolinario  and  I  analyzed  for  this  article.  e2b’s  founder,  Lynne   Henslee,  has  done  a  number  of  things  to  create  a  work  environment  that  makes  her  team  feel  loved.  “I   believe  our  relaxed  culture  is  what  keeps  everyone  loyal,”  says  Henslee,  “We  make  breakfast  for   everyone  in  the  office  every  Friday  morning.    We  have  company  fun  days  at  least  annually.  Everyone's   birthday  is  celebrated  with  a  cake  of  his  or  her  choice.”     Along  with  the  softer  side  of  loyalty,  Henslee  has  also  got  the  hard  stuff  right  by  having  her  employees   sign  both  non-­‐compete  and  non-­‐solicitation  agreements  that  are  “assignable”  in  the  event  of  a  change   of  ownership  at  e2b.    Apolinario  elaborates:  “If  an  acquirer  were  to  buy  e2b,  they  would,  at  least  in  part,   be  buying  the  company  for  the  extensive  and  varied  technical  expertise  of  its  staff.  The  buyer  is   therefore  going  to  want  to  ensure  that  this  asset  –  the  people  –  will  stick  around  under  the  new  owner.”     If  you  want  to  make  your  business  sellable,  you  need  to  include  some  “sticks”  in  your  employment   agreements  that  make  it  hard  for  employees  to  wiggle  out  of  their  commitments  to  your  business  when  
  • 22     it  changes  hands.  Lawyers  call  this  glue  “assignability,”  and  it’s  a  clause  in  an  employment  agreement   saying  that  in  the  event  you  sell  your  company,  your  employees  have  to  honor  the  terms  (e.g.,   confidentiality,  non-­‐compete,  etc.)  of  their  employment  contract  with  the  new  owner.         “Henslee  has  positioned  her  company  well,”  says  Apolinario,  who  is  a  certified  Exit  Planning  Advisor  and   the  president  of  Columbus-­‐based  Confidential  Sale.  “If  she  ever  wants  to  sell,  she  will  have  plenty  of   options.”       24.  Re-­‐energize  Your  Business   Do  you  need  some  pre-­‐sale  adrenaline?     Recently  a  reader  of  one  of  my  columns  wrote  the  following  comment:    'If  you  are  running  your  business   with  one  eye  looking  at  selling  it,  how  much  passion  and  dedication  are  you  putting  into  it?'     In  fact,  I  have  never  been  more  passionate  about  a  business  than  in  the  weeks  and  months  prior  to   selling  it;  and  I  have  never  woken  up  with  a  greater  sense  of  purpose  and  determination  than  just  before   selling  it.  Putting  your  business  up  for  sale  can  give  you  the  energy  and  discipline  to  tackle  tasks  like:     Offloading  pet  relationships   Every  business  owner  has  them:  customers  who  are  loyal  to  them  personally  and  insist  on  dealing  with   them  directly.  When  I  went  to  sell  my  last  business,  I  had  to  gently  pass  my  pet  customers  over  to  other   people  to  manage.     Standardizing  contracts   My  customer  and  employee  agreements  were  developed  iteratively  over  time.  When  I  started  to   prepare  my  business  for  sale,  we  needed  to  get  disciplined  about  having  one  standard  employee   agreement  and  one  standard  customer  agreement.     Fixing  up  your  website   Updating  our  website  was  always  a  bit  of  an  afterthought  for  me.      That  is,  until  I  decided  to  sell  my   business.  Then  I  got  serious  about  making  changes  to  the  site  so  potential  buyers'  first  impression  was  of   a  professional,  relevant  company.     Dealing  with  problem  employees   I  tend  to  procrastinate  when  it  comes  to  dealing  with  problem  employees.  When  I  know  I'm  getting   ready  to  sell  a  business,  my  desire  to  close  the  deal  gives  me  the  courage  and  determination  to  stomach   the  most  difficult  business  conversations.     If  you  find  yourself  losing  passion  for  your  business,  the  fastest  way  I  know  to  get  re-­‐energized  is  to   prepare  your  company  for  the  market.  Whether  you  decide  to  sell  it  or  not,  your  business  will  benefit   from  the  shot  of  adrenalin.  
  • 23         Part  III:    Negotiate  the  Best  Possible  Deal         Contents:   25. The  False  Finish  Line   26. Managing  the  Long  Goodbye   27. Three  Things  I  Wish  I’d  Known  about  Selling  a    Business   28. Questions  You’ll  Be  Asked  When  Selling  Your  Business     29. The  Math  Behind  Your  Multiple   30. The  Relationship  Between  Return  and  Risk   31. Four  Reasons  Big  Companies  Buy  Little  Ones   32. Avoid  Deal-­‐Killing  Mistakes,  Part  1:  The  Objective  Questions   33. Avoid  Deal-­‐Killing  Mistakes,  Part  2:  The  Subjective  Questions     Do  you  have  a  realistic  view  of  what  “selling”  a  business  looks  like?  The  reality  is  that  it  can  be  a  long,   grueling  process  where  you’re  still  involved  in  the  business  years  after  it’s  been  sold.    If  you  want  to   avoid  “the  long  goodbye,”  you  need  to  understand  the  complications  of  selling  a  business  and  the   importance  of  knowing  what  buyers  are  looking  for  when  they  check  out  your  company.    There  were  a   lot  of  things  I  didn’t  know  when  I  sold  my  first  business,  but  having  exited  three  more  businesses  since   that  time,  I’m  more  aware  of  what  buyers  are  willing  to  pay  actual  money  for  and  how  best  to  prepare   for  putting  a  company  on  the  market.         25.  The  False  Finish  Line   The  seller  sees  the  finish  line;  the  buyer  hears  the  starting  gun     If  you’re  like  most  of  the  business  owners  I  know,  you  imagine  selling  your  business,  having  a  going-­‐ away  party,  and  riding  off  into  the  sunset.  But  increasingly  it’s  not  working  that  way.    In  a  down   economy,  with  banks  shy  to  lend,  the  proportion  of  cash  that  business  owners  get  when  they  sell  is   decreasing,  while  the  proportion  of  the  sale  price  put  “at  risk”  in  some  sort  of  “earn-­‐out”  is  going  up.     I  recently  invited  a  Mergers  &  Acquisitions  (M&A)  professional  to  a  workshop  I  was  hosting.    She  spoke   about  the  typical  deals  she  is  doing  and  shared  the  story  of  one  buyer  who  is  acquiring  marketing   services  businesses  for  as  much  as  ten  times  earnings  before  tax.  The  fine  print?  They  only  pay  three   times  earnings  upfront  and  leave  the  possibility  of  the  other  seven  in  a  five-­‐year  earn-­‐out.       Buyers  and  sellers  come  at  the  M&A  process  from  totally  different  points  of  view.  The  seller  sees  the   finish  line;  the  buyer  hears  the  starting  gun.    
  • 24       For  the  buyer,  the  acquisition  represents  what  they  hope  will  be  an  amazing  opportunity,  and  they   expect  you,  the  founder,  to  be  their  driver.    Sellers  need  to  understand  that  the  days  of  driving  off  into   the  sunset  on  closing  day  (unless  maybe  you  own  a  technology  business  that  runs  itself)  are  over.    If  you   are  the  seller,  I  suggest  that  you  plan  to  sell  way  earlier  than  you  think  you  want  to,  so  you  still  have  the   energy,  passion  and  ideas  for  the  business  to  get  you  through  the  earn-­‐out.       If  you  think  you  want  out  in  five  years,  my  advice  is  to  plan  to  sell  in  two  years,  so  you  have  some  juice   left  to  get  you  over  the  finish  line,  which  is  moving  ever  further  away.       26.    Managing  the  Long  Goodbye   Three  possibilities  for  the  slow  exit     Given  the  current  reality  that  buyers  are  becoming  increasingly  risk-­‐averse,  it’s  good  to  be  aware  of  the   different  possibilities  for  a  slow  exit.    According  to  the  Mergers  and  Acquisitions  (M&A)  professionals  I   speak  with,  all  three  are  on  the  rise.     1.    The  70/30  earn-­‐out   The  proportion  of  cash  a  buyer  pays  upfront  for  a  business,  compared  to  what  is  available  to  the   owner  for  meeting  future  targets  (the  earn-­‐out)  is  decreasing.  One  M&A  professional  told  me  her   typical  deal  is  three  times  earnings  upfront,  with  the  potential  for  the  owner(s)  to  get  up  to  ten   times  earnings  if  the  business  meets  the  three  to  five-­‐year  targets  set  in  the  share  purchase   agreement.             2.    The  vendor  take-­‐back   Since  2008,  there  is  a  growing  trend  among  buyers  to  ask  the  sellers  to  lend  them  the  money  to   buy  their  business.  This  bizarre  financing  arrangement  is  called  a  “vendor  take-­‐back”  because  if   the  new  business  owner  defaults  on  the  loan,  the  seller  of  the  business  gets  their  business  back  –   albeit  in  much  worse  shape  than  when  they  left  it.  In  one  recent  example,  the  seller  of  a   construction  business  was  asked  to  finance  3  million  of  an  8  million  dollar  offer  to  buy  his   business.             3.    The  management  buy-­‐out   In  a  survey  I  conducted  with  the  readers  of  my  book  Built  to  Sell:  Creating  a  Business  That  Can   Thrive  Without  You,  of  the  632  business  owners  surveyed,  only  37  had  received  a  written  offer  to   buy  their  business  in  the  last  two  years.  Of  those,  the  average  bid  was  for  two  to  three  times   earnings.  Given  these  paltry  multiples,  more  and  more  business  owners  are  considering   transitioning  their  business  to  a  set  of  managers.  The  next  generation  of  owners  uses  the  free   cash  flow  from  the  business  to  buy  out  the  owner  over  many  years,  and  the  seller  avoids  the  fees   and  hassles  of  selling  to  an  external  buyer.      
  • 25           27.  Three  Things  I  Wish  I’d  Known  about  Selling  a  Business   Sometimes  the  basic  elements  of  the  sale  can  trip  you  up     Here  is  a  list  of  three  things  I  wish  someone  had  told  me  about  selling  a  business  before  I  went  through   the  process  for  the  first  time:     1.  Find  a  “sell-­‐side”  intermediary   Like  selling  a  house,  you  probably  want  someone  to  represent  you  in  the  sale  of  your  business— either  a  business  broker  or  a  Mergers  and  Acquisitions  (M&A)  professional.  But  beware:  both   buyers  and  sellers  can  hire  intermediaries.  When  your  broker  has  a  “buy  side”  mandate,  it  means   they  have  been  hired  by  a  buyer  to  find  them  a  company  to  purchase.  As  a  seller,  you  want  to  make   sure  you  choose  a  broker  that  does  the  bulk  of  their  work  on  the  “sell  side”  (being  hired  to  sell  a   company).       2.  Seven  drips  till  you  quit   Once  you  have  an  intermediary  engaged,  they’ll  work  with  you  to  develop  a  list  of  prospective   buyers.  Your  broker  will  then  contact  prospective  buyers  to  try  and  interest  them  in  a  conversation   about  buying  your  company.    However,  make  sure  you  watch  out  for  the  “three-­‐call  scenario.”     Your  broker  may  try  calling  a  prospect  once  or  twice,  give  up  after  the  third  time  if  his  calls  are  not   returned,  then  tell  you  “they’re  not  interested.”  There  can  be  many  reasons  a  call  goes  unreturned,   so  the  old  sales  adage  “seven  drips  till  you  quit”  is  apropos  –  make  sure  your  broker  tries  a  prospect   seven  different  times  before  delisting  them.     3.  Answering  THE  question   At  some  point  in  the  process  of  selling  your  business,  a  prospective  buyer  will  ask  you  –  oftentimes   casually  –  “Why  do  you  want  to  sell  your  business?”  These  eight  seemingly  innocuous  words  have   derailed  more  deals  than  any  other  question.    Answers  like  “I  want  to  slow  down  a  bit”  or  “I  want  to   travel”  communicate  to  the  buyer  you  plan  on  winding  down  when  they  take  over;  but  what  they   want  to  hear  is  your  intention  to  help  them  realize  the  potential  locked  inside  your  business.         28.  Questions  You’ll  Be  Asked  When  Selling  Your  Business   Make  sure  you’re  prepared  to  be  in  the  hot  seat     One  of  the  most  intimidating  parts  of  selling  my  last  business  was  facing  the  barrage  of  questions  during   the  various  management  presentations  I  did  for  companies  interested  in  buying  it.  As  mentioned  above,   you’ll  definitely  be  asked  why  you  want  to  sell  your  business,  but  there  are  other  questions  you  should   be  thinking  about.    Based  on  my  experience  in  the  hot  seat,  here  are  some  likely  questions:       What  is  your  cost  per  new  customer  acquired?   The  potential  acquirer  wants  to  find  out  if  you  have  a  predictable,  economical  and  scalable  formula  for   finding  new  customers.    
  • 26     What  is  your  market  penetration  rate?   The  acquirer  is  trying  to  understand  how  big  the  potential  market  is  for  your  product  or  service  and   what  part  of  the  field  remains  to  be  harvested.     Who  are  the  critical  members  of  your  team?   The  acquirer  wants  to  understand  the  depth  of  your  team  and  determine  specifically  which  members   need  to  be  motivated  and  retained  post-­‐purchase.     Who  buys  what  you  sell?   Strategic  buyers  will  be  searching  for  any  possible  synergies  between  what  you  sell  and  what  they  sell.   The  more  you  know  about  your  customer  demographics,  the  better  the  buyer  will  be  able  to  assess  the   strategic  fit.  If  your  customers  are  other  businesses,  a  buyer  will  want  to  know  what  functional  role  (e.g.,   training  manager,  VP  of  sales  and  marketing)  buys  your  product  or  service.     How  do  you  make  what  you  sell?   This  question  is  asked  in  an  effort  to  size  up  the  uniqueness  of  your  formula  for  creating  your  product  or   service.  Potential  buyers  want  to  know  if  you  have  any  proprietary  systems  that  would  be  hard  for  a   competitor  to  replicate.       What  makes  your  product  truly  unique?   A  buyer  is  trying  to  understand  how  big  the  moat  is  around  your  business  and  what  kind  of  protection  it   offers  from  competitors  who  may  decide  to  compete  with  you  in  the  future.       29.  The  Math  Behind  Your  Multiple   How  buyers  figure  out  their  future  profits     A  financial  acquirer  sees  buying  a  business  as  paying  today  for  a  stream  of  profits  in  the  future,  which  is   why  companies  are  usually  bought  and  sold  using  a  multiple  of  earnings.  Buyers  acquiring  a  company   will  do  some  math  to  figure  out  what  they  are  willing  to  pay  today  for  the  rights  to  that  business’s  future   profits.  We’ve  all  made  a  similar  calculation.    For  example,  you  may  have  decided  in  the  past  to  invest   $100  in  a  bond  that  offers  5%  interest  a  year;  that  is,  you  decided  to  spend  $100  on  something  that   would  be  worth  $105  a  year  later.     To  see  how  this  math  affects  the  value  of  your  business,  imagine  you  have  a  company  that  you  expect  to   generate  $100,000  in  pre-­‐tax  profit  next  year.    Buyers  looking  for  a  15  percent  return  on  their  money  in   one  year  would  pay  $86,957  ($100,000  divided  by  1.15)  today  for  $100,000  a  year  from  now.     When  valuing  a  business,  financial  buyers  will  typically  value  not  only  the  next  year’s  profit,  but  all   expected  profits  in  the  foreseeable  future.  For  every  year  into  the  future  that  buyers  must  wait  to  get   their  profits,  they  will  discount  the  future  profit  you  are  projecting  from  the  rate  of  return  they  expect.      
  • 27     30.    The  Relationship  Between  Return  and  Risk   How  can  you  de-­‐risk  your  business  in  order  to  get  a  higher  offer?     The  price  buyers  are  willing  to  pay  for  your  business  depends  on  a  lot  of  factors,  but  one  of  the  most   important  is  the  return  they  expect  to  get  and  the  risk  associated  with  achieving  it.     Let’s  assume  your  revenue  is  flat  or  growing  modestly.  The  higher  the  return  on  investment  the  buyers   are  looking  to  achieve,  the  lower  the  multiple  they  will  be  willing  to  pay  for  your  business.       At  the  risk  of  oversimplifying  a  complex  equation,  if  buyers  are  looking  for  a  22  percent  return  on  their   investment  in  your  company,  they  will  derive  the  multiple  they  are  willing  to  pay  as  follows:   100  divided  by  22  =  4.5  times  EBITDA     Provided  you’re  not  the  next  Google  equivalent,  the  buyers  would  be  willing  to  pay  around  4.5  times   EBITDA.  If  their  expectations  are  higher,  however—let’s  say  30  percent—they  will  be  willing  to  less  for   your  business.        100  divided  by  30  =  3.3  times  EBITDA     So  what  drives  up  buyers’  expectations  for  return  on  investment  while  at  the  same  time  driving  down   the  price  they’re  willing  to  pay  for  your  business?    In  a  word,  “risk.”    Likewise  with  your  own   investments:    you  are  willing  to  settle  for  a  lower  return  when  you  buy  relatively  safe  assets  like  a   government  bond.     So  how  do  you  de-­‐risk  your  business  in  the  eyes  of  an  acquirer?  Ted  Davidson,  a  valuation  consultant   with  SPARDATA,  an  independent  business  valuation  firm,  suggests  considering  factors  like  the  following:     1. Client  risk:    Do  you  rely  on  just  one  or  two  key  clients  for  most  of  your  business?   2. Supplier  risk:    Will  you  be  in  trouble  if  one  of  your  suppliers  goes  under?   3. Depth  of  management:    What  happens  if  a  key  employee  disappears?   4. Contracts:    Do  you  have  legal  agreements  or  handshakes?      “Show  investors  safety  in  your  pattern  of  earnings,  and  you  can  expect  a  higher  offer,”  says  Davidson.       31.    Four  Reasons  Big  Companies  Buy  Little  Ones     Your  most  attractive  exit  option  is  a  strategic  sale  of  your  business  to  a  larger  company     Over  the  past  year,  Google  has  bought  a  company  every  two  weeks,  doubling  its  stated  goal  of  12   acquisitions  a  year.    In  each  case,  the  acquisitions  have  been  “strategic”  rather  than  “financial.”    Many  companies  are  looking  to  acquisitions  to  supplement  their  weak  organic  growth.  Typically,   strategic  buyers  are  willing  to  pay  more  for  your  business  than  financial  buyers  (e.g.,  private  equity   firms)  because  they  have  strategic  assets  that  can  increase  the  value  of  both  your  company  and  theirs.   Here  are  four  reasons  big  companies  buy  little  ones:  
  • 28       1. To  sell  your  product  to  their  customers   First  Research  creates  cheat  sheets  for  salespeople  who  want  to  sound  smart  when  they  call  on  a   new  customer  in  an  industry  they  are  unfamiliar  with.  Dun  &  Bradstreet  has  hundreds  of  thousands   of  customers  buying  sales  leads  from  its  Hoovers  division.  Seeing    an  opportunity  to  cross-­‐sell,  D&B   was  willing  to  pay  $22.5  million  to  Bobby  Martin  and  his  partners  so  it  could  sell  First  Research   industry  profiles  to  Hoovers’  customers     2.        To  leverage  your  technology  to  make  one  of  their  products  better   Google  paid  $25  million  for  DocVerse  because  it  had  built  a  better  way  for  users  to  share  documents.   By  swallowing  DocVerse,  Google  is  accelerating  the  adoption  of  its  GoogleDocs  platform.     3.        To  get  hold  of  your  smartest  employees   In  the  hit  TV  series  Mad  Men,  Sterling  Cooper  got  acquired  because  of  the  creative  genius  of  Donald   Draper.  While  in  this  case  the  players  are  fictional,  big  ad  agencies  and  other  businesses  often  buy   smaller  ones  for  the  people.     4.        To  acquire  a  new  place  to  sell  their  stuff   Bell  Canada  bought  The  Source  last  year  to  add  756  new  stores  in  which  to  sell  retail  consumers   phones,  TVs  and  Internet  access.     Understand  what  makes  you  attractive.       32.    Avoid  Deal-­‐Killing  Mistakes,  Part  1:  The  Objective  Questions   Make  sure  you  know  the  answers  before  a  prospective  buyer  comes  calling     A  business  owner  I  know  refers  to  due  diligence  as  “the  entrepreneur’s  proctology  exam.”  It’s  a  crude   analogy  but  a  good  representation  of  what  it  feels  like  when  a  stranger  pokes,  prods,  and  looks  inside   every  inch  of  your  business.     Most  professional  acquirers  will  have  a  checklist  of  questions,  both  objective  and  subjective,  that  they   will  want  to  get  answered  before  making  an  offer  on  your  company.    Examples  of  objective  questions   include:     • When  does  your  lease  expire  and  what  are  the  terms?   • Do  you  have  consistent,  signed,  up-­‐to-­‐date  contracts  with  your  customers  and  employees?   • Are  your  ideas,  products  and  processes  protected  by  patent  or  trademark?   • What  kind  of  technology  do  you  use,  and  are  your  software  licenses  up  to  date?   • What  are  the  loan  covenants  on  your  credit  agreements?   • How  are  your  receivables?    Do  you  have  any  late  payers  or  deadbeat  customers?   • Does  your  business  require  a  license  to  operate,  and  if  so,  is  your  paperwork  in  order?  
  • 29     • Do  you  have  any  litigation  pending?     As  part  of  your  pre-­‐meeting  homework,  and  depending  on  what  type  of  business  you  have,  figure  out   other  questions  the  buyer  may  ask  you.       33.    Avoid  Deal-­‐Killing  Mistakes,  Part  2:  The  Subjective  Questions   A  seasoned  potential  acquirer  is  likely  to  have  various  tricks  up  his  sleeve       In  addition  to  asking  objective  questions,  acquirers  will  try  to  get  a  subjective  sense  of  your  business.     It’s  more  art  than  science  and  often  requires  a  potential  buyer  to  use  a  number  of  tricks  of  the  trade,   such  as:       Trap  1:  Juggling  calendars   By  asking  you  to  make  a  last-­‐minute  change  to  the  meeting  time,  they  will  try  to  determine  just  how   integral  you  are  to  the  success  of  your  business.  If  you  can’t  accommodate  the  change  request,  the   acquirer  may  probe  to  find  out  why  and  try  to  determine  what  part  of  the  business  is  so  dependent  on   you  that  you  have  to  be  there.     Trap  2:  Checking  to  see  if  your  business  is  vision  impaired   An  acquirer  may  ask  you  to  explain  your  vision  for  the  business,  and  he  or  she  may  also  ask  the  same   question  of  your  employees  and  key  managers.  If  they  offer  inconsistent  answers,  the  acquirer  may  take   it  as  a  sign  that  the  future  of  the  business  is  in  your  head.     Trap  3:  Asking  your  customers  why  they  do  business  with  you   A  potential  acquirer  may  ask  to  talk  to  some  of  your  customers,  and  he  will  expect  to  hear  good  things.   The  customers  may  be  asked  a  question  like  “Why  do  you  do  business  with  these  guys?”  If  your   customers  answer  by  describing  the  benefits  of  your  product,  service  or  company,  that’s  good.  If  they   respond  by  explaining  how  much  they  like  you  personally,  that’s  bad.     Trap  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  company,  or  check  out  your   website.     Make  sure  the  experience  your  company  offers  a  stranger  is  tight  and  consistent,  and  try  to  avoid  being   personally  involved  in  finding  or  serving  brand  new  customers.  If  potential  acquirers  see  you  as  the  key   to  wooing  new  customers,  they’ll  be  concerned  that  business  will  dry  up  when  you  leave.  
  • 30     Acknowledgments I would like to thank: - The community of 1,200 Sellability Score Advisors around the world who are helping business owners to build companies that are more valuable and more sellable; - The Built to Sell reader community whose comments and case studies have helped to inform the book; - All those who have participated in the various surveys that we do; your participation helps us to produce up-to-the-minute data that helps businesses create sellable companies; - My editor Cathy Reed; - My editor at Inc. magazine, Kimberly Weisul.