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.

1. 1
33
SECRETS:
AN
OWNER’S
GUIDE
TO
BUILDING
A
SELLABLE
BUSINESS
John
Warrillow
Fall,
2012

2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.