Building and running a company is hard. But running a company that was built to sell is even harder, especially if you run a consulting/services business.
For the past 2 years, I have been consulting full time and I have worked on some really interesting projects. While working on other’s ideas and products get you the money and experience, nothing can beat the joy of building your own product.
I wanted to build my own SaaS product for a while, but couldn’t dedicate enough time towards that. Since I was the person who has to do everything in my consulting business, I was stretched pretty thin. Also, I hated selling and my primary source of clients was through referral.
While I can hire some team members to work along with, I will then have the added headache of managing the team and the project. I then decided to look into productized consulting and began doing some research into it.
Many entrepreneurs have done different variants of productized services/consulting and I read through many articles, eBooks, etc.
Built to Sell: Creating a Business That Can Thrive Without You
Then I was recommended the book “Built to Sell” By John Warrillow. I loaded it up on my kindle today morning and began reading it. It’s just 188 pages long and I finished it before lunch.
It’s written as a business parable (check my previous articles about Five Dysfunctions of a Team for a similar genre) with a fictional story of Alex Stapleton, who owns an advertising agency and is stretched too thin because every client wants to work with the owner. His employees are average at what they do and they do custom projects for their clients.
One day he decides to sell it as he couldn’t handle the stress any longer and reaches out to a friend Ted Gordon, who has built and sold a number of businesses before. He is faced with the hard truth that no one will buy his company at its current state. And Ted begins to coach Alex into turning his company around.
If you want to sell a service business, you take on all the risk while the acquiring company pays only a small amount. The rest of the amount is paid out over 5 years called earn-out. However, if you sell a product company you can ask for a much higher price and you can move out because you have removed yourself out of the daily running of the business.
3 Point Summary
To summarize the book in 3 bullet points:
- The number one mistake entrepreneurs make is to build a business that relies too heavily on them for day-to-day activities.
- This is problematic as you are constantly putting out fires, talking to clients, etc. When someone looking to acquire sees this, they aren’t confident that the company can stand on its own – even if the business is profitable.
- Build your productized service that tick these three criteria – teachable, valuable, repeatable.
The third point is very important here. Every consultant would offer a variety of services for his clients. You can plot them all on this chart with two axes: Valuable and Teachable.
For example:
- Easily teachable, but not valuable: Data cleanup, menial coding job, etc.
- Very valuable, but not teachable: Building custom systems and architecture for a product.
- Very valuable, and also teachable: Code audit, security audit, etc.
To productize, you need to choose a service that is at the top right of the chart. And you also need to pick ones that are needed by clients repeatedly.
The book follows Alex and his business for 18 months, how he rebuilds it and the kind of decisions he takes.
Ted’s Tips
Each Chapter has a few of Ted’s Tips relevant at the stage Alex’ company is at. Here are the tips:
- Don’t generalize; specialize. If you focus on doing one thing well and hire specialists in that area, the quality of your work will improve and you will stand out among your competitors.
- Relying too heavily on one client is risky and will turn off potential buyers. Make sure that no one client makes up more than 10-15 per cent of your revenue.
- Owning a process makes it easier to pitch and puts you in control. Be clear about what you’re selling, and potential customers will be more likely to buy your product.
- Don’t become synonymous with your company. If buyers aren’t confident that your business can run without you in charge, they won’t make their best offer.
- Avoid the cash suck. Once you’ve standardized your service, charge upfront or use progress billing to create a positive cash flow cycle.
- Don’t be afraid to say “No” to projects. Prove that you’re serious about specialization by turning down work that falls outside your area of expertise. The more people you say no to, the more referrals you’ll get to people who need your product or service.
- Take some time to figure out how many pipeline prospects will likely lead to sales. This number will become essential when you go to sell because it allows the buyer to estimate the size of the market opportunity.
- Two sales reps are always better than one. Usually naturally competitive types, sales reps will try to outdo each other. And having two on staff will prove to a buyer that you have a scalable sales model, not just one good sales rep.
- Hire people who are good at selling products, not services. These people will be better able to figure out how your product can meet a client’s needs rather than agreeing to customize your offering to fit what the client wants.
- Ignore your profit-and-loss statement in the year you make the switch to a standardized offering even if it means you and your employees will have to forgo a bonus that year. As long as your cash flow remains consistent and strong, you’ll be back in the black in no time.
- You need at least two years of financial statements reflecting your use of the standardized offering model before you sell your company.
- Build a management team and offer them a long-term incentive plan that rewards their personal performance and loyalty.
- Find an adviser for whom you will be neither their largest nor their smallest client. Make sure they know your industry.
- Avoid an adviser who offers to broker a discussion with a single client. You want to ensure there is competition for your business and avoid being used as a pawn for your adviser to curry favour with his or her best client.
- Think big. Write a three-year business plan that paints a picture of what is possible for your business. Remember, the company that acquires you will have more resources for you to accelerate your growth.
- If you want to be a sellable, product-oriented business, you need to use the language of one. Change words like “clients” to “customers” and “firm” to “business”. Rid your website and customer-facing communications of any references that reveal you used to be a generic service business.
- Don’t issue stock options to retain key employees after an acquisition. Instead, use a simple stay bonus that offers the members of your management team a cash reward if you sell your company. Pay the reward in two or more instalments only to those who stay so that you ensure your key staff stays on through the transition.
Some of the tips were obvious – like specializing, not relying on one client, creating a standardized offering, etc.
Other tips like having 2 salespeople so that they are competitive, the way P&L statements are calculated, offering a long-term bonus plan instead of stock options, etc. were very useful.
Overall “Built to Sell” is a must-read book for consultants and freelancers who are running a services business and want to get rid of the headache constantly working “in” the business instead of “on” the business.