August 26, 2010

The hidden benefit of professional money

This week I spoke with the Chairman of a boutique private equity firm who invests in media businesses. He is in the midst of exiting his last of five investments in a mini fund he created and boasted that their worst investment delivered a 2 X return for his investors. Great for his shareholders, you might think, but what about the five entrepreneurs who gave up their sweat equity so he could treat his investors to such glorious returns?

Professional investors  (private equity, venture capitalists etc.) offer business owners one important — yet often overlooked–  currency beyond their money: they know how to sell a business.

My friend and venture capitalist Sam Ifergan (you can read my two part interview with Sam on what he looks for in an investment here )  just exited his investment in Visualsonics by engineering a sale of the company for $75 million. From the moment Sam invested his firm’s money, his eye was on how to build the company to a point where it could be sold.

To be sure, there are downsides to taking other people’s money. I was reluctant to take on outside investment in my last business, but as I have met more money men and women in the process of writing and promoting my book, I have become more posiitve about the role they play in helping business owners get out.

The money men and women know how to package your business so that it will be attractive to investors; they are two degrees separated from just about anyone with the money to buy your business; and they are coldblooded negotiators which is handy when they are on your side of the table.

If you’re going to play with the pros, it helps to know their motivation. Kind of like signing a free agent solely focused on winning a championship before he retires, I have found that professional money people have only one goal: to maximize the return on their investment for themselves and their partners. To win at this game, they need to buy a slice of your business for as little as possible, using as much debt as they can scrounge up,  and sell their stock fast for as much cash as possible.

As long as you know Return On Investment is their goal — and that they’re not trying to build a legacy, create a culture, win awards, help the homeless — then I think you can use professional money to your advantage.

I’d love to hear your thoughts. Do you think it is worth selling a piece of your business to a professional investor so you’ll have a ringer on your team when it is time to sell your business? Please use the comments section in my blog to tell me where you stand.

While we’re on the topic of your equity, the first of the two new articles below provides an alternative incentive scheme you can use to avoid giving up equity to employees when preparing your business for sale.

(photo courtesy of PocketAces)

Should You Share Equity With Your Employees?

~ published BNET August 25, 2010

Offering stock (or options) is a great way to attract and retain key employees, but it can be risky and expensive. Before you do it — and regret it later — consider this alternative.

The first time I was tempted to share equity in my ad agency was to attract a creative director I’ll call Alison. »more

RIP to RFPs: Why You Should Stop Chasing Bids for Business

~ published BNET August 26, 2010

Requests For Proposals (RFPs) are the business owner’s enemy.

I think they commoditize a category down to the point where the only way to win a contract is to be the lowest cost provider. As a result, the companies who use RFPs to pick vendors get what they deserve: crappy, cheap work.  »more

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August 19, 2010

Is your surname a good company name?

I owned a business called “Warrillow & Co.” and our product was “The Warrillow Subscriber Network” and our biggest marketing program was “The Warrillow Summit”.  When the Warrillow in Warrillow & Co. decided to sell his business, things got tricky, which is what I wrote about in this article.

This week one of my fellow columnists at BNET, Donna Fenn, wrote a counterpoint to my article suggesting that a family name could be a good company name.  She used the example of Joel Bomgaars who started a software company called Bomgar, which is an anglicized derivative of his Dutch surname. Donna points to Bomgar’s success – they have been on the Inc. 500 list for two years running– as proof a family name can work as a company name.

Donna’s article forced me to refine my thinking on whether or not a surname is a good company name if your ultimate goal is to sell your business. I think Bomgar’s name works primarily because it is not immediately obvious that it is a family name. Bomgar sounds like a funky piece of technology and it is a little fun to say. Kind of like “Toyota” rolls off the tongue with a sense of playfulness which is why I think it worked for Kiichiro Toyoda.

Thanks to Donna, I would also now draw the distinction between naming a service and product business. Bloomberg as a company name works because the Bloomberg terminal is a thing that separates the business from Michael Bloomberg the person.

If you’re stuck with your surname in your company name, my suggestion is to focus on building product brands that eventually surpass the prominence of your company name.  The brothers Johnson & Johnson started the business but we have become even more familiar with their products like Tylenol and Band-Aid.

If you have a service business and a traditional surname like “Robertson” or “Smith” in your company name, I think it can be more difficult to separate yourself personally when it is time to sell your business. What do you think?

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August 12, 2010

Hugh Hefner, criticism and 8 tough questions

Hugh HefnerI got slammed in the comments section of an article I wrote yesterday with the title “Do You Love Your Business As Much As Hugh Hefner does”. Last year Hefner told The New York Times that “If I sold it (Playboy Enterprises), my life would be over” and I used Hefner’s quote as a hook to write a piece about how much my business had become part of my identity until I almost lost both in 2004.

The comments mostly accused me of being an egomaniac. Here’s a little sampler:

“The writer must get paid by the number of clicks on the link. based on the pic, I thought it would be a good story about Hef and the challenges of the Playboy brand today. Instead, and very boring story about the writer himself. No wonder the key employee left.”

“A clue to this man’s ego is that he the company after himself. That he writes about himself as “news” demonstrates further this egoist does not deserve the title of journalist.”

When I write, I try to remember the suggestion I got from Entrepreneurs Organization (EO) about 10 years ago, which was to share experiences instead of providing advice. That’s why you’ll notice most of the articles below feature me as the protagonist. I understand why some people see that as narcissistic.

I still don’t like criticism but I have become used to it through the process of building a business to sell. First, my employees criticized my obsession with standardizing our offering and agreements. Later on, in the management presentations I conducted with potential acquirers, the MBAs poked holes in my business model. Eight of the toughest questions I got from prospective acquirers are featured in the first of the three new articles I have selected for you below:

Eight questions you’ll get when you’re ready to sell your business

~ published August 3, 2010 the Globe and Mail

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. Each meeting had a different vibe, with each potential acquirer keen to dig into various aspects of the business.

Based on my experience in the hot seat, I’ve prepared a summary of some of the questions you’re likely to get when you’re ready to sell your business.  »more

Re-energize your business by preparing to sell

~ published August 4, 2010 the Globe and Mail

Recently a reader wrote the following comment about one of my articles:

“If you are running your business with one eye looking at selling it to someone else, how much passion and dedication are you putting into it?”

Respectfully, I have to disagree with what the reader is suggesting. »more

3 Reasons Why Your Name Isn’t a Good Company Name

~ published July 30, 2010 BNET

Be careful what you name your company, it could come back to haunt you later.

The first time I was threatened with a lawsuit, I had been in the business for only three months. I had hastily chosen the name “Brass Tacks Communications” for my market research business without doing my homework to see if somebody already had that name. Sure enough, there was another Brass Tacks Communications offering marketing services in my city. »more

(photo courtesy of Hugh Hefner Pictures)
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August 5, 2010

Will you survive the elimination round tournament?

My neighbour was weeks away from selling his executive recruitment business before the financial crisis hit in 2008. Two years on, he is working harder than ever and yearning for the day the economy improves and he can put it on the block again.

I have found there to be a big gap between being approached by someone about buying your business and actually selling it. For example, The Riverside Group is a big private equity firm that buys, re-models and sells smallish businesses. Last year Riverside looked at buying 4,228 different businesses, sent love letters to 1,315 but actually only closed on 15 deals.

In other words, they walked away from 99.6% of the companies they considered buying.

I’m not sure I’m going to share that stat or the two articles below (about Riverside) with my neighbour just yet…

Selling a company is like a tennis tournament

~ published July 27, 2010 the Globe and Mail

I have found a big difference between being approached by someone to buy your business and actually selling it.

Consider the Riverside Group’s experience in 2009. Riverside is a large, successful private equity outfit that specializes in buying companies, streamlining their operations, jamming them together with other complementary companies, and selling them for a profit. »more

An eight-point checklist for selling your business

~ published July 28, 2010 the Globe and Mail

In a previous column I talked about the gates you need to pass to sell your business to a big, successful private equity firm such as Riverside Group.

Now let’s examine the characteristics Riverside looks for in a business to buy. According to its 2009 annual report, it seeks out companies that meet the following standards: »more

Letters to shareholders can help sell a business

~published July 29, 2010 the Globe and Mail

I wrote recently about how using a public-company multiple as a benchmark for what your business might be worth can lead to disappointment.

However, I did find value in looking at public companies for another purpose: Reading the letters to shareholders in annual reports in my industry helped me see what was important to potential acquirers. »more

Selling Your Business? The 2 Most Important Numbers to Analyze

~ published July 22, 2010 BNET

I was on my way home when I got the call I had been expecting from the mergers and acquisitions firm I was using to sell my company. I pulled over — this conversation was going to require some focus.

“We have two offers we’d like to meet to discuss,” said my banker. »more

photo courtesy of stock.xchng/lusi
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July 29, 2010

One surprising ingredient for creating a valuable company

relaxationHave you ever noticed how some of your best business ideas hit you when you’re on vacation?

I’m not sure if being relaxed allows the mind to operate on a more creative plane, or if it is just being observant to the way people do things differently, but when I travel, my entrepreneurial mind kicks into over drive.

I’m writing to you today from Aix-en-Provence where my family and I have spent the month of July. France isn’t exactly a bastion of entrepreneurialism (something like half the population works for the state in some capacity) but even here, my mind was spinning on new business ideas.

Fresh business ideas

Take for example the way the French peddle sports equipment. On the outskirts of Aix they have a sports multiplex called “Oxylane Village”. The anchor is a massive (think Walmart superstore) Decathlon sports store that is a mash up of an REI, Dick’s and Disneyland for sports enthusiasts. They have 50 isles of sports gear for every possible activity. They have an entire aisle dedicated to swimming goggles for example.

New ways to sell

Decathlon not only has everything you’d need for even the most peculiar of sporting pursuits, they also make buying the regular gear an experience. They have testing centers for just about any sport you can imagine: you can try a new racket on a mini tennis court set up with a ball machine to lob you floaters; there’s a putting green; scaled down soccer pitch; bike paths and it goes on. Outside is an entire village of kids sports activities including trampolines, zip lines, go carts etc.

I’ve never seen anything like Decathlon in North America, which is why my mind started racing about the North American retail concepts that are ready to be disrupted by offering customers an entirely new experience.

Not only do long vacations offer plenty of new business ideas, they are also a great way to test how ready your business is to be sold (the more it can run without you, the easier it will be to fetch a premium price for your company). To that end, and in case you needed any additional justification for a nice long break this summer, here are a couple of my recent articles on how a sabbatical is an essential ingredient in creating a sellable business:

Test your company’s value by going on vacation

~published July 21, 2010 the Globe and Mail

A holiday can be a good way to test how well your business can run without you — in other words, how sellable it is.

I had been running my research business for five years when I decided I needed a proper vacation. Not one of those quasi-vacations when you take your mobile to Florida for a week and check in three times a day. I needed a real vacation. »more

Sabbatical by the boss leads to attempted takeover

~ published July 20, 2010 the Globe and Mail

Recently I read about a guy who flew around France in a solar-powered plane for 26 hours without using a drop of fuel. The planning and plotting apparently took years, with a team of engineers thinking through every aspect of getting a plane aloft on the power of the sun and then storing enough battery power to keep it airborne throughout the night. After years of planning on land, someone actually had to get inside the plane and take a test flight. »more

Three ways to find out what your business is worth

~ published July 22, 2010 the Globe and Mail

It’s natural to want to know what your business is worth, but it can be hard to find out.

Years ago I owned a marketing and design agency and I used to rely on the multiples the big advertising-agency holding companies got on the stock exchange. I’d assumed that, because Omnicom was trading at 22 times earnings, my little agency with $150,000 in profit was worth around $3 million. »more

Selling Your Business? The 2 Most Important Numbers to Analyze

~ published July 22, 2010 BNET

I was on my way home when I got the call I had been expecting from the mergers and acquisitions firm I was using to sell my company. I pulled over — this conversation was going to require some focus.

“We have two offers we’d like to meet to discuss,” said my banker.  »more

photo courtesy of Flickr/Meagan
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July 22, 2010

Will you get the highest price possible for your business?

This morning I read a story in The New York Times that General Motors (GM) is preparing a public stock offering and analysts estimate the value of GM to be $50 billion to $90 billion.

What I find interesting is the huge range analysts estimate the company to be worth. There’s a $40 billion dollar gap between the high and the low; the low estimate is almost half that of the high.

It seems nowhere is pricing so subjective — so much in the eye of the beholder — than with a business. Can you imagine your real estate agent saying your house could fetch $500,000 or $900,000? You’d probably find a new real estate agent.

Despite all of the Wharton-educated analysts with their pivoting spreadsheets, valuing a company is still little more than a grownup game of pin the tail on the donkey.

When it comes to getting the highest price for your business, I have found it important to reserve your best selling skills for selling your business not your product, which is what I write about in my favorite (and the first) of the three articles below….

Make selling your business the top priority

~ published July 15, 2010 the Globe and Mail

Have you ever seen a speaker who said something that changed the way you think?

The most memorable speech I can remember hearing took place in 2002 at the executive education campus of the Massachusetts Institute of Technology. »more

Are you letting your customers wag the dog?

~ published July 13, 2010 the Globe and Mail

I have found giving customers too much choice can be a detriment to building a sellable company. I learned this the hard way when my first attempt at building a scalable service business flopped.

I had read a glowing article about Jupiter Research (now part of Forrester Research), an analyst firm that provided its studies to customers through a subscription offering. Jupiter would do one piece of research and present it to all of its customers. Finally, I thought, a model that brought some scale and leverage to the consulting business. »more

Are bossy customers undermining your business?

~ published July 14, 2010 the Globe and Mail

Yesterday I shared the perils of giving customers too much choice in what they buy. Today I’d like to share my experience around giving customers too much say in how you make what they buy.

First, some background: a decade ago I tried to scale up a subscription research offering similar to a Bloomberg or Forrester research program–you know, the model by which a customer subscribes to a pre-set number of reports provided to all. »more

photo courtesy of Flickr/Daniel Morris
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July 15, 2010

Why do you want to create a sellable company?

Have you ever watched the Randy Pausch video called “The Last Lecture: Really Achieving Your Childhood Dreams”?

Pausch was a 45-year old father of three and professor at Carnegie Mellon University when he discovered he had terminal pancreatic cancer.

Instead of wallowing in his misfortune, he decided to sign up for “The Last Lecture” which challenges professors to imagine they are going to die; then give their last talk to their students in which they must impart their most important life lessons.

Unfortunately for Pausch, his wife and three kids, it was not a hypothetical scenario. Somebody taped the lecture and posted it to YouTube where upon it gained a life of its own generating more than eleven million unique views by the time I stumbled on it yesterday.

At the end of the video Pausch surprises everyone by revealing that the primary audience for the speech was not those in the room, but that he was giving the lecture so that one day his kids could hear their father’s most important life lessons first hand. I was in tears as he revealed this twist in the last seconds of the video.

I was so moved that I starting Googling “Pausch and The Last Lecture” and discovered Pausch had become quite a celebrity as a result of his YouTube video. There were interviews with Diane Sawyer on ABC NEWS, The Wall Street Journal and Katie Couric.

In one of the final interviews before his death on July 25, 2008, Pausch commented on how some detractors were accusing him of profiteering from his diagnosis. Pausch responded by explaining that the reason he gave the lecture was that he is fundamentally a teacher and he thought is was the highest and best use of his time left to teach his most import students: his kids first and secondly the rest of his students.

You may be asking what all this has to do with building a sellable company. The answer is, not much. Pausch inspired me this week to want to keep writing and sharing my business experiences with you.  I thought I should pass on the video in case it helps you to get in touch with why you wanted to start your own business in the first place and why you want to grow it into a valuable — sellable — company.

Hope you enjoy the video and my latest articles on selling a business below.

Thinking of investing in commercial real estate?

~ published July 6, 2010 the Globe and Mail

Early in my career, I owned a small marketing services business. Beyond a few computers and desks, we didn’t have any assets to speak of.

I feared I wasn’t building any equity in my business but, rather, just peddling hours. I decided I would look into buying a piece of commercial property to operate from as a hedge in case my business turned out to be worthless. I reasoned that at least I could sell the property when it was time to move on.  »more

Bright ideas need not rest on deep pockets

~ published July 7, 2010 the Globe and Mail

Last week I met with Scott Armstrong, one of the three co-founders of Brainrider, a new business in Toronto designed to help companies like Yellow Pages and Pitney Bowes use their online content to attract more customers.

Brainrider was founded in January, and I think Armstrong and his partners, John Kewley and Nolin LeChasseur, are well on their way to building a valuable, sellable business. »more

The Secret to Making Your Business Saleable

~ published July 8, 2010 BNET

If you’re a business owner and you’re still doing all of the selling yourself, your company may not be worth as much as you think.

Let me explain.

I used to own a five-person advertising agency. I did the selling, and my employees did the work. We squeezed out $150,000 in pre-tax profit from $750,000 in revenue designing brochures and websites. »more

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July 6, 2010

Could one bad apple cripple your plan to sell your business?

I got my first bad review for Built To Sell this week on Amazon.com.  He gave Built To Sell 2 out of 5 stars and didn’t pull any punches:

“I was excited to order and recieve this book in the mail after reading all the positive reviews. What the hell!? Did the author pay for or write these reviews? This book is TERRIBLE. It is written in story format rather than an instructional format, so you have to read these fictional stories and try to get the “tips” or messages out of the story in order to get any usefulness out of the book. Ok, so I went though the book and wrote out all the tips on a piece of paper. Now that I am looking at the paper I see that 90% of these tips are obvious common knowledge, and the other 10% don’t apply to me.”

-Jeremy S, Manchester, U.K.

When I first read Jeremy’s review, I was disappointed but didn’t think too much of it reasoning that in the world of social media, everyone is entitled to have their say. There are 22 more positive reviews on Amazon so I thought Jeremy’s review would be irrelevant.

I was wrong.

Almost immediately after Jeremy posted his review, Built To Sell fell off  Amazon’s “entrepreneurship” category” Top 100 list and is now in the penalty box somewhere between “How to start a dog walking business” and “Fax machines made easy”. I’m not quite sure what I’m going to do to kick start sales again.

It was a good reminder for me of how one person can have such a dramatic impact on results. In Jeremy’s honor, I’ve written two articles below about the impact  (good and bad) individuals can have on building a sellable business

Hire do-ers, not thinkers, for a scalable business

~ published June 29, 2010 the Globe and Mail

One of the best pieces of business advice I ever got came from an adviser of mine: “The secret to creating a valuable company is to find something you can build once and sell many times.”

The advice sounded simple but it was devilishly hard to implement. At the time, I had one of those nasty businesses that require a custom proposal for every job. Each client wanted something unique, and the variety and complexity of their requests meant I would personally have to review pitches. It seemed like we spent more time writing proposals than actually doing the work. »more

Did you find a Jerry Maguire to sell your company?

~ published June 30, 2010 the Globe and Mail

When I finally got serious about wanting to sell my events business, I asked around about how the process worked.

I soon discovered there are people who make a living selling and buying businesses. Like the Tom Cruise character in the movie Jerry Maguire, these agents go by the title of business broker, M&A (mergers and acquisitions) professional or investment banker, depending on the size of the companies they sell. »more

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June 24, 2010

Does your customer want to buy your product or your company?

Clover Coffee

I had a Clover-brewed coffee this morning for the first time at the Starbucks attached to the Hyatt on Pine in downtown Seattle.  The Clover machine simulates the freshness of a French press coffee but shortens the brew time to 90 seconds instead of the 6 minutes typical of a French pressed cup of Joe. After a successful pilot in Seattle, these machines are being installed in all 5,000 small-format Starbucks locations in the US.

According to my barista this morning, Clover was conceived of by a Stanford grad who liked French pressed coffee but not the time and headache involved in making one.

They designed the $11,000 Clover machine and started selling them one unit at a time to small independent coffee shops keen for something new to differentiate themselves from Starbucks. Then along came Starbucks itself who said they’d like to install 5,000 units.

A $55 million order would have been many times the size of Clover’s annual sales so instead of placing the order, Schultz & Co. just bought the 11-person company outright.

Have you ever heard of a company getting a term sheet instead of a purchase order?

I hope you enjoy the articles below on selling a business with your brew of choice.

Buy business with emotion, justify with logic

~ published June 22, 2010 the Globe and Mail

On May 11, 2010, the NBA approved Mikhail Prokhorov’s bid to buy the New Jersey Nets. Mr. Prokhorov made his money mining nickel and gold in the wild-wild east of mid-’90s Russia.

By all accounts, Mr. Prokhorov is a hardscrabble entrepreneur who made the bulk of his fortune in the frozen Siberian tundra. But he reportedly has a soft spot for basketball. At six-foot-six, he is a competitive player himself. »more

Business can learn unity lessons from World Cup

~ published June 23, 2010 the Globe and Mail

It was fun to watch South Africa play soccer in the opening round of the World Cup.

The South Africans have never been a strong soccer nation, but their team was determined and unified around the common goal of winning. The stadium was packed to the gills, with tens of thousands of people all desperate to see their team win. And as the CBC cameras panned around the countryside and in the bars and on the streets, it seemed that all of South Africa shared a common goal.

It reminded me of the feeling you get when you’re in a company and everybody knows what the target is and everyone is motivated to achieve it. It also reminded me of the time I was misaligned with my general manager and how disruptive that was. »more

Would you sell out staff for an extra $1 million?

~ published June 24, 2010 the Globe and Mail

At the Vancouver airport not long ago, I bumped into an old friend I’ll call Melanie. She runs a successful marketing firm in Toronto, and we were both flying home.

I had come to know Melanie a decade earlier after I’d invited her to sit on the advisory board for one of my companies. At each meeting, Melanie would sit quietly and periodically ask questions — good questions. She didn’t grandstand or pound the table, she just listened and offered the occasional opinion based on her experience. »more

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June 18, 2010

How recurring revenue impacts the value of your business

I used to meet once a week with my senior team and the first item on our agenda was always the same: renewal rate.

Each week, we’d discuss how many subscribers had decided to re-up. We would try to understand why each former subscriber left and come up with ideas to “save” anyone teetering.

Although I didn’t say it at the time, I knew the single most important statistic in a negotiation to sell my company was going to be our renewal rate because it was the one gauge that would allow acquirers to project our revenue into the future.

I have ranked 6 different recurring revenue business models — from least to most valuable  in the eyes of an acquirer– in the articles below. Please use the comments field to share your own examples of creating an annuity stream.

Three valuable forms of recurring revenue

~ published June 15, 2010 Globe and Mail

The single biggest thing you can do to increase the value of your business — no matter the size — is to create a recurring stream of revenue that an acquirer can count on into the future.

Although all recurring revenue will have a positive impact on your company’s value, some forms are more desirable than others. Starting today and continuing tomorrow, I’ll present six forms of recurring revenue from least to most valuable: »more

The top three forms of recurring revenue

~ published June 16, 2010 Globe and Mail

Renewable revenue is the holy grail for business owners looking to create a valuable — and sellable — company.

Whether your business is large or small, acquirers need to know it will keep going after you’re gone, so the best way to get an attractive cash offer is to give the acquirer visibility into the future revenue of your company. »more

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