Republished with permission from Built to Sell Inc.

Wind Mobile founder Anthony Lacavera has started 12 businesses, six of which he has exited. His exits have ranged in value from the $6 million he got for one of his recent start-ups to $1.3 billion when he sold Wind Mobile. He did it by following two key tips.

1. Understand what kind of company you are running

Lacavera has owned hyper-growth unicorns and lifestyle businesses and urges entrepreneurs to be clear about their long-term prospects. Lacavera started a business supplying hotels with internet access and understood the company would be a good cash generator, but would never sell for a mint. He ran the business for almost two decades and used the cash it generated to fund various other ventures. Recently, he finally sold the business, which was generating $1.5 million in pre-tax profit, for $8 million—a relatively modest 5 times earnings, which was fine by Lacavera, because it had served its purpose of funding other companies along the way.

2. The role of CEO and owner are not the same

Lacavera encourages entrepreneurs to separate the role of CEO and business owner. Even though they may be the same person, they have different functions and, at some point, your business may be better served by separating the two roles. Entrepreneurs who are comfortable handing the reins to a professional manager may do better in the long run than those who need to control everything.

Lacavera had great success, which is visible in the fact that he has won just about every business award there is, including 2010 CEO of the Year, Top 40 Under 40, Deloitte Technology Fast 50, and Canada’s Fastest Growing Company. One of the top secrets to Lacavera’s success — knowing when to bring in a CEO to replace himself in any of his ventures.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Republished with permission from Built to Sell Inc.

One of the biggest mistake owners make in selling their company is being lured into a proprietary deal.

The Definition Of A Proprietary Deal

Acquirers land a proprietary deal (or “prop deal”) when they convince owners to sell their businesses without creating a competitive marketplace. Acquirers running a proprietary deal know they don’t have any competition and tend to make weaker offers with more punitive terms because they know nobody else is bidding.

Many founders become the target of a proprietary deal without even knowing they have been duped. First, someone senior from the acquiring company approaches the founder, complimenting them on their business. The acquirer suggests lunch, and then high-level financials are exchanged. Soon, the owner starts going down a path that is difficult to come back from.

As the parties in a proprietary deal get to know one another, founders often share information with the acquirer that puts them in a compromised negotiation position. The interactions are set up as friendly exchanges between two industry leaders, but many founders reveal key facts in these discussions that end up being used against them when negotiations turn serious. Business owners also become more emotionally committed to selling the more resources they invest in the process and the more time they spend thinking—perhaps dreaming—of what it would mean to sell their business.

How To Avoid Getting Taken In By A Proprietary Deal

Savvy sellers avoid the proprietary deal by creating a competitive process for their company. Take for example Dan Martell, the founder of Clarity.fm, among other companies. When Martell decided to sell Clarity, he knew the likely buyer was one of five New York-based companies. Instead of negotiating with one, he invited all five to an event he hosted in New York. The five CEOs—all of whom knew one another—saw a room full of their competitors and realized that if Clarity went on the market, they would have to out-bid the other buyers in that room.

Hosting the event was Martell’s way of communicating to all the potential buyers that a proprietary deal was off the table and that if they wanted to buy Clarity, they would have to compete for it.

It’s flattering to receive a call from an executive at a company you respect. Just know that if you accept their invitation of lunch, you run the risk of becoming the latest casualty of the proprietary deal.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Republished with permission from Built to Sell Inc.

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.

A strategic buyer is a different cat—usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

Tom Franceski and his two partners had built DocStar up to 45 employees when they decided to shop the business to some Private Equity (PE) investors. The PE guys offered four to six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which Franceski deemed low for a fast-growing software company.

Franceski was then approached by a strategic acquirer called Epicor, which is a global software business with a lot of customers who could use what DocStar had built. Epicor offered DocStar around two times revenue—a much fatter multiple than the PE firms were offering.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Republished with permission from Built to Sell Inc.

If you’re wondering what your business might be worth to an acquirer, there is a simple calculation you can use.

Let’s call it “The Build vs. Buy Equation”.

At some point, every acquirer does the math and calculates how much it would cost to re-create what you’ve built. If an acquirer figures they could buy your business for less than they would spend on both the hard and soft costs of re-deploying their employees to build a competitive product, then they will be inclined to acquire yours. If they think it would be less costly to create it themselves, they are likely to choose to compete instead.

The key to ensuring that what you have is difficult to replicate is focusing on a single product or service and building on your competitive point of differentiation. When you create a product that is unique and pour all of your resources into continuing to differentiate it from the pack, you can dictate terms, because re-creating your business becomes harder the more you focus on one thing.

The worst strategy is to offer a wide range of services and products only loosely differentiated from others on the market. Any acquirer will rightly assume they can set up shop to compete with you by simply undercutting your prices for a period of time and driving you out of business.

C-Labs Focuses On Building An Irresistible Product

Chris Muench started C-Labs in 2008 to go after the burgeoning opportunities presented by the Internet-of-Things (IOT). He began by writing custom software applications that allowed one machine to talk to another. In 2014, he got the industrial giant TRUMPF International to acquire 30% of C-Labs, which gave him the cash to transform his service offering into a single product.

By the end of 2016, Muench’s product was showing early signs of gaining traction but C-Labs was running out of money.

In the end, TRUMPF acquired C-Labs in a seven-figure deal that could stretch to eight figures if Muench is successful in hitting his future targets. Why would a large, sophisticated company like TRUMPF acquire an early-stage business like C-Labs? Because they knew that re-creating Muench’s technology would cost much more than simply writing a seven-figure check to buy it outright.

In other words, TRUMPF used The Build vs. Buy Equation and realized that buying C-Labs was cheaper than trying to reproduce it.

Selling too many undifferentiated products or services is a recipe for building a business that—if it is sellable at all—will trade at a discount to its industry peers. By contrast, the trick to getting a premium for your business is having a product or service that is irresistible to an acquirer, yet difficult for them to replicate.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Republished with permission from Built to Sell Inc.

John McCann sold The Bolt Supply House to Lawson Products (NASDAQ: LAWS) at the end of 2017.

McCann’s strategy involved learning from the acquirers who knocked on his door. He invited would-be buyers into The Bolt Supply House and listened to what they had to say. He was not committed to selling, but instead wanted to know what they liked and what concerned them about his company.

One giant European conglomerate, for example, approached McCann about selling, but after a thorough evaluation, they backed out of a deal, worried about McCann’s central distribution system.

McCann thanked them for their time and set to work turning his distribution system into a masterpiece. Eventually, Lawson cited this as one of the many things that attracted them to The Bolt Supply House.

When it finally came time to sell, McCann commanded a premium, arguing that he had built a world-class company he knew would be a strategic gem for a lot of businesses. He ended up getting five competing offers for The Bolt Supply House and eventually sold to Lawson.

When a big sophisticated acquirer approaches you about selling, the temptation is to decline a meeting if you’re not ready to sell, but hearing what they have to say can be a great way to get some superb consulting, for free. The investment bankers and corporate development executives who lead acquisitions for big acquirers are often some of the smartest, most strategic executives in your industry and—provided you don’t get sucked into a prop deal—hearing how they view your business can be an inexpensive way to improve the value of your company.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Republished with permission from Built to Sell Inc.

If your goal is to grow your business fast, you need a positive cash flow cycle or the ability to raise money at a feverish pace. Anything less and you will quickly grow yourself out of business.

A positive cash flow cycle simply means you get paid before you have to pay others. A negative cash flow cycle is the direct opposite: you have pay out before your money comes in.

A lifestyle business with good margins can often get away with a negative cash flow cycle, but a growth-oriented business can’t, and it will quickly grow itself bankrupt.

Growing Yourself Bankrupt

To illustrate, take a look at the fatal decision made by Shelley Rogers, who decided to scale a business with a negative cash flow cycle. Rogers started Admincomm Warehousing to help companies recycle their old technology. Rogers purchased old phone systems and computer monitors for pennies on the dollar and sold them to recyclers who dismantled the technology down to its raw materials and sold off the base metals.

In the beginning, Rogers had a positive cash flow cycle. Admincomm would secure the rights to a lot of old gear and invite a group of Chinese recyclers to fly to Calgary to bid on the equipment. If they liked what they saw, the recyclers would be asked to pay in full before they flew home. Then Rogers would organize a shipping container to send the materials to China and pay her suppliers 30 to 60 days later.

In a world hungry for resources, the business model worked and Rogers built a nice lifestyle company with fat margins. That’s when she became aware of the environmental impact of the companies she was selling to as they poisoned the air in the developing world burning the plastic covers off computer gear to get at the base metals it contained. Rogers decided to scale up her operation and start recycling the equipment in her home country of Canada, where she could take advantage of a government program that would send her a check if she could prove she had recycled the equipment domestically.

Her new model required an investment in an expensive recycling machine and the adoption of a new cash model. She now had to buy the gear, recycle the materials and then wait to get her money from the government.

The faster she grew, the less cash she had. Eventually, the business failed.

Rogers Rises From The Ashes With A Positive Cash Flow Model

Rogers learned from the experience and built a new company in the same industry called TopFlight Assets Services. Instead of acquiring old technology, she sold much of it on consignment, allowing her to save cash. Rogers grew TopFlight into a successful enterprise, which she sold in 2013 for six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) to CSI Leasing, one of the largest equipment leasing companies in the world.

Rogers got a great multiple for her business in part because of her focus on cash flow. Many owner think cash flow means their profits on a Profit & Loss Statement. While profit is important, acquirers also care deeply about cash flow—the money your business makes (or needs) to run.

The reason is simple: when an acquirer buys your business, they will likely need to finance it. If your business needs constant infusions of cash, an acquirer will have to commit more money to your business. Since investors are all about getting a return on their money, the more they have to invest in your business, the higher the return they expect, forcing them to reduce the original price they pay you.

So, whether your goal is to scale or sell for a premium (or both), having a positive cash flow cycle is a prerequisite.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.