Why You Should Build Your Startup to Sell (But Not to Flip)

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I recently started listening to the E-mything Your Business Podcast which is essentially a nine-episode commercial for a book called Built to Sell: Turn Your Business Into One You Can Sell. But it’s not a bad commercial; it has interesting information about the factors that can substantially increase the value of a business.

This ties in with something I’ve said before:

Build your business to sell, even if you have no plans to.

This is because the factors that make a business attractive to potential acquirers are the same ones that make your business a better business to own: efficiency, automation, repeatable, documented, scalable, etc…

Notice I’m not talking about building your business “to flip.” Flipping implies building a shoddy company that maximizes short-term profit.

Instead, we’re talking about building your startup to maximize its value based on factors the market values, since these factors will make it a better company to own in the both the short- and long-term.

A Product that Scales
The author, John Warrillow, says that most businesses do not scale well. By “scale” he means: can the business grow very quickly without a lot of manual intervention?

A consulting firm scales very poorly. You’ve likely tried consulting work or are still doing it, and you know it’s a dollars-for-hours trade. Nothing scalable (or fun) about that. This is why you’re thinking about a startup, right?

The three components to a scalable business, according to John, are being:

  1. Repeatable
  2. Teachable
  3. Valuable

Let’s take a look at each one of these in the context of a startup.

Repeatable
In a traditional business a repeatable product/service is something that does not require a high level of expertise and customization every time you make a sale. The sales process might be customized, but the product or service should be as cookie-cutter as you can make it. The more repeatable, the more profit you will make with each sale, and the more valuable your company becomes.

In a startup, this means developing a product and a sales process that does not require your time. Ideally you want the entire sales process to take place on your website with no manual intervention, including the purchase, order fulfillment, serial number generation, etc…

The ability to leave your startup on auto-pilot for a few weeks while you’re out of town (or working hard on new features) means more profit per hour for you, and a higher valuation should you ever decide to sell.

The lesson: build a product that does not require customizations, and completely automate your order fulfillment process.

Teachable
In a traditional business you leverage the time of your employees. You pay them less than you bill out, and you keep the difference. This means that the easier your process is to teach, the easier it is to find employees who can do the work, the more employees you can hire, and the more profit you will make per sale.

In a startup you have a few avenues: hire employees or use virtual assistants (VAs).

In either case it’s the same: having a process in place to handle customer support, refunds, product fulfillment, documentation updates, forum support, website updates, etc. will result in an easier ramp-up period for new hires , and less of your time that’s wasted in training.

The lesson: create a written for everything in your business, even if you’re the only person doing the work.

Valuable
John talks about having a product that’s valuable to your customers. In a traditional business this means offering non-commodity products and services.

For a startup, this means avoiding “me too” products, staying away from horizontal niches, solving a pain-point, and targeting a vertical niche.

By catering to a specific audience (plumbers, grocery store owners, psychologists, etc…) and building a product (and marketing) that caters to their every need…you will build something far more valuable than if you built the same product for a massive, horizontal audience.

The lesson: stick to vertical niches. Occupations and hobbies are best.

Charge Up Front
The other point I’ve taken away from the podcast is the fact that businesses that are the most valuable are able to charge for their work up-front. So instead of selling a product or service and invoicing in 30 or 60 days, the most valuable businesses charge before the product or service is supplier.

This allows for better cash-flow, potential profitability from day 1, and no need to take out a line of credit.

Applying this to startups is a no-brainer; most of us will charge the customer’s credit card before we provide a product.

The real application (and perhaps the punchline) is to charge for your product.

There are arguments against charging for your product, but unless you have venture funding they do not apply to you.

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2 comments ↓

#1 Why You Should Build Your Startup to Sell (But Not to Flip) |StartupDigest Classifieds on 07.01.10 at 12:52 pm

[…] Read the Entire Post […]

#2 Build Startups to Sell, Even If Keeping It | Scott Bratcher on 11.10.10 at 2:43 am

[…] There are arguments against charging for your product, but unless you have venture funding they do not apply to you. via softwarebyrob.com […]