How can you create a company that will sell to an enthusiastic buyer for a gazillion dollars? In his blog on thefourhourworkweek.com, Tim Ferriss calls upon John Warrillow, a successful startup veteran, to outline the key criteria necessary for a successful, sellable business. Here they are:
1. Before selling, your company must meet the following prerequisites:
- Its systems can be taught. The company must be able to run without you. You have to be able to pass on your knowledge to a team of people who can continue to run the company successfully without any further help from you.
- It has real valuable. The company must be a niche business that is hard to replicate and that also does not have a lot of competition. So, if you are making widgets, it has to be a widget that is valuable for a specific reason, and that no one else knows how to make as well as you do.
- Its revenue formula is repeatable. The most important part in selling off a startup, says Warrillow is that you make sure that your company has what he calls a recurring revenue model—a product or service that will be bought over and over again. Examples of those types of products or services are things like shampoo, which get consumed and rebought—or even better, that involve contracts that will be renewed.
II. To be attractive to a buyer, you must generate positive cash flow
Once you have created a sellable business, you should pay attention to your balance sheet to drive down your expenses and generate as much cash as possible.
III. You must build a compelling set of statistics. Buyers look specifically at the following metrics:
- Addressable market size: How many people buy what you sell in your market?
- Market penetration rate: How many people buy your product now and how many more could potentially buy it?
- Cost per customer acquired: How much does it cost you to attract each customer?
IV. Be able to make the case that your business will continue to grow for the foreseeable future.
Being able to make a convincing case about the upside potential of your business will prove to be a valuable selling tool when you face a prospective buyer. This is where your carefully compiled statistics come in handy.
V. Know when to sell.
This is a question that only the owner can answer, because it depends on so many factors. The important thing, he says, is to build a sellable company, and then the cards are in your hands.