Most company owners probably don’t want to sell their business right now – but they want to know they could. That’s the theory behind The Sellability Score, an online tool developed by author and serial entrepreneur John Warrillow. The Sellability Score – created based on market research with business owners and mergers & acquisitions professionals – is a free, 30-question self-assessment that helps business owners determine how saleable their company actually is. “Knowing you could sell allows you to sleep well at night,” says Warrillow, the author of Built to Sell: Creating a Business That Can Thrive Without You. “You know you’re building an asset that has value and could fund your retirement, let you travel, or whatever you’re passionate about.”
So what makes for a business that other companies would want to acquire? Warrillow gives a sneak preview of four top criteria.
- Management Team. “Any buyer will say, ‘What happens after you leave?’” says Warrillow. You want to answer that question definitively by having a strong second-in-command who knows the business and is committed to carrying on over the long term.
- The Switzerland Factor. Much as Switzerland has thrived by being studiously neutral, Warrillow suggests your business should do the same. Specifically, “you have to be neutral toward any one supplier, customer or employee – that is, you can’t be overly dependent on them.” You want to demonstrate that you’ve hedged your bets with a diversified client base and “no one employee has the secret sauce.”
- The Five Times Factor. Your business looks a lot more attractive if you’re able to scale it – specifically, says Warrillow, “Can your business scale five-fold without adding five times the costs?” A hotel running at only 20% occupancy is the perfect example of an underutilized asset that has room to grow; software companies also typically scale easily without adding lots of employees. But even in industries that usually don’t scale well – like law firms – there is room for innovation with new offerings like Legal Zoom, an online service that helps people create their own legal documents.
- Revenue Stream. In your personal life, you don’t want to live paycheck-to-paycheck – and to create a saleable business, you don’t want to live project-to-project, unable to predict future cash flow. Instead, your goal is to create a steady and consistent revenue stream with a subscription or membership model. That’s common for fitness centers or magazines, but even unlikely suspects can make it work (Warrillow cites a Canadian snowboard instructor who got tired of giving individual lessons and now has a thriving business selling subscriptions to his YouTube channel with exclusive snowboarding videos).
Let’s say your Sellability Score is top-notch and you’re ready to move – what next? Warrillow advises most business owners to work with an advisor or broker to help sell their company, because “their job is to create competitive tension, get multiple bidders, and run the process for you.” The fees can be steep – for a business with less than $1 million in sales per year, Warrillow estimates that brokers may charge 10-12%, and a mergers & acquisitions professional may charge 4-5% for a deal in the $5-$50 million range. But they help you avoid “the classic mistakes that business owners make in selling their company,” such as focusing so much on the sale that revenue actually slips and the value of the company diminishes. Says Warrillow, “Let them run the process so you can run your business.”
Have you sold your company – or do you want to? What pointers do you have to share?
This post originally appeared on the Forbes website.
Dorie Clark is CEO of Clark Strategic Communications and the author of Reinventing You: Define Your Brand, Imagine Your Future (Harvard Business Review Press, 2013). She is a strategy consultant who has worked with clients including Google, Yale University, and the Ford Foundation. Listen to her podcasts or follow her on Twitter.