5 Myths About Selling A Service Business
Wednesday, October 14, 2009 at 7:00AM When we started our own business, it seemed obvious that we should build it so we could sell it one day.
After all, even in the first raptures of blissful entrepreneurship, we thought it was possible we might not want to stay until the day we died.
So we did what we thought made sense.
We spent eleven years making ourselves irrelevant.
Which allowed us to sell when we were ready to go. And the company to prosper without us.
In the four years that we’ve been consulting, we’ve come across five myths about selling a business in a service industry that we would like to shatter.
1. The Disbeliever: You Can’t Scale A Service Business.
James O. McKinsey was an accounting professor at the University of Chicago. In 1926 he started a business in an industry that didn’t exist. Today, McKinsey & Company are the largest management consulting firm in the world. They keep their sales figures private. But will admit to at least $5 billion a year. Some estimates put it closer to $13 billion.
If the business isn’t scaling, don’t look at the base. Look at the head.
2. The Skeptic: Selling A Service Business Always Involves An Earn Out.
Only if you have made yourself essential to the business.
In which case, the price is depressed because of the uncertainty of what happens when you leave. And you have to stay longer, in order to extract yourself on someone else’s terms.
If the business functions perfectly without you, you get money in the bank and a great goodbye party.
3. The Talker: We’re Definitely Interested In Selling One Day. We’re Going To Start Planning For That Next Year.
Selling begins the day you start. We call it Plan The Last Day First®. It informs every decision, every hire, every customer relationship.
It costs no more to build for sale, than to build to stay. The only difference is the choices you have when the last day comes. Which is usually sooner than you can possibly imagine.
4. The Optimist: I Get Calls All The Time From People Interested In Buying My Business.
There’s a difference between buying a company. And talking about buying a company.
The first involves due diligence. A process that is invasive and uncomfortable and spends a lot of time looking at your financial statements. You’ll know when someone’s really interested in your business when they ask the third set of follow up questions. The ones you were hoping they wouldn’t.
The second involves a salad and a decaf cappuccino.
5. The Fantasist: We’re having a bad year. But if I got the right offer, I’d consider selling.
This is actually two myths in one.
Buyers don’t buy service businesses in a bad cycle unless they can see the problem clearly. Buyers buy service businesses when things are pretty good, and they think they can run them better. Which typically means cheaper.
And unless you’ve trained other people to do what you do, the ‘right’ offer will definitely involve an earn-out. In other words, this scenario means giving your company to someone else, and then having them tell you what to do for the next three years.
And if they get it wrong, you don’t get paid.
The Sixth Myth
There is a sixth myth. It’s the one that says building a company that can be sold means you’re betraying your craft, your passion, your calling.
The alternative is closing the doors when you’ve had enough. Or dropping dead at your desk.
Which seems like a waste of a lot of time and money.
Unless you believe in fairy tales.
Reader Comments (2)
being a service business owner this is helpful insight. in the production business there are few examples of this ever being done and to my knowledge none of them successfully. can this change in the future as business become more diversified? if so, how do you build to sell? How do you plant the seeds? And, who do you think would be the prospective buyers?
i think the biggest leap is making the emotional shift from a life style business to one that has value beyond your own contribution.
thanks for sharing.
I think part of the answer is certainly provided by greater diversification within the production community.
But, in my experience, the reason that very few (if any) production companies have ever successfully been sold is that they have never been built with that possibility.
It's analogous to building a grass hut to provide shelter in the summer, but which then gets blown away when the rainy season comes. It was only designed to meet a short-term need.
If you build a structure designed with an understanding of what you need in both the short and the long term, not only do you get protection from all the elements. But when you want to move, you have something of value to sell to someone else.
Most production companies are grass huts. When the sun stops shining on the principals, the hut's no use to them any more. And new arrivals would rather build their own because it's cheap and easy to do so.
Given how hard it is to build a successful business, I'm always amazed at how easily people throw them away when they're done. Building a sellable business takes the same effort as building an un-sellable one. The difference is you have options when you're finished.
The first-step is exactly the one you've identified. The emotional shift. The other answers are scattered through this blog and will also be in our upcoming book.