Ever dream of selling your business for a profit? Or maybe you’d like to know what prospective buyers think of your company’s potential?
Entrepreneur and angel investor John Warrillow developed the Sellability Score to quantify the “sellability” of a company based on eight factors. Warrillow also wrote a book the topic called Built to Sell: Creating a Business That Can Thrive Without You.
The Intuit Small Business Blog recently chatted with Warrillow about what determines the Sellability Score and how businesses can improve theirs. His thoughts follow.
ISBB: If things are going well and a business is profitable, why should the owner care about its sellability?
Warrillow: Well, first and foremost, those businesses that are unsellable are tented on the owner. When a business is tented on the owner, it’s just a ceiling beyond which the business cannot grow. That impacts the overall success of the business — both the top line and bottom line, potentially.
It also impacts the lifestyle of the business owner when businesses highly depend on the owners themselves. I think a sellable company tends to be more fun to run. It’s a marketable, valuable asset. At the same time, you could simply run it forever but run it in such a way that it can scale up beyond you personally.
What impacts the sellability of a company?
The first driver is financial performance of the company, which relates to the overall revenue of the business, the profitability of the company. The next one is growth potential. When a buyer buys a company, they’re not just buying today’s or yesterday’s performance. They’re buying the future performance of the business. What’s the growth potential of the business?
Another one refers to how dependent the company is on its #1 customer, employee, or supplier to force its valuation to teeter-totter. Also, the idea of cash flow and how it moves through the business, as well as recurring revenue. The next one is called “monopoly control,” which is how differentiated your company is from its competitors in the marketplace. The next is customer satisfaction, which is where we recommend the owners measure their Net Promoter Score. Also, how the business would perform without the owner being present.
What types of things could a small-business owner do to boost his or her Sellability Score?
To lift your score, you want to isolate which of these eight attributes you are weakest on. The first thing we would recommend is to take your overall score and then understand where you fall below your average score. For example, if your score was 80 — the score range is zero to 100 — you would go through and identify the attributes that [ranked] below 80 and try to lift the scores of those attributes.
Most business owners score well in some attributes and get dragged down by others. One very common attribute a lot of business owners score below average on — below their overall score — is that dependency the business has on its owner.
One of the tests is to go on vacation for a week and leave the iPhone at home and see how your business performs for five consecutive business days without [you being] in contact. If the business thrives and continues to operate well during that five-day test, then it is likely that it is actually quite a sellable company.
Anything else you’d like readers to know?
One of the questions I get asked a lot is which factors are weighted more heavily in the Sellability Score. Not all of the eight attributes are weighted in the same way. In fact, there are some attributes that have a bigger impact on the overall sellability of the company.
One of the biggest drivers of the sellability of a company, and therefore is weighted more, is that driver we call “growth potential,” which relates to how businesses scale up beyond you. There are three or four different lenses to look at growth potential through. One of those is, Could your idea work in another city?
So, Crumbs Bake Shop is an example of a company that started in Manhattan. They started making $3 and $4 cupcakes. It’s one of those little luxuries the people of Manhattan have chosen to become addicted to. Crumbs has successfully replicated this business in cities like Boston, Los Angeles, and Beverly Hills, where people can afford to spend $3 or $4 on a cupcake.
Another one is to look horizontally and ask yourself, Is there more stuff I can sell my customers? Let’s say you’ve got 100 rabidly loyal fans who love your company, they believe in your brand, and they like your culture. Richard Branson is probably the quintessential cross-seller of services: He’s got the Virgin brand, [and] people love what he does and believe in the idea of choice and the idea of great customer experiences. He’s slapped that brand on everything from mobile phones to air travel, insurance, and banking. So, he’s looked more horizontally and said, “No, I’m not going to go find other cities to offer it in. I’m going to find other stuff I can sell to people who already love the Virgin brand.”