PDF Summary:Built to Sell, by John Warrillow

In Built to Sell, entrepreneur and small business expert John Warrillow teaches you how to build a business you can sell. As someone with first-hand experience creating and selling a small business, Warrillow claims that a sellable business is one that can function without the owner. To create such a company, he provides a step-by-step process any business owner can follow.

In this guide, we’ll explain why a self-sufficient business is more attractive to potential buyers and why you should strive to build such a business regardless of whether you intend to sell it. We’ll also explore each step of Warrillow’s process, including how to find and market a unique product or service, find the right salespeople, incentivize upper management, and finalize a sale of your business. Throughout the guide, we’ll compare Warrillow’s strategies with those of other business experts.

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(Shortform note: Though similar, cash flow and profits are not the same. Profit is the amount of money left over after expenses. Cash flow is the net amount of cash on hand. A profitable business can have negative cash flow. For example, if a company is owed money for a product or service they’ve already delivered, this would go toward their revenue but not their cash on hand.)

To create positive cash flow, Warrillow recommends charging up front for your product or service. This way, you’re receiving the money for the service before you pay for its costs. A subscription model is a great way to generate positive cash flow, as you take in a monthly or yearly fee before you provide the service. If you’re unable to charge for subscriptions, try to get at least some of the money up front.

(Shortform note: There are many ways you can improve your company’s cash flow. To facilitate the up-front money Warrillow recommends, consider offering discounts for early payment or sending out invoices as soon as they’re generated. If you can’t charge for subscriptions, you can also improve cash flow by doing credit checks for customers to ensure they’ll make timely payments moving forward.)

Step 3: Hire the Right Salespeople

Now that you have cash on hand and a service you can provide without being personally involved, Warrillow recommends hiring a sales team. With a sales team, you can remove yourself from the process of selling the service or product.

According to Warrillow, you want salespeople with experience in selling products, not services. Even if your company provides a service, a salesperson who can sell products has experience selling a specific, unchangeable item. Because of this, they’ll know how to sell a customer the exact specialized service you provide. On the other hand, a salesperson who’s used to selling services will want to modify your product or service to cater to each customer’s needs and desires. This will make it more difficult to build a consistent, scalable business model.

If possible, Warrillow also recommends hiring at least two salespeople. This is because salespeople usually thrive on competition. Multiple salespeople will also prove to potential buyers that your company is successful because of its product or service, not because of one talented salesperson.

More Tips On Building a Sales Team

In Sales Management. Simplified, Mike Weinberg also advises that you hire more than one salesperson, but he recommends that you do so in order to have different people for different roles within the sales department: finding leads, retaining customers, and helping customers. Having separate roles for finding new customers and retaining existing ones is especially important because of the different skills these jobs require.

Weinberg says one of the most important aspects of sales is a strong sales pitch that can be used to sell your specific product or service without changing it for each new customer—this will help you sell your exact, unmodified product or service as Warrillow recommends. A sales pitch should be a short, simple narrative that conveys how your product or service will be valuable to the customer.

Step 4: Build a Team of Managers and Incentivize Them to Stay

Warrillow argues that if you want to sell your business, you need a capable management team that is likely to stay with the company after the sale. Your management team, whether it’s a single manager who knows the ins and outs of the business or several managers with a variety of expertise, should be able to oversee every aspect of the company without you and deal with any potential issues.

(Shortform note: In The Making of a Manager, Julie Zhuo mentions versatility as one of the qualities of a good manager, which aligns with Warrillow’s advice on having a manager who understands all aspects of your company. She also states that a good manager should be accountable, team-oriented, and work well with others.)

Potential buyers of your business will also want to be sure that the management is likely to stay with the company long term. Warrillow argues that as the owner, it’s your responsibility to incentivize managers to stay after you sell the company. The most effective way to do this is to create a bonus account that they can only withdraw from after a certain period of time. For instance, each manager gets an additional yearly bonus put into an account. After three years with the company, they can withdraw up to 25% from the account each year. This way, if they decide to leave the company, they’ll be leaving a lot of money on the table.

(Shortform note: In addition to monetary incentives, there are other ways you can ensure your managers stay with your company after you sell it. One way is to encourage managers to connect with their employees. Managers who focus on building strong relationships are not only more effective, they’re more likely to stay with the company because they feel valued. You should also provide managers the time and space to help and learn from each other. Peer support can provide unique insights and growth opportunities that top-down feedback can’t. If your managers feel they’re connected with their employees and supported by their peers, they’ll be much more likely to stay after you’re gone.)

Warrillow also advises against offering managers equity in the company or a share of the profits as long-term incentives, as both of these can make a sale more difficult and create conflicts of interest.

If you give a manager a stake in the company, you’ll not only lessen your own stake, you’ll now have a part-owner whose input you’ll have to consider. They might not be as inclined to sell the company as you are, or a potential buyer might not want to purchase a company with multiple owners. If you give managers a profit share, they might oppose decisions that slightly decrease short-term profits but make the business more attractive to potential buyers, like cutting out a big client because they no longer fall under your specialization.

(Shortform note: Although Warrillow advises against offering equity as compensation for managers, it’s a fairly common practice, and it does have its benefits. For instance, offering equity in the company can help you hire strong candidates at lower salaries. This can help free up cash flow to expand the business. Furthermore, although giving managers equity may complicate a potential sale, offering equity may ultimately increase your chances of selling your company by making it stronger—equity can boost manager morale and productivity because managers have more agency and more incentive to improve the company.)

Step 5: Find the Right Company to Help Sell Your Business

Once your company is in a good position to be sold, you need to find a professional adviser to help with the sale. When searching for an adviser, Warrillow says there are two key aspects to consider: the size of the firm and their knowledge of your business specialty.

Finding a broker or firm that’s the right size for your business is important because it ensures they’ll have the right contacts and appreciate your specific needs. Warrillow advises using a business broker if your company does less than $2 million in annual sales, and a merger and acquisition firm if it does more than that. If a broker is too small for your company, they might not be able to find the companies that would give you the highest offer. If a firm is too big, they might view your business as less important than their bigger clients and not put in the effort to find the most suitable buyer. Instead, they’ll simply look to sell your company as quickly as possible, take their cut, and be on their way.

(Shortform note: Though both types of firms help people sell and buy companies, there are key differences between merger and acquisition (M&A) firms and business brokers. In general, business brokers operate on a smaller scale, brokering deals of single companies in a local or regional market. M&A firms are more likely to broker complex deals on a national or international scale. A business broker is also more likely to work for companies that are easy to evaluate and focus on getting the deal done for a predetermined compensation. M&A firms are more likely to help their clients after the deal is done and thus require additional payouts.)

Your adviser should also be familiar with the industry your company specializes in. If they’re not, they may overlook or underappreciate the value you bring to that particular industry. If you have truly built something special, a broker or firm familiar with your industry will recognize that and fight for every dollar your company is worth.

(Shortform note: Warrillow’s recommendation to make sure your adviser knows your industry is similar to Peter Lynch’s investing advice in One Up On Wall Street. Lynch argues that when you invest in the areas you’re most familiar with, you’re more likely to accurately predict how well a company will perform. It seems that across the board, familiarity with companies and industries leads to better financial choices.)

Step 6: Inform Your Managers

According to Warrillow, telling your managers you plan to sell the company can be a tricky and uncomfortable situation. If you own a small business, you’ve probably worked closely and built a relationship with your management team, and they may not be happy to hear you’re selling the business. The best time to tell them will vary depending on your situation, but Warrillow recommends letting them know once you find a potential buyer. The potential buyer will want to set up a meeting with you and your managers to get a feel for the company. Obviously, you don’t want your managers to be blindsided by this meeting.

(Shortform note: Other business experts cite additional reasons to inform managers early of a potential sale. The National Federation of Independent Business (NFIB) recommends you involve key managers in the process early so they can support the transition and answer other employees’ questions regarding the sale. An M&A expert notes that informing management early is important in maintaining trust and ensuring management stays with the company after the deal is complete.)

Though you may be nervous about telling your managers of your intentions, there are a few things you can do to calm your anxiety. First, recognize there are potential benefits for managers if you are bought out by a larger company. For example, they might have more upward mobility and opportunities for raises as part of a bigger business. Another thing you can do is to offer managers a one-time bonus for the sale of the company. This will show that you appreciate their efforts and give them a pick-me-up as they deal with the transition.

(Shortform note: Warrillow notes the benefits managers may see if their company is sold, but it’s also important to be aware of the potential drawbacks your employees face. Historically, when a business is sold, jobs are cut. Senior management positions in particular are in danger because the acquiring company already has managers, and they’ll want to reduce redundancies and increase efficiency. Another drawback is the change in culture your managers may face. Bigger companies may be more organized, but corporate culture may not appeal to some managers.)

Step 7: Accept an Offer

The final step in selling a business is to accept an offer. Warrillow recommends knowing exactly what you want from a deal. This will make the decision easier. For example, have a minimum amount of money you’ll accept up front, with any performance fees or add-ons seen as a special bonus. If most of your compensation is based on how the company performs in the future, you may be forced to continue working for the company to ensure you get a proper payout. Knowing exactly what you want will help you stand firm if your business broker pushes for you to accept a less-attractive deal just so they can get paid and move on.

More Advice on Selling Your Business

In The Hard Thing About Hard Things, Ben Horowitz contends there are two sides to consider when selling a company: your rational side and your emotional side. Though Warrington doesn't explicitly mention these, his advice on knowing what you want from a deal will incorporate both considerations: You should decide rationally what your company is worth while keeping in mind that your assessment may be influenced by your emotional attachment to it.

One way Horowitz advises that you can properly—and rationally—assess its value is to ask yourself if the market your company specializes in is bigger than anyone realizes, and if your company has a chance at being one of the top businesses in that market. If the answer is yes to either or both of these questions, you may be selling your company for much less than it’s truly worth.

Additionally, be aware that when a company agrees to buy your business, they’ll want to do due diligence (make a comprehensive appraisal), and this can be a painstaking process. The due diligence process usually lasts two to three months, and the buyer will examine every aspect of your company with a microscope. It’s not uncommon for a company to decrease their offer or pull out of a deal entirely after they’ve combed through your business. Don’t be discouraged if this happens, and stick to your guns if they offer less than you think your company is worth.

(Shortform note: To get an idea of just how thorough the due diligence (DD) process can be, let’s look at some of the different types of due diligence that an acquiring company will perform. There’s financial DD, which looks at all the company’s finances in detail, such as financial statements, company projections, debt, inventory, and an analysis of customer accounts. There’s human resources DD, which analyzes all the employees, their benefits, labor disputes, HR policies, and any other employee-based information. An acquiring company will also do due diligence on administrative items, assets, environmental impact, taxes, legal processes, customers, and anything else they wish to look at.)