Most entrepreneurs don’t start a company to become the next Billionaire.

They start a business because they crave freedom.

Not the Social Media version.

I find the real version ties to Control.

• • Control over their time.
  • Control over their decisions.
  • Control over their financial destiny.

Unfortunately, the way most founders build their businesses makes them unsellable.

I’ve studied many mid-market businesses. I’ve seen profitable companies that couldn’t be sold. I’ve seen smaller companies command significant multiples. I’ve also been in meetings with M&A teams when founders were confident that they were sitting on a goldmine, yet walk away realizing all they had built was a job. It’s one of the key reasons why most businesses – when they go out to market – don’t sell.

This article is about the difference.

And more importantly, how to build something buyers desire and perhaps even ‘fight’ over.

The Questions Buyers Ask

When a buyer evaluates your company, they don’t just ask:

“Is this profitable?”

They also ask

• • Should we buy this company?
  • Should we build to compete? Or
  • Should we buy a competitor?

If they can compete with you easily, your desirability evaporates.

From the buyer’s perspective, if it takes too long, cost too much, or carry too much risk to replicate what you’ve built, there is something of value.

That’s where valuation lives.

Which brings us to the first strategic principle.

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1.Dominate One Thing

The highest-value businesses dominate a single, narrow, defensible niche. Especially for businesses below $8 Million.

Not ten things.

One.

Warren Buffett calls it a “moat.” I call it a strategic choke point.

If you try to be a services company that does:

• • A little HR consulting,
  • A little software,
  • A little services, and
  • A little business advisory.

You dilute differentiation and you also confuse the market.

Here’s where founders go wrong:

• • They read about “multiple streams of income.”
  • They start cross-selling.
  • They layer- on adjacent services.

Revenue grows, as does profitability.

But their value and sell-ability shrinks!

Why?

Because most acquirers want clean, focused assets. I’ve been in deals when a buyer has looked at an organization like a pick and mix candy store and part of the deal was to close down the other parts.

Not complexity.

When you try to broaden your reach too wide too soon your business and its clients become a target for focused providers.

I once met with a Garden Nursery Company. It had a great reputation and a number of locations. They also sold wide range of lounge furniture, decorations and ceramics. Additionally, they provided garden designing, installation and ongoing maintenance. Overall, their business was just under $15 Million in revenue. Each of the product lines was in its own “no man’s land” which required specific focus, and investment needs with the additional challenge that the stock of the furniture, decorations and ceramics being a sunk cost. They also clogged up the nursery retail locations, indicating to their clientele that they were out of touch with today’s trends.

The business was about to circle the drain.

The Cross-Selling Trap

Early cross-selling feels smart and is for an income focused business until they become businesses within their own right as in the example above.

It’s easier to sell something new to an existing client than find a new customer.

But if your goal is exit value, inappropriate cross-selling can quietly destroy it.

Most buyers want:

• • One clear value proposition
  • One ideal customer
  • One dominant capability

The more focused you are, the more strategic you can become to the right acquirer.

When companies drift into “we do a bit of everything,” they become commoditized.

And commoditized businesses trade at rock-bottom multiples.

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2. Decide What You Actually Want

Here’s a conversation most founders avoid.

Are you building:

a) An income business AKA a cash machine?

or

b) A sellable asset?

Those are not the same thing.

If you just want to profit today, great. Take distributions and live well.

Many businesses are initially started to provide, and it is often assumed that they will be a sellable asset. If you extract all or most of the profit and never reinvest in scalability, systems, or leadership, you are building a lifestyle business not a transferable enterprise.

Your key people see that.

If there’s no long-term vision, high performers eventually leave.

Your growth ceiling becomes permanent.

Make a clear and conscious decision as to what it is you are building. The only right answer is clarity.

Additionally, what is your motivation to sell?

• • Is it exhaustion?
  • Is it age?
  • Is it boredom?
  • Is it a personal situation?
  • Is it irrelevance?

Is it that you see your business being replaced by something else?

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3. Understand the Buyer Landscape

There are three primary buyer types:

a) Financial Buyers (e.g. Private Equity)

They buy at X.

They sell later at Y.

They optimize through:

• • Leverage (debt),
  • Cost consolidation,
  • Volume purchasing,
  • Multiple expansion, and
  • Adding on smaller businesses (volume)

They often

• • Give you cash between 30 – 60%.
  • Revenue or Profit based earn out over 2 or 3 years while you stay and operate.
  • 10% – 40% linked to a future sale if the consolidated businesses achieve a certain valuation.
  • Sometimes they want you to stay, operate and build over five or more years.

This can create a “second bite of the apple.” Sometimes the buyer’s illustration shows that it should be worth the same if not more than the cash you received, and even more if you do a further roll for a third bite.

Why would Private Equity buy your business?

They are looking for:

• • Strong cashflows,
  • Capable team to scale the business,
  • Platform to roll in other smaller players,
  • They can scale from your base,
  • You are in a category that they know they can sell,
  • Key industry infrastructure, and
  • Hard for others to enter.

Selling to private equity has its risks and can also create misery. For some smaller players it might be the only viable option to roll their business into the platform.

When you become a minority shareholder, you no longer control the outcome, and you are now going against the drivers that drove you to set up your company.

If things go wrong, you can’t fix them.

That’s not theoretical. I’ve seen rolled equity go to zero, personally. I’ve seen private and public market businesses effectively become bankrupt because there was no willing buyer, or inadequate cashflow to feed the machine as the business consolidated business after business.

Consolidations are math and risk. Rolled-up equity generally has more risk to the seller than they realize. and math doesn’t care about your emotions.

It’s worth noting, I’ve seen some Private equity firms or their advisors state they have the required “expertise.” Sometimes it’s real. Sometimes it’s just a good suit and an MBA. I’ve been in meetings where people use $10,000, or $1,000 words to describe a $2 issue, just to impress.

If someone claims they can add value beyond capital, push for specifics.

• • What systems?
  • What contacts?
  • What operational playbook?
  • What management structure?
  • What industry knowledge? and
  • What are the synergies beyond capital?

If you’ve run your business for 10 years, odds are you understand it deeply.

Don’t give up control for vague promises.

b) Strategic Buyers

These are companies who buy you because you solve a strategic problem. This could be you solve a business problem; you have access to a market segment or a geography that they don’t.

Example: Home Depot acquiring Blinds.com.

Why?

Not just for revenue.

But because Blinds.com had figured out how to sell complex, installation required products online, something Home Depot desperately needed across billions in inventory.

For Home Depot, the acquisition and leveraging the technology provided speed to market and reduced the risk of trying this themselves.  They bought:

• • E-Commerce sophistication,
  • Management tools,
  • Installation workflows and playbooks, and
  • Conversion optimization systems.

They were able to apply this across billions in inventory.

Strategic buyers pay premiums because you accelerate something they cannot easily build internally and often have failed at previously, such as products, access to markets or territories.

Understand why you built your business and how you do what the big players cannot do, especially if what you have built threatens their old way of doing things or addresses a gap that their customers are asking for.

To become of interest to a strategic buyer:

• • Dominate one niche,
  • Document systems – how you do it faster, better, cheaper, more profitably than anyone else,
  • Reduce owner dependence, build your capable management team,
  • Show defensibility, to others coming into your space, and
  • Build recurring revenue, and strong customer loyalty.

As with many buyer types there are also hidden risks depending on your business’ maturity.  For example:

• • Earn outs especially tied to key clients,
  • Cultural integration risk,
  • Brand absorption,
  • Leadership redundancy, and
  • Operational redundancy.

c) Individual / Smaller Buyers

Often relevant for sub-$5M revenue especially those below $1M in revenue.

There are a variety of buyer sub-types within this arena including:

• • First-time buyers,
  • Owner operators exiting corporate careers,
  • A new role or career,
  • High Income professionals looking for alternative investment portfolio companies, and
  • Search fund entrepreneurs, wanting to scale and expand.

Valuations are lower.

Most of the time they are buying income. They are wondering if they can:

• • Replace their salary?
  • Is it stable?
  • Can they operate it?
  • Is it easy to staff if it?
  • Will the owner train me?

Expectations are simpler. They are not looking for synergies; they are looking for a business that is sustainable and less stress than what they have been doing.

To specifically to set up buyers for success put the following in place to make your business more attractive to them:

• • Well-documented and up-to-date playbooks,
  • Well-documented and up-to-date Standard Operating Procedures,
  • A strong company profile, rather than a personal reputation,
  • A leadership or management structure, and
  • Clear reporting systems, data, and predictive KPIs.

If your business only works because of you then this is highly unlikely to succeed with a new owner.

Businesses sold to individuals are often funded with bank loans, SBA loans, and or seller notes.

These individual buyers have their own distinct risks including:

• • Financing failure,
  • Inexperience,
  • Overestimation of their capability,
  • Quality of the sustainable business infrastructure, and
  • Heavy reliance on seller transitions.

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4. World Domination Player vs. The Independence Seeker

I am fascinated by human behavior and its drivers. Through research and observations, I’ve found three interesting founder archetypes:

a) World Domination Player

• • They are motivated by scale,
  • They are obsessed with growth,
  • They keep revenue as their scoreboard,
  • They are also often comfortable raising capital, and
  • They also play a long game.

Think of founders like Jeff Bezos. They’ll give up equity to quickly ascend their next mountain or enter their next market.

b) The Independence Seeker

• • They are motivated by self-reliance,

• • They insist on control,
  • They value optionality,
  • They like to call the shots, and
  • They do not want a board dictating life.

This represents most mid-market founders I work with.

They say they want growth, but what they really want is autonomy.

When they take outside equity, conflict starts.

The moment you take on that capital know that the clock starts ticking toward a mandatory exit.

Investors need liquidity.

That timeline may not match your internal wiring.

c) The Craftsperson or Artisan

• • They are motivated by mastery,
  • They love the work itself,
  • They are not driven by exit or scale, and
  • They are often defined by their work

These are a very important group but they are do not want to build a business for scale. I’ve seen these businesses bought by others and they wonder why they are so hard to integrate or operate.

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5. Recurring Revenue Changes Everything

This is where valuation becomes dramatic.

Buyers pay exponentially more for predictable revenue.

Example from security industry:

Installation revenue:
Buyer pays $0.75 per $1.

Monitoring subscription revenue:
Buyer pays $3 per $1.

Four times the valuation.

Why?

Because predictability reduces risk.

And valuation is a pricing model for risk.

Transaction vs. Recurring

Take car washes for example.

Old model:

3,000 random monthly washes.

New model:

3,000 members paying monthly subscriptions.

Revenue identical.

Valuation radically different.

Recurring revenue:

• • Improves cash flow visibility,
  • Reduces customer acquisition pressure, and
  • Increases leverage in sale negotiations

This isn’t a small bump.

It’s transformational!

Where can you ensure that you have recuring revenue?

“But My Industry Is Transactional.”

Some industries are harder such as real estate, mortgages, etc.

That doesn’t mean impossible.

Options include:

• • Membership communities
  • Masterminds
  • Data subscriptions
  • Advisory retainers
  • SaaS overlays
  • Maintenance plans

It may require strategic creativity.

But recurring revenue is one of the most powerful valuation levers available.

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6. The Drivers of Enterprise Value

Through analyzing tens of thousands of companies, those that are sellable versus those that are not have common facets. When multiples are cited, it is often the industry benchmark, or industry average, within a size range, and all business owners I speak to know cases where some companies got higher and others that were offered below this benchmark. It’s easier to see in the public markets where the market either likes or dislikes a company.

Factors that repel buyers or cause significant renegotiation:

• • External drivers such as technological, societal, legal, governmental, economic i.e. Those that effectively could kill the business or severely damage it,
  • Off-book Liabilities, such as rumors of a class action lawsuit, potential product liabilities,
  • Owner or key person dependence,
  • Poor management and financial systems,
  • Confusing or muddy books,
  • Lack of investment,
  • Cyclical revenues, and
  • Reliance on one or two key clients.

Factors that concern buyers – They want to derisk these:

• • Project or lumpy revenue,
  • Beyond industry cost base and ratio,
  • High staff turnover, and
  • Unexplained volatility in revenue and profitability.

Factors that attract buyers

• • Consistent financial performance that tracks and exceeds the industry,
  • Ability to leverage their products and markets into yours,
  • Ability to scale what you have built across their business and beyond,
  • Transferable systems and innovations,
  • Attract, retain, and develop people,
  • Strong relevant culture,
  • Diverse clients in terms of revenue and sometimes also industry,
  • No client has accounts for 5% or more revenue,
  • Costs are well managed,
  • There is no dependence on a single supplier,
  • Revenue is recurring,
  • Your brand is clearly differentiated that you are the obvious choice,
  • High customer advocacy, and
  • High quality management team and owner independence.

We cluster these into 12 bands and rate the business in terms or buyer attractiveness. Those that score less than 40% have very little change of selling, a sellable business usually rates at 75% and above with exceptional businesses rating beyond 85%.

This is not theory. It’s been borne out by external valuation specialists, post-sale buyer interviews, reality, as well as transaction data.

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7. Owner Dependence Is a Silent Killer

Talking a little more about owner dependency. You might not believe that the business is dependent on you, after all you may have people with the title manager.

If you are:

• • Head of sales,
  • Chief rainmaker, or salesperson,
  • Key relationship holder,
  • Final decision maker,
  • Brand identity, or
  • Product or solution designer

You don’t own a business. You own a high-paying job. You are often the spider in the center of the web, where all business functions will only work when you are around and in the center.

When buyers see owner dependency, they discount aggressively by about 50% or they or they walk away.

The Strategic Fork in the Road

At some point, every business that is growing hits a capital constraint.

You have three options:

1. 1. Raise money and give up equity,
   2. Take on debt, or
   3. Slow growth and maintain control.

The World Dominators choose 1

Independence Seekers choose either option two or three.

Neither is wrong.

But choosing unconsciously or reactionarily creates regret.

Final Thought: Build for Independence Intelligently

Most founders say they want freedom. But they build businesses that trap them.

If you truly want optionality:

• • Dominate one niche,
  • Avoid cross-selling dilution,
  • Build recurring revenue,
  • Remove owner dependence,
  • Decide your psychographic profile honestly, and
  • Design with the end in mind.

The irony?

When you build a business that can be sold…

You often don’t need to.

Because it finally works without you.

Having the choice, more than any liquidity event is real freedom for many.

If you had to choose today:

Are you building for income…

Or are you building an asset?