“The Art of Selling Your Business” Summary by Rusty Bishop 2023

“The art of selling your business is getting someone to value something they cannot touch. In essence, they are buying a story about what your business could be in their hands.”

John WarRillow, the art of selling your business

Buy it on Amazon – Hard Cover | E-book

This simple change in your mindset as a seller sets the stage for everything you do during the sales process from hiring the right broker to negotiating the final terms.

Here are a few things I would have done differently had I read this book before we sold FatStax to Bigtincan:

• Hire a broker that knows the process cold
• Do not accept any kind of earnout because earnouts SUCK
• Take more time to sign a binding LOI to get our ducks in a row

Finally, realize that most founders wish that had sold sooner! It’s never too early to start looking to sell your company.

The Art of Selling Your Business Summary

IBSN: Print ISBN: 978-1-7334781-5-1 eBook ISBN: 978-1-7334781-6-8

Suggester Podcast Pairing – John Warrilow on James Shramko’s podcast.

This is book 3 in a series of books by John Warrilow which includes Built to Sell and The Automatic Customer.

If you are thinking about selling or are in the process of selling your business grab a copy of this book immediately.

It’s a short read and is packed with gems and tactics to get the most value for your company (Took me two mornings to read it/take notes).

This is a useful non-fiction book written for a very specific audience of founders with businesses between $1 and $100M in revenue that are looking to sell them.

The book was produced from years of podcast interviews with Founders and provides some nice examples of each of the key steps in the process of selling a company.

The process is easy to follow, but I don’t think the action steps were as straightforward as they could have been.

The book is written in very actionable steps and flows through the steps very logically.

For me personally, it dredged up deep memories of selling my company and fighting our asses off for our earn-out.

The earn-out was probably one of the most stressful times of my adult life and, the author’s strategies to NOT have one in your deal are a must-read.

As always here are my Raw Book notes for the Art of Selling Your Business Summary

IBSN: Print ISBN: 978-1-7334781-5-1 eBook ISBN: 978-1-7334781-6-8

Raw Books Notes – The Art of Selling Your Business

Chapter Structure – well set up, Chapters seem to be well organized, easy to jump around, and know what value you are getting.

Hard rules and softer edges of selling

My standard talk covers eight things acquirers look for when they evaluate your company as a potential acquisition—for example, how fast your company is likely to grow in the future, how much recurring revenue you have, how well you have differentiated your product or service, and how dependent your business is on your personal involvement. Bolding this because this is where I can possibly add the most value vs writing a rewrite of this book.

Finally cuts to the chase around 5% into the book.

Difference between market value and current value of hard assets

“The art of selling your business is getting someone to value something they cannot touch. In essence, they are buying a story about what your business could be in their hands.”

Process-driven book – might be ripe for facilitation?

How to hire a broker? – Questions swipe file?

Pull factors are the things you are excited to do next! I love this concept. There can be no retirement w/o asking this question.

Make a vision board with pictures so you can see it, interesting concept.

Market cycles can impact valuations by 2 turns (e.g., 5X becomes 3X)

You can’t time the market – duh! So don’t time your sale

Wait until you have deal momentum – e.g., a winning streak. BUT what if you never hit a winning streak or you are stalled ? Not sure about this one seems like a tee ball.

Build Deal momentum by having all your ducks in a row for DD. Every little thing you have to go dig up will slow down the deal

Avoid deal fatigue. This is an important concept I need to blog about.

Build Pre-diligence package – rethink due diligence as your time to shine (what if the opposite were true?)

Hard to walk back from the set of events that are triggered once you decide to sell, so commitment to pre-diligence will be important.

A professionally prepared pre-diligence package is a subtle but powerful way to create competitive tension for your business—even if none exists.

Section 2 – Building Your Negotiating Leverage

Slow reveal of your company’s info. Information about you is your currency, decide how to spend it.

PEG – fished for managers by acting like they were going to buy 80 companies, buying 2 then hiring away all the good people from the other 78. Nasty!

Prop deals vs. Bidding war – means the buyer has the top hand and they know it

Prop deals start with a dinner and praise, trying to be your friend, telling you awesome your business is, etc. Don’t believe them! They are experienced at business deals.

Titles – Corporate Development and Business Development

Stephen Watkins – “Your job as an entrepreneur is to hire salespeople to sell your products and services so you can spend your time selling and marketing your company. You make a few hundred or a few thousand dollars when you sell your product, but if you turned those same skills to selling your company, you can make exponentially more. You have the right skills, but you’re selling the wrong product.”

Entrepreneurs that get the best return on their investment get in and get out quickly. Built to Sell pitch?

Acquirers rely on shortcuts and buckets like everyone else, they may only spend a few minutes looking at your company. Position your company as something unique in a category they already know.

3 types of business buyers

1. Individual investors – typically borrow from a bank and you, least well financed.
2. Private Equity Group (PEG) – apply debt like homeowners so your biz needs to be bankable e.g., generates profits so a bank loan can be repaid. May off you a “second bite of the apple”. In the business of buying low and selling high
   1. Fund
   2. Family office
   3. Fundless sponsor
3. Strategics – remember they are in love with their business not yours

1% improvement could be a big deal to large strategic – = good Marketing. AND good marketing should use this in positioning a company for sale.

5-20 rule for acquirers – 5x to 20 x larger than your revenue.

Use $100K per employee to estimate how much a biz makes

Prepare an anonymous teaser – see teaser chapter for details, and rehearse your answer for why you want to sell

Confidential Information Memorandum CIM – “the book” – provide the acquirer with enough info to generate an LOI

“To calculate your number, you have to answer two questions: 1. What’s your business worth? 2. What’s your business worth to you?”

Section 3 – punching above your weight in a value negotiation

Negotiating – ask who, not how. Selling your company is not a do-it-yourself project!

Business broker sells companies worth up to $10M

M&A professionals sell businesses $10-100M

Success fee = commission

Investment bankers sell businesses – > $100M

Buy side v sell side – careful about people’s motives as intermediaries

6 reasons not to go it alone

1. Create competition
2. Keep acquirers interested
3. Provide a buffer
4. Be the good cop, they be the bad cop
5. Time the reveal
6. Receive services (mostly) for Free

The form of payment is just as important as the price

“You set the price, I’ll set the terms” – buy side expression

You need an experienced M&A attorney. Lawyer speak – “market” = terms that are normal. “Out-of-market” = terms that should be questioned

Understand the difference between an LOI and a Definitive Purchase Agreement

Points of the LOI to study = offer price, working capital calculations, assets vs shares, currency, approvals, your role post sale, noncompete, due diligence, contingencies.

You lose leverage once you sign an LOI. With each passing day, you become more committed to selling your business and they have the power now.

Most exits are gradual and you need to carefully structure your role

Earnouts suck. They are a mirage.

Make a quantitate case for why you should be paid more for your biz, preferably in CASH

BATNA – best alternative to a negotiated agreement

Normalizing your P&L to get a better price.= adjustments

Show them your deal is accretive = increase the value of their business over time

Don’t get emotional be cool and collected! I’ve def failed at this.

Most founders wish that had sold sooner

Kindle Highlights and Quotes

Section 1: Things to Consider Before You Start

Highlight(yellow) – My Story > Page 5 · Location 183

My standard talk covers eight things acquirers look for when they evaluate your company as a potential acquisition—for example, how fast your company is likely to grow in the future, how much recurring revenue you have, how well you have differentiated your product or service, and how dependent your business is on your personal involvement.

Highlight(yellow) – My Story > Page 6 · Location 196

began to realize that there was a need for impartial advice on how to go about negotiating the sale of a business.

Highlight(yellow) – The Birth of Built to Sell Radio > Page 8 · Location 219

The art of selling your business is getting someone to value something they cannot touch. In essence, they are buying a story about what your business could be in their hands.

Highlight(yellow) – Chapter 2: The Secret to a Happy Exit: The Most Important Question Most Founders Never Answer > Page 13 · Location 274

He’s satisfied because he wasn’t just leaving his business; he was going toward something new.

Highlight(yellow) – Riding It over the Top > Page 20 · Location 348

Lost and Founder: A Painfully Honest Field Guide to the Startup World as

Highlight(yellow) – Deal Momentum and the Pre-Diligence Process > Page 23 · Location 390

The primary culprit is a seller who has not taken the time to assemble the information an acquirer will need during due diligence.

Highlight(yellow) – Deal Momentum and the Pre-Diligence Process > Page 25 · Location 413

Outsource it to a consultant or your accountant.

Highlight(yellow) – Deal Momentum and the Pre-Diligence Process > Page 26 · Location 425

“When they see that you’re prepared like that, and they know they have the right of first refusal, you’ve created a silent auction, because if they don’t take [your business], they know that you’re dressed for success. They know you can take it to their biggest competitor, and you are ready to go.” On January 14, 2005, Gallo

Highlight(yellow) – Deal Momentum and the Pre-Diligence Process > Page 26 · Location 428

A professionally prepared pre-diligence package is a subtle but powerful way to create competitive tension for your business—even if none exists.

Section 2: Building Your Negotiating Leverage

Highlight(yellow) – Chapter 5: Fish Where They Are Biting: How to Position Your Company to Be Acquired > Page 40 · Location 575

“Your job as an entrepreneur is to hire salespeople to sell your products and services so you can spend your time selling and marketing your company. You make a few hundred or a few thousand dollars when you sell your product, but if you turned those same skills to selling your company, you can make exponentially more. You have the right skills, but you’re selling the wrong product.”

Highlight(yellow) – Chapter 5: Fish Where They Are Biting: How to Position Your Company to Be Acquired > Page 41 · Location 580

The entrepreneurs who earn the best return on their investment of money, time, and energy are the ones who get in and out quickly.

Highlight(yellow) – Positioning: The Foundation on Which All Great Marketing Rests > Page 42 · Location 593

Positioning is a concept that was first popularized by advertising legends Al Ries and Jack Trout in a series of articles they wrote for the trade magazine Advertising Age (now the global media company Ad Age) back in 1972. Their articles went on to become a book called Positioning: The Battle for Your Mind, which is arguably the best book ever written on the marketing principle of positioning. It still holds up today and is well worth reading.

Highlight(yellow) – Taking Action > Page 47 · Location 652

Review your website, and ensure that it clearly positions you as a leader in the industry where companies are looking to make acquisitions. Then invest in SEO so you will naturally rank among the leading companies in that industry.

Highlight(yellow) – Acquirer Type 2: Private Equity Group > Page 54 · Location 733

One of the tricks PEGs use is to apply a lot of debt to maximize their return. Similar to buying a house with a small deposit, the leverage allows the buyer to amplify their returns for shareholders if things go as planned. 21 To borrow money using your business as collateral, your business has to be what industry insiders call “bankable,” meaning it is a business that consistently generates profits that would allow a bank loan to be paid back with some wiggle room if things go south.

Highlight(yellow) – Acquirer Type 2: Private Equity Group > Page 54 · Location 738

The answer often comes down to the way a PEG structures their acquisitions. Unless it’s a fundless sponsor, PEGs typically don’t have managers to run a business like yours, so they may ask you to stick around by offering you a “second bite of the apple.” This is a term used to describe an acquisition model, which involves you keeping some of your equity and continuing to play a leadership role in your business after the PEG invests.

Highlight(yellow) – Acquirer Type 2: Private Equity Group > Page 55 · Location 751

The other lever a PEG has for making your business more valuable is to overrule your decisions and “professionalize” your company.

Highlight(yellow) – Acquirer Type 3: Strategic Acquirer > Page 62 · Location 837

Let’s imagine Home Depot could leverage what they learned from Blinds.com and apply that insight to all of their product categories for a 1% improvement in overall sales. On a $ 90 billion base of revenue, that 1% lift is worth $ 900 million in incremental sales per year to Home Depot. So you can see how they saw Blinds.com as a strategic acquisition.

Highlight(yellow) – Choose the Best Type of Auction for You > Page 71 · Location 931

Occasionally, a proprietary deal can make sense when you are in an industry that trades in a narrow range and you are being preemptively offered a price at the top end of the established range of multiples.

Highlight(yellow) – The 5-20 Rule of Thumb > Page 83 · Location 1054

and thus the buffer to ride out any hiccups that might arise as they integrate your business with theirs.

Highlight(yellow) – The Confidential Information Memorandum > Page 98 · Location 1219

While your CIM is an information packet, it’s also a marketing document. Remember that great marketing always includes both features and benefits. As legendary Harvard Business School marketing

Highlight(yellow) – The Confidential Information Memorandum > Page 99 · Location 1221

Theodore Levitt put it, customers (in your case, acquirers) want to “hire” a product to do a job. “People don’t want to buy a quarter-inch drill,” he explained. “They want a quarter-inch hole!” 35

Highlight(yellow) – Your End of the Bargain > Page 110 · Location 1352

YOUR END OF THE BARGAIN

Highlight(yellow) – Your End of the Bargain > Page 111 · Location 1363

If your answer to all of those questions is “yes,” then you’ve delivered on your end of the employment bargain, and you don’t owe your employees advance notice of a potential sale.

Highlight(yellow) – Two Employee Categories > Page 112 · Location 1373

Consider a simple “stay” or “success” bonus that you’ll pay on a successful transaction.

Highlight(yellow) – Figuring Out Your Number > Page 119 · Location 1439

To calculate your number, you have to answer two questions: 1. What’s your business worth? 2. What’s your business worth to you?

Section 3: Punching above Your Weight in a Negotiation

Highlight(blue) – Ask “Who,” Not “How” > Page 132 · Location 1578

As with hiring any professional, you’re in the best position to manage an intermediary if you know what they should be doing.

Highlight(blue) – Sell Side vs. Buy Side > Page 136 · Location 1620

They want to avoid burning a bridge with any acquirers. In other words, being viewed as reasonable by the main acquirers in your industry may be more important to them than squeezing an acquirer for every last penny or deal point.

Highlight(blue) – Letter of Intent > Page 150 · Location 1779

So slow down and consider the following points addressed in an LOI:

Highlight(blue) – Legitimate vs. Bad-Faith Re-trading > Page 156 · Location 1854

Nail your results. Make sure you continue to hit your numbers while you’re in negotiations to sell your business. Don’t give the buyer any excuses to start re-trading.

Highlight(blue) – Legitimate vs. Bad-Faith Re-trading > Page 157 · Location 1870

Employ the no-re-trading handshake.

Highlight(blue) – Legitimate vs. Bad-Faith Re-trading > Page 157 · Location 1872

Look them in the eye and say, “I’ll agree to this on one condition: no re-trading. Do we have a deal?”

Highlight(blue) – Chapter 15: Earnout vs. Flameout: How to Structure Your Role Post-Sale > Page 162 · Location 1909

“We had to rebrand everything.

Highlight(blue) – Chapter 15: Earnout vs. Flameout: How to Structure Your Role Post-Sale > Page 162 · Location 1912

I’d actually put a time delay on the earnout period, starting maybe three months in. In

Highlight(blue) – Your Role as Lender (Vendor Takeback, or VTB) > Page 165 · Location 1943

Example of a 20% VTB with a 5%/ yr coupon over 5 years

Highlight(blue) – Your Role as Shareholder (Recapitalization) > Page 170 · Location 2007

In some sleazy cases, the PEG tries to name you as a guarantor of the debt they are taking on to buy your business;

Highlight(blue) – Getting the Best Deal Possible > Page 176 · Location 2067

Believe it or not, your would-be acquirer will probably get on just fine without buying your business. Unless

Highlight(blue) – Apply the Magic of Adjustments > Page 179 · Location 2099

This involves a process M& A professionals refer to as “normalizing,” “recasting,” or “adjusting” your P& L.

Highlight(blue) – The Bob Dylan Effect > Page 195 · Location 2307

Founders thrive on solving problems.