Productising a service business part four: the bit you can sell

This is the 4th article in a series on productising service businesses. If you haven’t already, check out Part One, Part Two and Part Three.

The big payoff that comes as a result of creating a fully productised business is the ability to sell it for more money.

When I have this conversation with business owners they say things like, “Oh I’m not thinking of selling my business”, but until you can sell your business, it’s not truly an asset.

The reality is that things change and life can throw unexpected curve balls. Wouldn’t you like to know that you could sell your business if you had to?

When you sell your business, you typically negotiate a price based on some multiple of revenues. Each industry has “standard multiples” that provide a starting point for negotiations, but you can dramatically increase the multiple you’re able to sell for by reducing the risks presented to potential buyers.

WHAT ARE THE RISKS?

One of the least discussed but frequently problematic risks when selling a business is the merging of different work cultures. These issues arise when one established work culture meets another and the two are forced to work together – there is bound to be friction, just as there is bound to be some level of friction between existing and new staff members.

Potential buyers need to evaluate their position from both a financial and non-financial perspective. Financial risks are generally on the forefront of people’s minds – how much am I personally investing? What if I overpay? What fees are involved? And while these are all risks to consider, one can never underestimate the non-financial risks involved in buying a business – how much time will this new venture take up? Will it negatively affect my personal relationships? How much stress could it potentially cause? (Keep in mind the number one reason people sell a business is because of personal exhaustion.)

Perhaps the biggest risk of all is the one that a buyer can never prepare for – unexpected problems. Equipment in urgent need of repair, a manager suddenly walking out. To guard against these types of risks, potential buyers will reserve working capital and discount the purchase price accordingly.

HOW DOES PRODUCTISATION HELP MITIGATE THESE RISKS?

The reason I’m using the term “productisation” here rather than “systemisation” is to make a distinction between businesses that simply have operational procedures written down, and those that have documented processes for finding leads, closing sales and delivering services.

Imagine how difficult it would be to sell a car if there were no petrol stations. That’s what it’s like when you try to sell a business without a clear strategy for finding new clients and growing the business.

Additionally, when you sell a business you need to be able to provide clear instructions on how the person buying it will run the business without you. This is sometimes solved by requiring that the founder of the business stay on for an “earn out” period – that is, you sell the business and work for the acquiring company as an employee for some period of time to smooth the transition.

Can you imagine anything worse?

Not only is this widely reported as being a totally horrible experience, but it also doesn’t help if you’re selling the business because you can no longer work (for example, due to injury or change in circumstances).

This doesn’t just stop with the business owner: quite often there are “key employees” without whom the business would be essentially valueless.

If you’re going to sell your business, will your staff stick around? Will the new owner be able to cope with the impact of negative cultural clash by hiring new people or training existing staff to run the processes of the new business? A thoroughly productised and documented business doesn’t necessarily protect a potential buyer from cultural mismatches occurring, but goes a long way to insulating them from the negative consequences by having clear hiring and training procedures that don’t rely on keeping the same “superstars” employed.

If you can show clearly how much time running your business takes, how and why it will grow as well as providing clear documentation about what you sell and who does the work (and how to hire them!) you’re dramatically reducing the “unknowns” – the risks – and the amount of money that must be held “in reserve” to guard against them. This money then ends up in your pocket.

If we consider the analogy of selling a car again, you want to sell a car that most people will know how to drive without any special training, and which will be easily serviceable by a wide range of local mechanics.

If we put these factors together we need to have a business that can be sold so that:

  • Anyone reasonably competent can find out how to run it with the minimum of training
  • There is a clearly defined and scalable growth strategy and;
  • It can be staffed by people who are readily available in the job market rather than relying on a couple of “superstar” employees and complex earn-out contracts

THE 2-ENTRY POINTS METHOD

So how do we do this?

I’d like to share with you my simple strategy for creating documentation that satisfies all these conditions.

First, your documentation needs two entry points:

  1. The first is for the new business owner. This page should quickly answer two questions: what do we sell, and who does the work?
  2. The second is for new employees. When the business owner hires someone, they should be able to send them a single page which describes in detail everything they need to know in order to do their job

This is where the “structure” of your documentation becomes really important.

It’s quite easy to write out a bunch of operating procedures and put them in word documents on a shared network drive, but that’s not enough to create a sellable asset.

What we do is separate our documentation into two main areas:

  • Products: these are things that produce an outcome; they can be “internal” (meaning that our own business is the “client”) or they can be “external” (meaning they’re things that get sold to other people)
  • Roles: these are things that people do. More than one person can perform the same role, and the same person may fulfill multiple roles.

Since we discussed roles in detail in the previous article in the series, the rest of this article will focus on the concept of “products”.

So the “front page” of our documentation lists our products and our roles:

2014-10-07 at 2.42 PM

As the business owner, I can quickly see which parts of my business are systemised (and which ones aren’t!) Each “external” product includes information on how we find leads, close sales, set up clients and deliver the services.

Each product page also lists the roles that are responsible for work in that area, as well as roles which have recurring processes. In general, products are a good way of “grouping” processes and connecting them to Roles from a “top down” view (as opposed to each individual role’s induction page, which tells one person everything they need to know about doing their job).

Here’s an example of our “Web Application Development” product page:

2014-10-07 at 2.47 PM

So when it comes time for us to sell our business, we’ll be able to supply a new business owner with a single, self-documenting page that gives them all the information they need in one place on how to connect to customers and deliver services.

When they hire people they simply send them a link to their “team member page”, as outlined in our previous article on how to define roles in the business.

How does your business documentation measure up to this standard? Do you have a single page that you could provide to a new business owner that would tell them everything they need to know to run the business?

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