I read a very interesting blog from John Warrillow (Built To Sell author) about why he thinks people who sell service-based businesses do less well than the owners of other types of business. By implication, such people are not such good business people generally.
Is that true?
The logic is that:
- Barriers to entry for service business are lower. Generally, they start up their ‘business’ selling their own time and working from home. There is no need for stocking up, premises, staff and other things that require cash investment, which in turn may need business plans to be drawn up and a much more professional approach to be taken.
- Because the service business owner is, and often stays as, the main fee-earner, they are too close to the day-to-day workings of the business and the clients to make objective decisions. In my experience working with clients, this ‘blind spot’ problem is most damaging in setting the pricing policy.
- The right-brain (creative, emotional) tendency of service business people makes them less analytical than their left-brain counterparts.
All this can make service businesses easy prey for acquirers, and the fact that there are far more offers to such businesses (in North America anyway) would suggest that this is true.
To protect against this, service business owners should take the following steps, according to John Warrillow:
- Calculate the value of your company using the same methodology acquirers use
- Bump up your multiple
- Create a reliable stream of recurring revenue
- Reduce your reliance on a few key clients
- ‘Productise’ your service
- Reward and retain key employees without making them a partner
- Eliminate the need to respond to a Request for Proposal (RFP)
- Increase the number and quality of your referrals
- Spot and interpret the second most important sentence in an offer to buy your company
- Shorten the length and importance of an ‘earn-out’
- Avoid the biggest mistake service firm owners make when getting their business ready to sell
- Structure agreements to include the one sentence you need in order to sell your business for a premium
The full article is here.
Do you agree with John? My dealings over the years with ‘professional’ business owners (accountants, solicitors, surveyors) generally supports this, but please post a comment to tell me what you think.